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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 July 31, 1998
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.)
One Financial Way, Suite 400
Cincinnati, Ohio 45242-5859
(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 September 10, 1998: 8,814,520.
This report consists of 36 pages, and the Exhibit Index appears on page
24.
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TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at July 31, 1998 and January 31, 1998 ............................ 3
Condensed Consolidated Statements of Operations for the three and six months ended
July 31, 1998 and 1997. .............................................................................. 5
Condensed Consolidated Statements of Cash Flows for the six months ended
July 31, 1998 and 1997 ............................................................................... 6
Notes to Condensed Consolidated Financial Statements . .................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................................. 21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................................... 21
Item 2. Changes in Securities and Use of Proceeds .............................................................. 21
Item 3. Defaults on Senior Securities .......................................................................... 23
Item 6. Exhibits and Reports on Form 8-K ....................................................................... 23
Signatures ............................................................................................. 23
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited) (Audited)
July 31, January 31,
1998 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 1,247,916 $ 2,142,881
Investment securities 7,021,980 5,074,258
Accounts receivable, net of allowance for doubtful
accounts of $295,000 and $265,000, respectively 4,427,520 2,992,987
Unbilled receivables 1,707,909 1,135,365
Other 1,480,014 1,179,603
------------ ------------
Total current assets 15,885,339 12,525,094
Property and equipment:
Computer equipment 4,388,302 3,876,962
Computer software 547,959 487,841
Office furniture, fixtures and equipment 1,515,037 1,424,036
Leasehold improvements 989,385 931,020
------------ ------------
7,440,683 6,719,859
Accumulated depreciation and amortization (2,427,958) (1,563,202)
------------ ------------
5,012,725 5,156,657
Investment securities - 3,834,908
Capitalized software development costs, net of accumulated
amortization of $836,895 and $661,896, respectively 635,034 612,033
Other 86,070 71,430
------------ ------------
$ 21,619,168 $ 22,200,122
============ ============
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities, Convertible Redeemable Preferred Stock and Stockholders' Equity
(Unaudited) (Audited)
July 31, January 31,
1998 1998
------------ ------------
Current liabilities:
Accounts payable $ 570,532 $ 1,631,941
Accrued compensation 1,419,649 943,221
Accrued other expenses 1,795,634 1,746,883
Deferred revenues 1,060,037 1,061,996
------------ ------------
Total current liabilities 4,845,852 5,384,041
Long-term debt 6,000,000 -
Long-term accrued interest 32,500 -
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 35,102,459 35,110,817
Treasury stock, at cost, 81,980 and 90,500 shares, respectively (389,692) (430,188)
Accumulated other comprehensive income 14,887 75,203
Accumulated (deficit) (24,075,803) (18,028,716)
------------ ------------
Total stockholders' equity 10,740,816 16,816,081
------------ ------------
$ 21,619,168 $ 22,200,122
============ ============
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended July 31,
(Unaudited)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues:
Systems sales $ 1,565,010 $ 428,286 $ 3,671,940 $ 1,598,847
Service, maintenance and support 1,334,998 1,140,500 2,770,598 2,083,132
Service bureau operations 108,214 - 170,714 -
------------ ------------ ------------ ------------
Total revenues 3,008,222 1,568,786 6,613,252 3,681,979
Operating expenses:
Cost of systems sales 431,135 535,352 1,209,856 1,164,880
Cost of service, maintenance and support 1,431,677 1,246,671 2,958,353 2,353,757
Cost of service bureau operations 725,571 - 1,347,840 -
Selling, general and administrative 2,109,586 2,353,707 4,575,807 4,923,942
Product research and development 948,122 1,247,535 2,398,613 2,229,850
Restructuring expense 300,000 - 300,000 -
------------ ------------ ------------ ------------
Total operating expenses 5,946,091 5,383,265 12,790,469 10,672,429
------------ ------------ ------------ ------------
Operating (loss) (2,937,869) (3,814,479) (6,177,217) (6,990,450)
Interest income 94,366 283,256 197,629 613,520
Interest expense 67,500 - 67,500 -
------------ ------------ ------------ ------------
Net (loss) $ (2,911,003) $ (3,531,223) $ (6,047,088) $ (6,376,930)
============ ============ ============ ============
Basic net(loss) per common share $ (.33) $ (.40) $ (.69) $ (.72)
============ ============ ============ ============
Diluted net(loss) per common share $ (.33) $ (.40) $ (.69) $ (.72)
============ ============ ============ ============
Number of shares used in per common share computations 8,808,871 8,813,446 8,807,459 8,849,312
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July 31,
(Unaudited)
1998 1997
------------ ------------
Operating activities:
Net (loss) $ (6,047,088) $ (6,376,930)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 1,039,755 471,749
Cash provided by (used for) assets and liabilities:
Accounts and unbilled receivables (2,007,077) 95,226
Other current assets (300,411) (520,277)
Accounts payable and accrued expenses (536,230) (63,501)
Deferred revenues (1,959) 435,313
Long-term accrued interest 32,500 -
------------ ------------
Net cash (used for) operating activities (7,820,510) (5,958,420)
Investing activities:
Purchases of investment securities (9,836,409) (16,149,732)
Sales of investment securities 11,663,279 23,225,552
Purchases of property and equipment (720,824) (1,120,887)
Capitalization of software development costs (198,000) (198,000)
Other (14,639) (32,548)
------------ ------------
Net cash provided by (used for) investing activities 893,407 5,724,385
Financing activities:
Proceeds of long-term debt 6,000,000 -
Sale of treasury stock to employee stock purchase plan 32,138 -
Purchase of treasury stock - (430,188)
------------ ------------
Net cash (used for) financing activities 6,032,138 (430,188)
------------ ------------
Increase (decrease) in cash (894,965) (664,223)
Cash and short term cash equivalents at beginning of period 2,142,881 664,223
============ ============
Cash and short term cash equivalents at end of period $ 1,247,916 $ -
============ ============
Supplemental cash flow disclosures:
Income taxes paid $ - $ -
Interest paid $ - $ -
See Notes to Condensed Consolidated Financial Statements.
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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 generally accepted
accounting principles 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 and six months ended July 31, 1998, are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 1999.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented on page
18 of its 1997 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
1998.
The Company is accounting for the minimum guaranteed rate of return on the
long-term debt (see note 4) as if the loan were guaranteed to earn a 25%
compound annual return. Accordingly, in addition to the 12% coupon interest, the
Company records as interest expense the difference between the minimum guarantee
and the 12% coupon interest as additional interest expense. This liability is
reflected as long-term accrued interest.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The net decrease in cash and cash equivalents and investment securities results
from the sale of investments and use of cash to fund current operations and
purchase additional fixed assets.
The increase in accounts receivable, net, results primarily from certain
customers slowing payments until certain aspects of an implementation are
resolved to their satisfaction. Management believes existing reserves are
adequate for any items in dispute. Additionally, the
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increase in receivables is due to increased sales in the current quarter
compared with the quarter ending January 31, 1998.
The increase in unbilled receivables result from the addition of new clients,
and implementation of additional phases of existing contracts vis-a-vis the
contractual terms relating to milestone payment dates for products and services
delivered.
Other current assets consist primarily of prepaid expenses, including
commissions, and acquired software and hardware awaiting installation. The
increase at July 31, 1998, results primarily from increases in prepaid
commissions and expenses related to the long-term debt (see note 4) which will
be amortized over the life of the loan.
The increase in property and equipment relates primarily to the purchase of
equipment for the VHS Service Bureau, which went on-line in the first half of
fiscal 1998.
The decrease in accounts payable is due to a reduction in purchases of hardware
and third-party software for resale and reduced levels of capital expenditures
in the current quarter compared with the quarter ended January 31, 1998.
The increase in accrued compensation results primarily from the accrual of
$300,000 for severance in connection with the restructuring (see note 7).
Note 4 - LONG-TERM DEBT
In July, 1998, the Company issued a $6,000,000 note to The HillStreet Fund,
L.P., which bears interest at 12%, payable monthly. The note is repayable in
quarterly installments of $500,000 commencing October, 2001 through July, 2004.
In July, 2002, the Company has a one-time option to prepay in full the then
outstanding balance of the note. The note is secured by all of the assets of the
Company and the loan agreement restricts the Company from incurring additional
indebtedness for borrowed money, including capitalized leases, limits certain
investments, restricts substantial asset sales, capital expenditures, cash
dividends, stock repurchases and mergers and consolidations with unaffiliated
entities. In addition, the Company is required to maintain certain financial
conditions, including minimum levels of revenues, combined cash and investments
and net worth.
In connection with the issuance of the note, the Company issued a warrant to
purchase 750,000 shares of common stock of the Company at $3.87 per share at any
time after May 16, 1999 through July 16, 2008. The warrant is subject to the
customary antidilution and registration rights provisions.
Under the terms of the loan agreement, the Company has guaranteed the lender
that the increase in the market value of the stock underlying the Warrants, at
the time of loan maturity, over the exercise price plus the 12% interest paid on
the loan will yield the lender a 25% compound annual return. If the yield from
the Warrant plus interest paid does not provide the lender with the guaranteed
return, the Company is required to pay the additional amount in cash at the time
of
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maturity. Should the Company exercise its prepayment option in July, 2002, then
the minimum guaranteed rate of return is increased to 30%. However, to the
extent that the computed minimum compound annual rate of return exceeds 30% at
the date of the prepayment, the Company has the right to cancel up to 150,000
warrants.
In addition, the founders and majority shareholders of the Company have
consented to certain restrictions on the sale or transfer of their shares.
Maturities of long-term debt are as follows: fiscal years 1999 & 2000, $-0-;
2001, $1,000.000; 2002, $2,000,000; 2003, $2,000,000; 2004, $1,000,000.
The Company was in compliance with all of the terms and conditions of the loan
agreement as of July 31, 1998.
Note 5 - STOCKHOLDERS' EQUITY
The Company has reserved 2,279,841 shares of Common Stock for issuance as
follows: 750,000 shares for issuance upon exercise of warrants issued in
connection with the long-term debt, and 1,529,841 shares for issuance in
connection with various Stock Option Plans and the Employee Stock Purchase Plan.
On June 30,1998, 8,520 shares of Treasury Stock were sold to the Employee Stock
Purchase Plan. The $8,358 loss on the sale of the Treasury Stock has been
recorded as a reduction of capital in excess of par value in the Stockholders'
Equity.
Note 6 - STOCK OPTIONS
During the first seven months of the current fiscal year, the Company granted
228,550 stock options, net of 17,950 forfeited options, at the weighted average
exercise price of $3.00 per share under the 1996 Employee Stock Option Plan.
Note 7 - RESTRUCTURING EXPENSE
During the second quarter, the company restructured certain aspects of its
operations to flatten the management structure, reduce expenses in all areas,
and, at the same time, improve customer service. Accordingly, the Company
accrued $300,000 for the anticipated costs of severance and related taxes and
fringe benefits related to a reduction of the work force by 16 people. The
Liability has been recorded as a current liability and will be paid during the
third quarter. Also, as LanVision has completed certain of its major software
development projects, the Company has been able to reduce the use of outside
contractors in product development. Healthcare applications using document
imaging and workflow technologies are still in the very early stages of market
penetration. Over the last two years, the Company has made significant
investments in new product development for this market, and announced the
release of many new products during the last nine months. Since the Initial
Public Offering, the Company expanded the sales, marketing, support and
administrative staffs in anticipation of more rapidly increasing revenues.
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However, revenues have not grown as expected, and the Company continues to
experience lengthy sales cycles. Based upon our past experience, it appeared
revenues may not increase rapidly enough, in the near term, to justify
maintaining the July 31, 1998 staffing levels. The goal of the restructuring was
to reduce expenses in all areas while maintaining quality customer service and
support. Accordingly, most of the reductions were in areas other than product
development and support and consulting services. The Company continues to
believe it is very well positioned in the marketplace, and anticipates revenues
will continue to grow. LanVision's customers are experiencing significant
success with its products, and the acceptance of healthcare applications using
document imaging and workflow technologies is growing. As revenues increase,
staffing levels will be selectively increased to ensure the Company maintains
its technological leadership, provide superior levels of support and provide
adequate numbers of trained consultants.
Note 8 - EARNINGS PER SHARE
The basic (loss) per common share is calculated using the weighted average
number of common shares outstanding during the period.
The diluted (loss) per common share calculation, excludes the effect of the
common stock equivalents (stock options) as the inclusion thereof would be
antidilutive.
Note 9 - COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Accordingly, the Company has
accounted for the unrealized holding gains on available-for-sale securities in
accordance with this new accounting standard, as follows:
Three months ended July 31, Six months ended July 31,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net (loss) $(2,911,003) $(3,531,223) $(6,047,088) $(6,376,930)
Unrealized holding gains (losses)
arising during the period (4,827) 105,208 (5,630) 110,579
Reclassification adjustment for
gains included in Net (loss) (14,164) (35,878) (54,686) (65,658)
----------- ----------- ----------- -----------
Comprehensive (loss) $(2,929,994) $(3,461,893) $(6,107,404) $(6,332,009)
=========== =========== =========== ===========
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
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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. 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(TM) is a leading provider of healthcare information access systems and
web-based outsourced data center operations that enable hospitals and integrated
healthcare networks to capture, store, manage, route, retrieve and process vast
amounts of clinical and financial patient information. The Company's systems
deliver on-line enterprise-wide 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. LanVision's
systems, which incorporate data management, document imaging/management and
workflow technologies, consolidate patient information into a single repository
and provide fast and efficient access to patient information from universal
workstations located throughout the enterprise, including the point of patient
care. The systems are specifically designed to meet the needs of physicians and
other medical and administrative personnel and can accommodate multiple users
requiring simultaneous access to patient information, thereby eliminating file
contention. By providing access to all forms of patient information, the Company
believes that its Healthcare Information Access Systems are essential components
of the computer-based patient record.
The Company's revenues are derived from: the licensing and sale of systems
comprising LanVision software and third-party software and hardware components;
product support, maintenance and professional services; and service bureau
operations (outsourced data center operations). Professional services include
implementation and training, project management and custom software development
and currently are provided only to the Company's customers with installed
systems or who are in the process of installing systems. Revenues from
professional services, maintenance and support services, typically are expected
to increase as the number of installed systems increase. The Company earns its
highest margins on proprietary LanVision software and the lowest margin is on
third-party hardware. Systems sales to customers may include differing
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. Revenues from the Company's service
bureau operations, which provides high quality, transaction-based document
imaging/management services from a central data center, commenced in the first
quarter of fiscal 1998 and are expected to increase as the number of hospitals
outsource services to the Company's Virtual Healthware Services division (VHS).
Additionally, revenue from each VHS customer is
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expected to increase as the volume of archived historical data increases and
retrievals of data increase as the systems are fully implemented within a
healthcare facility.
Sales are made by the Company's direct sales force and through Healthcare
Information Access Systems distribution partners.
On February 23, 1998, the Company entered into a Remarketing Agreement with
Shared Medical Systems Corporation ("SMS"). Under the terms of the agreement,
SMS was granted an exclusive worldwide license to distribute ChartVision(R),
On-Line Chart Completion(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.
SMS has over 1,800 customers in the United States and a total of 3,500 customers
in 20 countries and territories in North America and Europe. The large
Healthcare Information Access Systems providers, such as SMS, are often able to
positively influence the buying decisions within their customer base. LanVision
management believes the distribution of its products by SMS will shorten sales
cycles and increase revenues. Although SMS has already begun to actively promote
LanVision's products, the full impact of this distribution agreement will likely
not be realized until later in fiscal 1998 or early 1999, as more of the SMS
organization is trained to sell and implement the LanVision products.
On August 18, 1998, the Company announced that SMS had recently completed its
first sale of ChartVision, which includes a license for more than 250 concurrent
users.
In 1996, the Company entered into a non-exclusive Remarketing Agreement with
Lanier Worldwide, Inc. (Lanier). Under the terms of the Agreement, Lanier was
entitled to market and distribute ChartVision, On-Line Chart Completion and
related products throughout North America. Through April 30, 1998 Lanier had
licensed the Company's products to two customers. The Remarketing Agreement has
expired and will not be renewed. Under the terms of a proposed settlement with
Lanier, LanVision will refund to Lanier approximately $130,000 of development
fees related to porting certain software to the Lanier platform. This liability
had been previously accrued. Additionally, the Company will forgive
approximately $160,000 of receivables due from Lanier, and this $160,000 was
charged to expense in the second quarter.
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. Throughout
1996, 1997 and the first six months of 1998, the Company has experienced
extended sales cycles. 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 results.
Furthermore, healthcare organizations are assessing and implementing many new
technology solutions, and Year 2000 compliance, and although many of these
systems do not compete with the LanVision products, these systems do compete for
capital budget dollars and the available time of information system
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personnel within the healthcare organizations. The agreements cover the entire
implementation of the system and specify the implementation schedule, which
typically takes place in phases. The agreements generally provide for the
licensing of the Company's proprietary software and third-party software with a
one-time perpetual license fee that is adjusted depending on the number of
workstations using the software. Third-party hardware is sold outright, with a
one-time fee charged for installation and training. Interfaces with existing
customer systems and other consulting services are sold on a fixed fee or a time
and materials basis.
Generally, revenues from systems sales are recognized when a purchase agreement
is signed and products are delivered. Revenues from the service elements of a
contract including: routine installation, integration, project management,
interface development, training, etc. are 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 completed, depending
on the contractual terms. Revenues from maintenance and support 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.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's internal use computer programs and hardware as well as its software
products that are date sensitive may recognize a date using "00" as the Year
1900 rather than the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities for both the Company and its customers who rely on its
products.
The Company is actively engaged, but has not yet completed, reviewing,
correcting and testing all of the Year 2000 compliance issues. Based on the
current, albeit incomplete review and remediation, the Company has determined
that it will be required to modify or replace some of its internal use software
and hardware, modify certain existing software products and await the
modification of third-party software so that they will function properly, as a
system, with respect to dates in the Year 2000 and thereafter.
The Company presently believes that with modifications to its products and
third-party software and the replacement of internal use software and
non-compatible hardware, the Year 2000 issue will not pose significant
operational problems for the Company or its customers. However, if such
modifications and replacements are not made, or not completed timely, the Year
2000 issue could have a material impact on the Company and its customers.
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The Company has divided the Year 2000 issue into two areas: internal use
software and hardware; and software products and systems sold to customers.
With regard to software products sold to customers, the Company has: completed
the overall Year 2000 plan; made a preliminary review of the existing software
code; corrected all known Year 2000 code problems and; developed a test plan.
The testing of the revised code has begun and, based upon the test results, the
code may need further revisions, with re-testing in successive iterations, until
such time as all the product code is determined to be Year 2000 compliant. Based
on current estimates, the above phases should be completed by December 31, 1998.
Because the Company's software products rely upon third-party software,
including custom developed software interfaces, the Company has initiated formal
communications with its vendors to determine the extent to which the Company's
software products are vulnerable to those third parties' failure to correct
their own Year 2000 issues. Generally, software provided by third parties and
included in the Company's systems is developed by leading software suppliers
with Year 2000 programs underway and a majority of these vendors have certified
to the Company that their products are Year 2000 compliant. However, there can
be no guarantee that the software of other companies, on which the Company's
systems rely, will be timely converted.
Upon determination that the Company's and third-party software are Year 2000
compliant, the Company will begin the integration testing phase of the various
components of the system [LanVision software, third-party software and the major
hardware components] for compatibility and interoperability as they relate to
the Year 2000 issue. Based on current estimates, the above integration-testing
phase should be completed by December 31, 1998. The Company will then deliver
revised software to its customers for testing at the customer sites using their
then current hardware configurations. The Company believes that Year 2000
compatible equipment is available for acquisition by customers, if necessary, to
ensure installed systems operate properly.
Should the LanVision systems sold to customers not be timely modified to be Year
2000 compliant, the most likely worst case scenario would be that customers
could: suspend use of the system until such time as the Year 2000 issues are
remediated; or continue to use the systems with reduced functionality. If this
were to happen, customers could claim breach of contract and seek damages.
However, based upon current information and the time remaining to complete the
remediation, the Company believes that the risk of such occurrence is minimal.
Contingency plans have not yet been developed. However, contingency plans will
be developed if they are needed.
With regard to the Company's service bureau operations, the Company has
determined that its systems and equipment are Year 2000 compliant except for
LanVision software products discussed above, which are in the process of
remediation, and telecommunications services provided by outside vendors. The
Company is in the process of determining the Year 2000 issues that could affect
operations should the telecommunications vendors not be compliant. Without Year
2000 compliant LanVision software and telecommunications, the service bureau
operations will not be able to provide current levels of services to its
customers and no contingency plan has yet been developed. However, contingency
plans will be developed if they are needed.
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With regard to internal use software and hardware, the company is currently
reviewing all such items. To date, based upon reviewing approximately half of
the software and equipment, it has been determined that a small amount of older
computer equipment must be replaced, but the type and amount are not significant
and will be replaced in the ordinary course as systems are upgraded. With regard
to third-party software, it has been determined that some software is not
compliant and will need to be upgraded as vendors provide Year 2000 compliant
versions. The company also utilizes third-party vendors for processing data and
payments, e.g. payroll services, 401(k) plan administration, check processing,
medical benefits processing, etc. The Company has initiated communications with
its vendors to determine the status of their systems. Should these vendors not
be compliant in a timely manner, the Company may be required to process
transactions manually or delay processing until such time as the vendors are
Year 2000 compliant. No contingency plan has yet been developed. However,
contingency plans will be developed if they are needed.
The Company will utilize both internal and external resources to reprogram, or
replace and test its software products for the Year 2000 modifications. The
Company anticipates completing the Year 2000 project as soon as practical, but
not later than December 31, 1998, which is prior to any anticipated impact. The
total cost of the Year 2000 project is not considered to be material, and will
be funded through existing cash resources and future operating cash flows. The
requirements for the correction of Year 2000 issues and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's current best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that may cause such
material differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and collect all relevant
computer codes and similar uncertainties.
The Company has warranted, to certain customers, that its products will be Year
2000 compliant. In addition, provisions of its long-term debt and certain
significant remarketing agreements require the Company's products be Year 2000
compliant. Non-compliance with the product warranties, debt covenants and
remarketing agreements would result in an event of default on the long-term debt
and probable legal action for breach of contract relating to the product
warranties and remarketing agreements. Based upon the current best estimate for
remediation of the Year 2000 issues, the Company believes the risk is minimal
that the Company will not comply with current commitments and internal
processing needs.
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 VHS
services which
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commenced operations in the first quarter, are expected to increase over time,
as more hospitals outsource services to VHS, and existing customers increase the
volume of documents stored on the systems and the number of retrievals increase
from the ever increasing data base of stored documents. Because a significant
percentage of the Company's operating costs are expensed as incurred, a
variation in the usage of VHS services, the timing of systems sales and
installations and the resulting revenue recognition, can cause significant
variations in operating results from quarter to quarter.
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 LanVision document imaging and workflow systems, 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. 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 second fiscal quarter ended July 31, 1998, were $3,008,222, a
92% increase, compared with $1,568,786 in the comparable quarter of 1997.
Revenues for the first six months ended July 31, 1998, were $6,613,252, an 80%
increase, compared with $3,681,979 in the comparable period of 1997.
Although revenues for the three and six months ended were greater than the
corresponding periods in fiscal 1997, revenues for the second quarter were less
than the Company's internal plan due to the delay in signing two contracts under
negotiation.
During the first quarter, the Company signed one new contract with Christiana
Care Health Services. During the second quarter, SMS signed its first contract
to sell ChartVision. Through the first six months of 1998, the Company
recognized approximately $1,417,000 of revenues from these contracts. The
remaining systems sales revenues during the second quarter came from
implementation of previously signed agreements (backlog) and from add-on sales
to existing customers. During the first quarter the Company's newly formed
Virtual Healthware Services (VHS) division began operations.
Several contracts that the Company expected to close in the second quarter were
delayed. One of the delayed contracts, The Medical University of South Carolina,
was signed and announced on August 18, 1998. Some of the factors that affect
planned contract signings include: the continuing problem of healthcare legacy
systems relating to Year 2000 conversions, consolidations and mergers within the
healthcare industry and the attendant management changes and consolidations
resulting therein and more involvement of committees in setting information
system agendas and priorities.
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As previously discussed, 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 more
fully discussed under "Uneven Patterns of Quarterly Operating Results." Three
customers accounted for approximately 53% of the revenues for the second quarter
of 1998 and three customers accounted for 37% of the revenues for the first six
months of 1998.
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 second quarter of 1998 and 1997 were
27% and 125%, respectively, and 33% and 73%, respectively for the first six
months of 1998 and 1997. The lower cost reflects the higher mix of LanVision
software with higher margins relative to the hardware and third-party software
components with lower margins and higher costs. However, the cost of Systems
Sales for the second quarter and six months includes an $83,333 write off of
software previously acquired from a third-party.
Cost of Service, Maintenance and Support
The cost of service, 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 service, maintenance and support
revenues, the cost of such service, maintenance and support was 107% and 109%
for the second quarter of fiscal 1998 and 1997, respectively and 107% and 113%,
respectively, for the first six months of 1998 and 1997.
The LanVision Customer Support existing staff is sufficient to support the
existing customer base. Increases in customers will not require a proportional
increase in support staffing or total support costs. Accordingly, margins are
expected to improve as more customers are added. Additionally, the Company's
support margins are highest on LanVision's proprietary software. Accordingly,
margins are expected to improve as the Company licenses more of its software.
The LanVision Professional Services staff provides services on a time and
material or fixed fee basis. The Professional Services staff has experienced
some inefficiencies in the delivery of services, and certain projects have taken
longer to complete than originally estimated, thus adversely affecting operating
performances. Management believes the increase in experience of its Professional
Services staff and the increase in backlog should improve the overall efficiency
and operating performance of this group.
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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
second quarter of fiscal 1998, Selling, General and Administrative expenses
decreased to $2,109,586 compared with $2,353,707 in the comparable prior quarter
and decreased to $4,575,807 in the first six months compared with $4,923,942 in
the comparable prior period. For the second quarter and six months, Selling,
General and Administrative expenses include a charge of $160,522 related to the
expiration of the Lanier Remarketing Agreement. The reductions in Selling,
General and Administrative expenses compared to the comparable prior periods
reflects the reduced expenses (including salaries, travel, advertising) to a
level commensurate with anticipated, near term revenues.
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. At July 31, 1998, the product research and development staff
consisted of twenty-five employees compared with twenty-nine employees at July
31, 1997. However, the Company supplements its development staff through the use
of independent contractors and software development firms. Research and
development expenses in the first quarter of fiscal 1998 increased to $1,450,491
as a result of stepped-up development efforts related to the many new products
recently released. Research and development expenses for the second quarter were
$948,122, reflecting the use of fewer contractors and reduced staffing
subsequent to completion of major projects. Over the last several months
LanVision released upgrades to ChartVision and provided the general release of
On-Line Chart Completion, Enterprisewide Correspondence, OmniVision(TM),
WebView(TM), and new Document Capture System(TM) modules. These new releases
have enabled LanVision to offer an expanded product portfolio to new customers
and allowed existing customers to expand their use of the LanVision systems. The
Company capitalized, in accordance with Statement of Financial Accounting
Standards No. 86, $198,000 of product research and development costs in the
first six months of fiscal 1998 and 1997.
Interest income consists primarily of interest on investment securities. The
decrease in interest income results from the sale of investment securities to
fund operations and acquire fixed assets.
Interest expense relates to the new long-term debt (see Item 1, Note 4 of Notes
to Financial Statements).
Net loss
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The net loss for the second fiscal quarter of 1998 was $2,911,003 ($.33)
compared with a net loss of $3,531,223 ($.40) in the second quarter of 1997. The
net loss for the first six months of 1998 was $6,047,088 ($.69) compared with a
net loss of $6,376,930 ($.72) in the first six months of 1997. The decrease in
the net losses for the periods results primarily from the increased margins on
systems sales, with a higher mix of LanVision proprietary software, reductions
in selling, general and administrative expenses and product research and
development. Excluding the $673,845 operating loss of the new VHS division, the
$243,855 in special charges mentioned above and the $300,000 restructuring
charge, LanVision's operating loss for the three months ended July 31,1998 was
$1,720,169, a significant improvement when compared with an operating loss of
$3,814,479 in the corresponding quarter of 1997.
In spite of the less than anticipated number of new customer agreements signed
in the past six months, management continues to believe that the healthcare
document imaging and workflow market is going to be a significant market.
Management believes it has made 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.
Since commencing operations in 1989, the Company has from time to time incurred
operating losses. Although the Company achieved profitability in fiscal years
1992 and 1993, the Company incurred a net loss in fiscal years 1994 through
1997. 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
Since its inception in 1989, LanVision has funded its operations, working
capital needs and capital expenditures primarily from a combination of cash
generated by operations, a 1994 private placement of convertible redeemable
preferred stock and an initial public offering and borrowings, including in
July, 1998, a $6,000,000 loan ( see Item 1, Note 4 of the Notes to Financial
Statements).
The Company'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. Agreements with customers often
involve significant amounts, and contract terms typically require customers to
make progress payments.
The Company has no significant obligations for capital resources, other than
noncancelable operating leases in the total amount of approximately $2,500,000,
payable over the next six years. However, the VHS service bureau operation will
need to acquire additional software and equipment as VHS adds additional
hospitals and clinics to its customer base. The centralized data center has been
originally configured to serve approximately fifty hospitals, with significant
expansion capabilities. However, for each customer, VHS establishes one or more
onsite
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document capture centers and provides the equipment. Each document capture
center is expected to require approximately $125,000 of equipment. Also, because
VHS charges for its services on a per transaction basis, LanVision's cash flow
for capital and operating expenses will normally be greater than cash inflows
until customers begin to use the system at anticipated normal volumes for a
period of time.
Over the last two years, the Company's revenues have been less than the
Company's internal plans. However, during the same time period, the Company has
expended significant amounts for capital expenditures, product research and
development, sales, support and consulting expenses as the Company expanded its
operations in anticipation of significant revenue growth. This has resulted in
significant net cash outlays over the last two years. Accordingly, to achieve
profitability, and positive cash flow, it is necessary for the Company to
increase revenues. Management believes that the recent general release of the
products described above under "Product Research and Development" has
significantly strengthened the product portfolio. Additionally, the SMS
Remarketing Agreement has significantly expanded the sales distribution
capabilities, and management believes that market opportunities are such that
the Company should be able to increase its revenues in the second half of fiscal
1998. However, there can be no assurance the Company will be successful in
increasing its revenues. At July 31, 1998, the Company had unrestricted cash and
investments of $5,869,896. Investments consist primarily of U.S. Government
obligations with maturities ranging from one month to twelve months.
Management believes existing cash balances and investment securities and
revenues from operations will be sufficient to meet its liquidity and capital
spending requirements. However, in the event revenues do not increase over the
next two quarters, management may need to secure additional borrowings or other
equity financing. Any additional borrowings will require lender approval.
However, if such financing is not secured, management may need to significantly
reduce and/or defer operating and capital expenditures. These actions could have
an adverse affect on future operating performance.
To date, inflation has not had a material impact on the Company's revenues or
income.
SIGNED AGREEMENTS - BACKLOG
At July 31, 1998, the Company's customers had entered into agreements for
systems and related services (excluding support and maintenance, and transaction
based revenues for VHS) which had not yet been delivered, installed and accepted
which, if fully performed, would generate sales of approximately $8,300,000. See
"Results of Operations: General" for a description of the Company's agreements
with customers. The systems and services related to the agreements are expected
to be delivered or performed, based upon customer implementation schedules, over
the next two to three years.
The Company's agreements also generally provide for an initial maintenance
period and give the customer the right to subscribe for maintenance services on
a monthly, quarterly or annual basis.
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In addition, the VHS division has entered into an agreement, which is expected
to generate revenues in excess of $5,500,000 over the remaining life of the
contract.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its cash balances, in excess of its current needs, in U.S.
Government Securities. The Company does not invest for the purposes of trading
in securities, however, the portfolio is managed and invested for maximum return
on the investment. The marketable securities at July 31, 1998, which are
recorded at a fair value of $7,021,980 and include unrealized gains of $14,887,
have exposure to price risk. This risk is estimated, absent any economic
justification for the selection of a different amount, as the potential loss in
fair value resulting from a hypothetical 10% adverse change in price quoted by
dealers and amounts to $702,198.
Actual results may differ.
The fair market values of investment securities are based on the quoted market
prices at the reporting date for those investments. The estimated fair market
value of investment securities by contractual maturity at July 31, 1998 is as
follows: $7,021,980 in 1998.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not currently engaged in any litigation.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sale of Unregistered Securities
In connection with the issuance of a $6,000,000 note, ( see Part I, Item
1, Note 4 of the Notes to financial Statements) the Company issued a warrant to
purchase 750,000 shares of common stock of the Company at $3.87 per share at any
time after May 16, 1999 through July 16, 2008. The warrant is subject to the
customary antidilution and registration rights provisions.
(d) Use Of Proceeds from Public Offering
(1) Effective date of the Registration Statement (Commission File Number
2-01494) for which Use of Proceeds information is provided is April
17, 1996.
(2) The offering date of the Registration Statement was April 18, 1996.
(3) The Managing Underwriters were:
Jefferies & Company, Inc.
Unterberg Harris
McDonald & Company Securities, Inc.
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(4) The Securities Registered was - Common Stock, $.01 Par Value.
(5) Aggregate offering price of securities registered and sold to date for
the account of:
Issuer -
Amount Registered 2,912,500 Shares
Aggregate Price of Offering Amount Registered $37,862,500
Amount Sold 2,912,500 Shares
Aggregate Offering Price of Amount Sold $37,862,500
Selling Security Holders -
Amount Registered 750,000 Shares
Aggregate Offering Price of Amount Registered $9,750,000
Amount Sold 750,000 Shares
Aggregate Offering Price of Amount Sold $9,750,000
(6) Amount of expenses incurred for the Registrant's account in
connection with the issuance and distribution of the Securities
Registered, all of which were made to "others" and none to directors,
officers, general partners or affiliates of the Registrant.
Underwriting Discount and Commission $2,651,353
Finders Fees -
Expenses paid to or for Underwriters -
Other Expenses, Estimated at $906,365
(7) Net offering proceeds to the Registrant after total expenses above $34,304,782.
(8) From the effective date of the Registration Statement through the end
of the quarterly period of this Form 10-Q, the Registrant made direct
or indirect payments to "others" in the amounts listed below. No
payments direct or indirect were made to Directors, Officers, General
Partners, or Affiliates of the Registrant.
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment $ 6,834,482
Purchase of real estate $ -
Acquisition of other business(es) - purchase of in process
research and development $ 400,000
Repayment of indebtedness $ 1,110,266
Working capital $ 3,432,736 *
Expanded Staff, facilities, advertising, and
software development $ 22,097,110 *
Repurchase of treasury stock $ 430,188
*Represents estimates.
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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
10(a) Severance Agreement between LanVision Systems, Inc. and
Alan J. Hartman
10(b) Severance Agreement between LanVision Systems, Inc. and
Robert F. Golden
11 Computation of Earnings (Loss) Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 24, 1998 the Company filed a Form 8-K, reporting under Item 5,
disclosing that the Registrant borrowed $6,000,000 pursuant to a term loan
received from The HillStreet Fund, L.P. and made on July 17, 1998.
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: September 10, 1998 By: /s/ J. BRIAN PATSY
--------------------------- ----------------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: September 10, 1998 By: /s/ THOMAS E. PERAZZO
--------------------------- ----------------------------------------
Thomas E. Perazzo
Vice President, Chief Operating Officer,
Chief Financial Officer and Treasurer
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INDEX TO EXHIBITS
Sequential
Exhibit No. Exhibit Page No.
----------- ------- --------
10(a) Severance Agreement between LanVision Systems, Inc. and
Alan J. Hartman 25
10(b) Severance Agreement between LanVision Systems, Inc. and
Robert F. Golden 29
11 Computation of Earnings (Loss) Per Common Share..................................... 34
27 Financial Data Schedule ............................................................ 35
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