<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 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.)
4700 Duke Drive, Suite 170
Mason, OH 45040-9374
(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 December 13, 1999: 8,838,033.
1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets at October 31, 1999 and January 31, 1999.................... 3
Condensed Consolidated Statements of Operations for the three and nine months ended October 31,
1999 and 1998..................................................................................... 5
Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 1999 and
1998.............................................................................................. 6
Notes to Condensed Consolidated Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............
9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 21
Item 3. Defaults on Senior Securities..................................................................... 21
Item 5. Other Information................................................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................................................. 22
Signatures........................................................................................ 22
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
1999 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,992,441 $ 5,445,498
Accounts receivable, net of allowance for doubtful
accounts of $370,000 and $325,000, respectively 2,613,828 3,642,330
Unbilled receivables 1,372,598 2,383,964
Other 774,126 1,024,960
------------ ------------
Total current assets 9,752,993 12,496,752
Property and equipment:
Computer equipment 4,409,681 4,407,863
Computer software 590,591 588,441
Office furniture, fixtures and equipment 1,379,043 1,534,206
Leasehold improvements 648,230 930,920
------------ ------------
7,027,545 7,461,430
Accumulated depreciation and amortization (4,158,072) (3,321,466)
------------ ------------
2,869,473 4,139,964
Capitalized software development costs, net of accumulated
amortization of $1,055,228 and $920,228, respectively 839,701 749,701
Other 342,508 98,633
------------ ------------
$13,804,675 $17,485,050
============ ============
</TABLE>
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
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
1999 1999
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 544,771 $ 474,189
Accrued compensation 404,769 543,790
Accrued other expenses 2,201,695 3,105,021
Deferred revenues 1,344,921 1,083,837
------------ ------------
Total current liabilities 4,496,156 5,206,837
Long-term debt 6,000,000 6,000,000
Long-term accrued interest 1,081,430 431,167
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 35,003,931 35,102,459
Treasury stock, at cost, 58,467 and 81,980 shares, respectively (277,921) (389,692)
Accumulated (deficit) (32,587,886) (28,954,686)
------------ ------------
Total stockholders' equity 2,227,089 5,847,046
============ ============
$ 13,804,675 $ 17,485,050
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended October 31,
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Systems sales $ 968,159 $ 1,307,886 $ 2,436,807 $ 4,979,826
Services, maintenance and support 2,015,910 1,276,852 4,765,868 4,047,450
Service bureau operations -- 251,591 154,925 422,305
----------- ----------- ----------- ------------
Total revenues 2,984,069 2,836,329 7,357,600 9,449,581
Operating expenses:
Cost of systems sales 129,217 315,912 679,464 1,525,768
Cost of services, maintenance and support 1,052,610 1,340,522 2,961,665 4,298,875
Cost of service bureau operations 266,374 755,534 1,098,250 2,103,374
Selling, general and administrative 1,115,210 1,516,922 3,571,295 6,092,729
Product research and development 504,303 722,443 1,575,357 3,121,056
Restructuring expense -- -- -- 300,000
----------- ----------- ----------- ------------
Total operating expenses 3,067,714 4,651,333 9,886,031 17,441,802
----------- ----------- ----------- ------------
Operating (loss) (83,645) (1,815,004) (2,528,431) (7,992,221)
Interest income 37,464 94,112 125,596 291,741
Interest expense 447,961 390,000 1,230,366 457,500
----------- =========== ----------- ------------
Net (loss) $ (494,142) $(2,110,892) $(3,633,201) $ (8,157,980)
=========== =========== =========== ============
Basic net (loss) per common share $ (.06) $ (.24) $ (.41) $ (.93)
=========== =========== =========== ============
Diluted net (loss) per common share $ (.06) $ (.24) $ (.41) $ (.93)
=========== =========== =========== ============
Number of shares used in per common share computations 8,836,165 8,814,520 8,823,356 8,809,856
=========== =========== =========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended October 31,
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
Operating activities:
Net (loss) $(3,633,201) $ (8,157,980)
Adjustments to reconcile net (loss) to net cash
provided by(used for) operating activities:
Depreciation and amortization 1,318,766 1,521,653
Increase in long-term accrued interest 650,263 231,833
Cash provided by (used for) assets and liabilities:
Accounts and unbilled receivables 2,035,013 (1,944,501)
Other current assets 255,689 (97,000)
Accounts payable and accrued expenses (825,839) (1,140,175)
Deferred revenues 261,084 (8,809)
----------- ------------
Net cash provided by (used for) operating activities 61,775 (9,594,979)
Investing activities:
Purchases of investment securities -- (9,836,409)
Sales of investment securities -- 13,681,089
Proceeds from disposal of property and equipment 10,562 --
Purchases of property and equipment (69,761) (740,151)
Capitalization of software development costs (225,000) (297,000)
Other (243,876) (15,616)
----------- ------------
Net cash (used for) provided by investing activities (528,075) 2,791,913
Financing activities:
Proceeds of long-term debt -- 6,000,000
Sale of treasury stock to employee stock purchase plan 13,243 32,138
----------- ------------
Net cash provided by financing activities 13,243 6,032,138
----------- ------------
Decrease in cash and cash equivalents (453,057) (770,928)
Cash and cash equivalents at beginning of period 5,445,498 2,142,881
=========== ============
Cash and cash equivalents at end of period $ 4,992,441 $ 1,371,953
=========== ============
Supplemental cash flow disclosures:
Interest paid $ 546,000 $ 152,000
</TABLE>
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 or nine months ended October 31, 1999, are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 2000.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 21 of its 1998 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 1999.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The decrease in cash and cash equivalents results from the use of cash to fund
current operations.
The decrease in receivables is due to improved collections, and the write off of
some previously reserved accounts.
In August 1997, the Company announced the formation of Virtual Healthware
Services (VHS), a new healthcare information application service provider
division that delivers high quality, transaction-based document
imaging/management services to healthcare providers from a central data center.
Also, in August 1997, the Company announced that The Detroit Medical Center
(DMC) signed a three-year agreement with VHS and the contract was expected to
generate in excess of $6,000,000 in revenues over the initial term of the
agreement. In 1997, and the first part of 1998, the Company spent approximately
$4,000,000 to build the central data center and place it into production. During
the first quarter of 1998, VHS began production at the DMC. However,
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during 1998, The Detroit Medical Center encountered financial difficulties, and
as previously announced in February, 1999, the DMC as part of an overall
financial restructuring, notified the Company that it sought to terminate its
agreement with VHS. The agreement between the DMC and LanVision does not provide
for early termination, and the Company has filed a complaint seeking the
recovery of damages in excess of $2,000,000 and initiated arbitration
proceedings against the DMC. However, at the present time, the Company is unable
to predict the outcome of these proceedings. At October 31, 1999, LanVision's
receivables due from the DMC approximated $667,000. Management believes it has
adequately provided for any possible uncollectible amounts.
The decrease in unbilled receivables is due to the timing of progress billings
on contracts.
Other current assets consist primarily of prepaid expenses, including
commissions, and acquired software and hardware awaiting installation. The
decrease reflects a decrease in prepaid expenses and the reclassification of
prepaid loan fees to a non-current asset.
The decrease in property and equipment is due to the downsizing of facilities
including the disposal of excess office furniture and equipment and abandonment
of certain leasehold improvements.
The increase in other non-current assets results primarily from an increase in
and the reclassification of prepaid loan fees from current to non-current.
The increase in accounts payable is due to the timing of payments on certain
payables.
The decrease in accrued compensation results from a reduction in headcount and
the payment of incentive compensation.
The decrease in accrued other expenses results from the settlement of certain
contractual issues with customers and the use of the accrued restructuring
liability for facilities downsizing.
The increase in deferred revenues is due to the receipt of advance payments on
several contracts prior to revenue recognition.
Note 4 - STOCK OPTIONS
During the first nine months of the current fiscal year, the Company granted
101,000 stock options under the Employee Stock Option Plan. During the same
period 208,887 options were forfeited under all plans and options to purchase
10,000 shares of Common Stock were exercised.
Note 5 - RESTRUCTURING EXPENSE
During the prior fiscal year, the company restructured certain aspects of its
operations. Accordingly, the Company accrued $700,000 for the anticipated costs
of severance and related
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taxes and fringe benefits for the reduction of the work force by 16 people and
downsizing the existing facilities to the current and near term need. At October
31, 1999, approximately $647,000 of the accrual has been used for the
restructuring and approximately $53,000 remains for additional facilities
downsizing.
Note 6 - 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 7 - 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:
<TABLE>
<CAPTION>
Three months ended October 31, Nine months ended October 31,
------------------------------- ---------------------------------
1999 1998 1999 1998
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net (loss) $(494,142) $(2,110,892) $(3,633,201) $(8,157,980)
Unrealized holding gains
arising during the period -- 12,023 -- 6,393
Reclassification adjustment for
gains included in Net (loss) -- (1,758) -- (56,444)
=========== =========== ===========
Comprehensive (loss) $(494,142) $(2,100,627) $(3,633,201) $(8,208,031)
========= =========== =========== ===========
</TABLE>
Note 8 - LONG-TERM DEBT
The Company's Long-term Debt Agreement is in the process of being amended to
include new financial covenants and requiring the Company to maintain a minimum
cash balance of $2,700,000, as of October 31, 1999 and thereafter. The lender
has agreed to amend the loan agreement to include the following: eliminate the
existing minimum revenues and net worth covenants and replace them with a
requirement to execute new software license agreements during the period August
1, 1999 through January 31, 2000 in the amount of at least $1,500,000, and for
the period February 1, 2000 through July 31, 2000 in the amount of at least
$2,500,000; and beginning with the quarter ending July 31, 2000, and each
quarter thereafter, generate positive cash flow of at least $200,000, per
quarter, or maintain a minimum net worth of at least $4,000,000.
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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 from third party vendors, the healthcare regulatory
environment, healthcare information systems budgets, availability of healthcare
information systems trained personnel for implementation of new systems, as well
as maintenance of legacy systems, Year 2000 Compliance priorities, 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 a leading
supplier of Healthcare Information Access Systems and services and an
Application Service Provider with solutions that can utilize the power of the
Internet/Intranet to link hospitals, physicians, patients and payers to a robust
Electronic Medical Record that enable, on a real-time basis, access to all the
various forms of clinical and financial patient information from a single
permanent health information repository. LanVision's solutions enable the
coordination of both "structured" and "unstructured" patient data through a
single health information repository. The Company's products are complementary
to existing clinical and financial systems, and use document imaging and
workflow tools to ensure end users can electronically access all the various
forms of healthcare information including clinician's handwritten notes,
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 and eventually a patient's home using web-browser
technology. Web access to the entire medical record significantly 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 Company's solutions integrate a proprietary document
imaging platform, application suites, and image and web-enabling tools, that
allow for the seamless merger of "back office" functionality with existing
Clinical Information Systems at the desktop. The Company offers a
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robust document imaging/management infrastructure that is built for high volume
transaction processing and is optimized for the healthcare industry. In addition
to providing the clinician access to information not previously available at the
desktop, the Company's applications fulfill the administrative and legal needs
of the Medical Records and Patient Financial Services departments. Furthermore,
these systems have been specifically designed to integrate with other Clinical
and Patient Account Information Systems. For example, the Company has integrated
its products with selected systems from Shared Medical Systems Corporation,
Cerner Corporation, IDX Systems Corporation, and Oacis Healthcare Holdings Corp.
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. The Company's systems deliver on-line
enterprisewide access to fully-updated patient information which historically
was maintained on a variety of media, including paper, magnetic disk, optical
disk, x-ray film, video, audio and microfilm.
The Company's revenues are derived from: the licensing and sale of systems
comprising LanVision and third-party software and hardware components, product
support, maintenance, professional services, and service bureau operations.
Professional services include implementation and training, project management,
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
different configurations of software and hardware, resulting in varying margins
among contracts. The margins on professional services revenues are expected to
fluctuate based upon the negotiated terms of the agreement with each customer
and the Company's ability to fully utilize its professional services,
maintenance and support services staff. Revenues from the Company's service
bureau operations, which provides high quality, transaction-based document
imaging/management services from a central data center, 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 expected to increase as the volume of archived historical data
increases and retrievals of data increases as the systems are fully implemented
within a healthcare facility. VHS has installed its system at The Health
Alliance, Inc., a group of five hospitals in the greater Cincinnati area.
The systems and service bureau operations enable hospitals and integrated
healthcare networks to capture, store, manage, route, retrieve and process vast
amounts of clinical and financial patient information. 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, wherever located, including the point of patient care.
Sales are made by the Company's direct sales force and through a Remarketing
Agreement with Shared Medical Systems Corporation.
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In February, 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 WebView(TM),
ChartVision(R), On-Line Chart Completion(TM) and Release of Information
(ROI)(TM) (formerly called 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 fiscal 2000 and beyond, as more of the SMS organization is
trained to sell and implement the LanVision products. To date SMS has sold six
systems to end users.
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, 1998 and the first nine months of 1999, the Company has experienced
extended sales cycles, and sales in each period have been less than the
Company's internal plans. 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 although many of these systems do not compete with
LanVision's products, these systems do compete for capital budget dollars and
the available time of information system personnel within the healthcare
organizations. Additionally, many healthcare companies have been preoccupied
with Year 2000 remediation and deferred the purchase of new information systems.
The LanVision 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 sold by LanVision's direct sales force 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
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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.
Under the terms of the remarketing agreement with SMS, the Company receives
royalties from SMS on LanVision software licensed by SMS to their end user
customers. For perpetual licenses, SMS pays LanVision 25% of the total royalty
30 days following the quarter in which SMS executes a license with an end user.
Upon delivery of the software by SMS to its end user, SMS is required to pay
LanVision the remaining 75% of the royalty 30 days following the quarter in
which the software was delivered. LanVision recognizes 25% of the royalty as SMS
executes licenses and 75% of the royalty as SMS delivers the software to its end
users. Royalty revenue is included in the Statement of Operations under the
caption "Systems Sales."
YEAR 2000 COMPLIANCE
The Year 2000 Compliance 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 has completed all stages of reviewing, correcting and testing Year
2000 Compliance issues related to its internal use software and hardware and the
Company's products, including third-party software components offered for
resale.
The Company presently believes the Year 2000 Compliance issue will not pose
significant operational problems for the Company or its customers. However, if
clients do not make the necessary changes to equipment and upgrade to Year 2000
Compliant software in a timely manner, the Year 2000 Compliance issue could have
a material impact on the Company and its customers.
The Company has divided the Year 2000 Compliance issue into two areas: software
products and systems sold to customers and internal use software and hardware.
With regard to software products sold to customers, the Company has: completed
the overall Year 2000 Compliance remediation plan; made a review of the existing
software code; corrected all known Year 2000 code problems; developed a test
plan; and tested the revised code for quality assurance. The Year 2000 quality
assurance testing, which included integration testing of LanVision software
products and other third-party software and hardware system components, has been
completed and where necessary the code was modified. This testing and
modification was done in several iterations. All LanVision Year 2000 Compliant
software products have completed
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Beta testing and are in General Release. The Company believes that Year 2000
compatible equipment is available for acquisition by customers, if necessary, to
ensure installed systems operate properly.
The Company is now working with its customers to upgrade their systems to Year
2000 Compliance. Based upon current information and the time remaining for
clients to upgrade their systems to be Year 2000 Compliant, including upgrading
to LanVision's Year 2000 Compliant software, the Company believes that the risk
of a customer not having a Year 2000 Compliant system is minimal. Accordingly,
no contingency plans have not been developed.
With regard to the Company's service bureau operations, the Company has
determined that its systems and equipment are Year 2000 Compliant, including the
LanVision software products discussed above and telecommunications services
provided by outside vendors. Without Year 2000 Compliant LanVision software and
telecommunications, the service bureau operations would not be able to provide
current levels of services to its customers. No contingency plan has been
developed based upon our current review of the systems, software and
telecommunications services.
With regard to internal use software and hardware, the Company has reviewed all
of the internally used software and equipment, and determined that a small
amount of older computer equipment required replacement, but the type and amount
were not significant and were replaced in the ordinary course as systems were
upgraded. With regard to third-party software, it has been determined that some
software is not compliant and will be upgraded, in 1999, as vendors provide Year
2000 Compliant versions. All major systems have been upgraded. However, several
auxiliary systems still require vendor upgrades. 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. The major vendors have advised the Company they are
currently Year 2000 Compliant. Accordingly, no contingency plan has been
developed.
The Company utilized both internal and external resources to reprogram, or
replace and test its software products for the Year 2000 Compliance
modifications. The total cost of the Year 2000 Compliance remediation is
estimated to be less than $500,000.
The Company has warranted, to certain customers, that its products will be Year
2000 Compliant. If the Company were unable to provide a Year 2000 Compliant
solution to these customers, the customers could claim breach of contract and
seek available legal remedies. Provisions of the Company's long-term debt
agreement and the Remarketing Agreement with SMS required the Company's products
be Year 2000 Compliant by December 31, 1998. Although, LanVision's products were
modified to be Year 2000 Compliant by December 31, 1998, all Alpha and Beta
testing was not completed as of that date. Waivers of compliance have been
received from our lender and the Remarketing Agreement with SMS is being
amended. Based upon the current best estimate for remediation of the Year 2000
Compliance issues, the
14
<PAGE> 15
Company believes the risk is minimal that the Company has not complied with
current commitments.
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 the VHS
service bureau operations are expected to increase over time, as more hospitals
outsource services to VHS, existing customers increase the volume of documents
stored on the systems, and the number of retrievals increase. VHS has installed
its system at The Health Alliance, Inc., a group of five hospitals in the
greater Cincinnati area. 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 system, unpredictability in the number and timing of systems
sales, length of the sales cycle, delays in the installation process and changes
in the customer's financial condition or budget. As a result, period to period
comparisons may not be meaningful with respect to the past operations of the
Company nor are they necessarily indicative of the future operations of the
Company.
REVENUES
Revenues for the third fiscal quarter ended October 31, 1999, were $2,984,069,
compared with $2,836,329 reported in the comparable quarter of 1998. Revenues
for the nine months ended October 31, 1999, were $7,357,600 compared with
$9,449,581 in the comparable prior period. The decrease in revenues, for the
nine months, results primarily from the decrease in new customers during the
current periods, offset to some extent by increased revenues from SMS, as most
healthcare organizations concentrated on Year 2000 remediation of legacy systems
rather than installing new systems.
Additionally, consolidations and mergers within the healthcare industry and the
attendant changes in management have delayed or terminated sales discussions.
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.
15
<PAGE> 16
Management believes the healthcare industry's focus on Year 2000 Compliance will
continue to adversely affect potential sales opportunities for its direct sales
force throughout fiscal 1999 and perhaps the first quarter of fiscal 2000.
Additionally, reduced reimbursements from Medicare under the Balanced Budget
Act, have adversely affected many healthcare providers because they have not
been able to reduce expenses to the extent revenue from reimbursements has
decreased. Accordingly, many healthcare providers have needed to tighten
operating and capital budgets. This adversely affected new systems sales in
fiscal 1999 and may continue in the Year 2000 and beyond.
The Remarketing Agreement with Shared Medical Systems Corporation has developed
more slowly than expected. To date, SMS's Marketing of LanVision's products has
been conducted by a small specialized sales force. Additionally, SMS's strategy
is to tightly control marketing activities until such time that the integrated
LanVision/SMS solution can be successfully demonstrated at its key customers.
The integrated products have been delivered to two SMS customers and final
integration testing has been successfully completed. LanVision expects that
SMS's marketing activities related to the LanVision products will increase and
believes revenue from this Remarketing Agreement will represent a greater
percentage of the Company's total revenues in the future.
On agreements executed by LanVision's direct sales force, 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, excluding our remarketer SMS, accounted for approximately 29% of the
revenues for the third quarter and 32% for the first nine months of 1999
compared with 56% and 31%, respectively, of revenues in the comparable periods
of the prior year. Revenues from SMS accounted for approximately $955,000 and
$1,168,000 for the three and nine months ended October 31, 1999, respectively.
OPERATING EXPENSES
Cost of Systems Sales
The cost of systems sales includes amortization of capitalized software
development costs on a straight-line basis, royalties and the cost of
third-party software and hardware. Cost of systems sales as a percentage of
systems sales may vary from period to period depending on the mix of hardware
and software of the systems or add-on sales delivered. The cost of systems sales
as a percentage of systems sales for the third quarter of 1999 and 1998 were 13%
and 24%, respectively. The lower cost reflects the change in the mix of
LanVision software with higher margins relative to the hardware and third party
software components with lower margins and higher costs. The cost of systems
sales as a percentage of systems sales for the first nine months
16
<PAGE> 17
of 1999 and 1998 were 28% and 31%, respectively, reflecting the higher mix of
LanVision software sales in the current period compared with the prior period.
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. The cost of such services, maintenance and support as a
percentage of the corresponding revenue was 52% and 105% for the third quarter
and 62% and 106% for the first nine months of fiscal 1999 and 1998,
respectively. The LanVision Professional Services staff provides services on a
time and material or fixed fee basis. The Professional Services staff has, in
the past, experienced 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 developing training courses and developing plans to move to LanVision's new
product releases, etc. However, improvement in the cost of sales is due to
reduced operating expenses and more effective utilization of the professional
services and support staffs. The Company's support margins are highest on
LanVision's proprietary software. Accordingly, margins are expected to improve
as more customers are added.
Cost of Services Bureau Operations
The cost of service bureau operations has declined in both the current quarter
and first nine months compared with the comparable prior periods as the overall
operations were significantly reduced when The Detroit Medical Center terminated
their agreement. See Note 3 of the Notes to Condensed Consolidated Financial
Statements. The ongoing cost of the service bureau operations during the third
quarter was primarily depreciation and the core centralized data center staff.
In October, 1999, The Health Alliance, Inc., began using the VHS Service Bureau.
Selling, General and Administrative
Selling, General and Administrative expenses consist primarily of: compensation
and related benefits and reimbursable travel and living expenses related to the
Company's sales, marketing and administrative personnel; advertising and
marketing expenses, including trade shows and similar type sales and marketing
expenses; and general corporate expenses, including occupancy costs. During the
third quarter of fiscal 1999, Selling, General and Administrative expenses
decreased to $1,115,210 compared with $1,516,922 in the comparable prior quarter
and decreased to $3,571,295 compared with $6,092,729 in the comparable prior
nine months of 1998. The reductions in Selling, General and Administrative
expenses is due to decreased staffing levels and reduced expenses in other
areas. 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 Partners.
Product Research and Development
17
<PAGE> 18
Product research and development expenses consist primarily of: compensation and
related benefits; the use of independent contractors for specific development
projects; and an allocated portion of general overhead costs, including
occupancy. During the third quarter of fiscal 1999, research and development
expenses decreased to $504,303 compared with $722,443 in the comparable prior
quarter and decreased to $1,575,357 compared with $3,121,056 in the comparable
prior nine months of 1998, as a result of a reduction of staff and use of
outside contractors as major development projects were completed in the later
portion of the prior fiscal year. The Company capitalized, in accordance with
Statement of Financial Accounting Standards No. 86, $225,000 and $297,000 of
product research and development costs in the first nine months of fiscal 1999
and 1998, respectively.
Interest income consists primarily of interest on invested cash. The decrease in
interest income results from the sale of investment securities and use of cash
to fund operations and acquire fixed assets.
Interest expense relates to the long-term debt.
Net loss
The net loss for the third quarter of fiscal 1999 was $494,142 ($.0.06 per
share) compared with a net loss of $2,110,892 ($.0.24 per share) in the third
quarter of fiscal 1998. The net loss for the first nine months of fiscal 1999
was $3,633,201 ($.0.41 per share) compared with a net loss of $8,157,980 ($.0.93
per share) in the first nine months of fiscal 1998. The decrease in the net loss
for the periods results primarily from reductions in selling, general and
administrative expenses and product research and development as well as
reductions in costs of sales, primarily as a result of staff reductions and
better utilization of staff, offset by increased interest expense on the
long-term debt outstanding during the nine months.
In spite of the less than anticipated number of new customer agreements signed
in the past, management continues to believe that the healthcare document
imaging and workflow market is going to be a significant market. 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
primarily through third party distributors and remarketing partners, and
potentially emerging healthcare Internet Service Providers, Application Service
Providers and content/E-commerce organizations.
Since commencing operations in 1989, the Company has incurred operating losses.
Although the Company achieved profitability in fiscal years 1992 and 1993, the
Company operated at a loss in fiscal years 1994 through 1998. 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.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1989, the Company 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, an initial public offering and borrowings, including a
$6,000,000 loan in July, 1998.
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. However, recently 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.
The Company has no significant obligations for capital resources, other than
noncancelable operating leases in the total amount of approximately $835,000,
payable over the next five years. However, the VHS service bureau operations
will need to acquire additional software and equipment as VHS adds additional
hospitals and clinics to its customer base. The central data center has been
configured to serve approximately fifty hospitals, with significant expansion
capabilities. For certain new customers, VHS may operate one or more onsite
document capture centers and provide the necessary scanning 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 fee
basis, the Company'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 several 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 three years. Throughout 1998 and
1999, the Company has reduced staffing levels and related expenses and improved
operating performance. However, the Company's expenses continue to exceed its
revenues. Accordingly, to achieve profitability and positive cash flow, it is
necessary for the Company to increase revenues or continue to reduce expenses.
Management believes that the recent general release of new or enhanced versions
of products has significantly strengthened the product lines. 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. However, there can be no
assurance the Company will be able to increase its revenues.
At October 31, 1999, the Company had cash and cash equivalents of $4,992,441.
Cash equivalents consist of overnight bank repurchase agreements. Under the
terms of its loan
19
<PAGE> 20
agreement, the Company has agreed to maintain a minimum cash and investment
balance of $2,700,000.
Management has significantly reduced operating expenses throughout 1998 and the
first nine months of fiscal year 1999, and believes the Company is well
positioned to achieve quarterly break-even or profitability, before interest,
expense, in the fourth quarter of fiscal year 1999 with modest increases in
revenues. However, based upon current expenditure levels and in the absence of
increased revenues, the Company would continue to operate at a loss.
Accordingly, for the foreseeable future, management will need to continually
assess its revenue prospects compared to its current expenditure levels. If it
does not appear likely that revenues will increase, it will be necessary to
further reduce operating expenses or raise cash through additional borrowings,
the sale of assets, or other equity financing. Certain of these actions will
require lender approval. However, there can be no assurance the Company will be
successful in any of these efforts. If it is necessary to significantly reduce
operating expenses, this could have an adverse affect on future operating
performance.
To date, inflation has not had a material impact on the Company's revenues or
expenses. Additionally, the Company does not have any significant market risk
exposure at October 31, 1999.
SIGNED AGREEMENTS - BACKLOG
LanVision enters into master agreements with its customers to specify the scope
of the system to be installed, services to be provided by LanVision, the agreed
upon aggregate price, and the timetable for implementation. The master agreement
typically provides that the Company will deliver the system in phases pursuant
to the customer's purchase orders, thereby allowing the customer flexibility in
the timing of its receipt of systems and to make adjustments that may arise
based upon changes in technology or changes in customer needs. The master
agreement also allows the customer to request additional components as the
installation progresses, which additions are then separately negotiated as to
price and terms. Certain Master Agreements allow customers to cancel subsequent
phases without penalty. 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 this trend will continue in
the future.
At October 31, 1999, the Company's customers (excluding customers of the Virtual
Healthware Services division) had entered into master agreements for systems and
services (excluding support and maintenance) which had not yet been delivered,
installed and accepted which, if fully performed, would generate sales of
approximately $5,821,000, compared with $6,073,000 and $6,881,000 at the end of
the second quarter of fiscal 1999 and the end of fiscal 1998, respectively. In
addition, the Company has deferred recognition of revenue on approximately
$667,000 of SMS contracts until such time as the software is delivered. The
systems and services are currently expected to be delivered over the next two to
three years. In addition, the Company anticipates approximately $2,000,000 in
transaction-based fee revenues for the Virtual Healthware Services division's
new client over the four-year life of the contract. Because implementation and
service
20
<PAGE> 21
bureau transaction-based fees are dependent upon the customer's schedule and
usage, the Company is unable to predict accurately the amount of these revenues
in future periods.
The Company's master agreements also generally provide for an initial
maintenance period and give the customer the right to subscribe for maintenance
and support services on a monthly, quarterly or annual basis. Maintenance and
support revenues for fiscal years 1998 and 1997 and 1996 were approximately
$2,755,000, $2,151,000 and $1,186,000, respectively and are expected to increase
as new or expanded systems are installed.
The commencement of revenue recognition varies depending on the size and
complexity of the system, the implementation schedule requested by the customer
and usage by customers of the VHS service bureau operations. Therefore,
LanVision is unable to accurately predict the revenue 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 its 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
The Company is not currently engaged in any material adverse litigation.
As announced in February, 1999, LanVision's customer The Detroit Medical Center
("DMC") terminated its agreement with the Company. Because the agreement does
not provide for early termination, arbitration proceedings against DMC commenced
in December, 1999. A final decision could be rendered before the end of the
current fiscal year.
Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan Agreement.
Item 5. OTHER INFORMATION
The Company announced on October 25, 1999 that The Nasdaq-Amex Market Group had
notified the Company that it was not currently in compliance with Nasdaq's
listing standards and the Company would seek to continue the listing of its
Common Stock on the Nasdaq National Market or, alternatively, to transfer the
listing of its Common Stock to The Nasdaq Small Cap Market. The Company appealed
the Nasdaq staff determination before a Listing Qualifications Panel on November
18, 1999. On November 29, 1999 the Company announced that its Common Stock would
be transferred to The Nasdaq SmallCap Market, effective with the opening of
21
<PAGE> 22
business on November 30, 1999, via an exception from Nasdaq's minimum bid price
and net tangible assets requirement (Total Assets - Total Liabilities - Goodwill
- - Redeemable Securities = Net Tangible Assets). Although LanVision failed to
meet the minimum $1.00 minimum bid price requirement as of October 31, 1999, the
Company was granted a temporary exception from this standard subject to
LanVision meeting certain conditions. At October 31, 1999, LanVision was in
compliance with Nasdaq's standard minimum net tangible asset requirement for
continued listing on the Small Cap Market; however, Nasdaq's current exception
requires LanVision, by January 31, 2000, to demonstrate its ability to sustain
compliance by meeting certain additional conditions specified by Nasdaq. The
exceptions will expire on January 31, 2000. In the event the Company is deemed
to have met the terms of the exceptions, it shall continue to be listed on The
Nasdaq SmallCap Market. The Company believes that it can meet these conditions,
however, there can be no assurance that it will do so. If at some future date
the Company's securities should cease to be listed on The Nasdaq SmallCap
Market, they may continue to be listed on the OTC-Bulletin Board. For the
duration of the exception, the Company's Nasdaq symbol is LANVC.
The Company's Board of Directors has authorized a special meeting of
shareholders, currently scheduled for January 12, 2000, to act upon a proposal
to approve an amendment to the Company's Certificate of Incorporation of the
Company that would permit the Board of Directors to effect a reverse stock split
of the Company's issued and outstanding Common Stock at a ratio not to exceed
one-for-three (1:3). If adopted by the Company's shareholders, this amendment
would allow the Board of Directors, in its discretion, to declare a reverse
split, which could enhance the Company's ability to maintain a minimum bid price
of over $1.00.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings (Loss) Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 25, 1999, the Company filed a Form 8-K, reporting under Item 5,
disclosing that the Registrant had been notified that The Nasdaq-Amex Market
group had notified the Company that it was not currently in compliance with
Nasdaq's listing standards and the Company will seek to continue the listing of
its Common Stock on the Nasdaq National Market or, alternatively, to transfer
the listing of its Common Stock to The Nasdaq Small Cap Market. The Company
appealed the Nasdaq staff determination before a Listing Qualifications Panel on
November 18, 1999.
On November 29, 1999, the Company filed a Form 8-K, reporting under Item 5,
disclosing that the Registrant's Common Stock would be listed on The Nasdaq
Small Cap Market via an exception from certain listing requirements.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANVISION SYSTEMS, INC.
DATE: December 13, 1999 By: /s/ J. BRIAN PATSY
--------------------------- -----------------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: December 13, 1999 By: /s/ THOMAS E. PERAZZO
---------------------------- -----------------------------------------
Thomas E. Perazzo
Vice President, Chief Operating Officer,
Chief Financial Officer and Treasurer
23
<PAGE> 24
INDEX TO EXHIBITS
Exhibit No. Exhibit
-----------
11 Computation of Earnings (Loss) Per Common Share
27 Financial Data Schedule
24
<PAGE> 1
Exhibit 11
LANVISION SYSTEMS, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended
October 31,
----------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net (loss) $ (494,142) $(2,110,892)
============ ===========
Average shares outstanding 8,836,165 8,814,520
Stock options:
Total options -- --
Assumed treasury stock buyback -- --
Warrants assumed converted -- --
Convertible redeemable preferred
stock assumed converted -- --
============ ===========
Number of shares used in per
common share computation 8,836,165 8,814,520
============ ===========
Basic net (loss) per share of common stock $ (0.06) $ (0.24)
============ ===========
Diluted net (loss) per share of common stock $ (0.06) $ (0.24)
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
-----------------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net (loss) $(3,633,201) (8,157,980)
============ ===========
Average shares outstanding 8,823,356 8,809,856
Stock options:
Total options -- --
Assumed treasury stock buyback -- --
Warrants assumed converted -- --
Convertible redeemable preferred
stock assumed converted -- --
============ ===========
Number of shares used in per
common share computation 8,823,356 8,809,856
============ ===========
Basic net (loss) per share of common stock $ (.41) $ (0.93)
============ ===========
Diluted net (loss) per share of common stock $ (.41) $ (0.93)
============ ===========
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's condensed consolidated financial statements for the nine months ended
October 31,1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,992,441
<SECURITIES> 0
<RECEIVABLES> 4,356,426
<ALLOWANCES> (370,000)
<INVENTORY> 0
<CURRENT-ASSETS> 9,752,993
<PP&E> 7,027,545
<DEPRECIATION> (4,158,072)
<TOTAL-ASSETS> 13,804,675
<CURRENT-LIABILITIES> 4,496,156
<BONDS> 6,000,000
0
0
<COMMON> 88,965
<OTHER-SE> 2,138,124
<TOTAL-LIABILITY-AND-EQUITY> 13,804,675
<SALES> 7,357,600
<TOTAL-REVENUES> 7,357,600
<CGS> 4,739,379
<TOTAL-COSTS> 9,886,031
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,230,366
<INCOME-PRETAX> (3,633,201)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,633,201)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,633,201)
<EPS-BASIC> (.41)
<EPS-DILUTED> (.41)
</TABLE>
