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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 April 30, 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.)
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 June 1, 1999: 8,814,520.
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TABLE OF CONTENTS
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Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements......................................................... 3
Condensed Consolidated Balance Sheets at April 30, 1999 and January 31, 1999........................ 3
Condensed Consolidated Statements of Operations for the three months ended April 30, 1999 and 1998.. 5
Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 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................................................................................... 19
Item 3. Defaults on Senior Securities....................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................................................. 19
Item 6. Exhibits and Reports on Form 8-K.................................................................... 20
Signatures.......................................................................................... 21
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PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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Assets
(Unaudited) (Audited)
April 30, January 31,
1999 1999
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Current assets:
Cash and cash equivalents $ 4,147,981 $ 5,445,498
Accounts receivable, net of allowance for doubtful
accounts of $340,000 and $325,000, respectively 3,785,065 3,642,330
Unbilled receivables 2,010,404 2,383,964
Other 1,113,055 1,024,960
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Total current assets 11,056,505 12,496,752
Property and equipment:
Computer equipment 4,435,006 4,407,863
Computer software 590,591 588,441
Office furniture, fixtures and equipment 1,543,772 1,534,206
Leasehold improvements 930,920 930,920
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7,500,289 7,461,430
Accumulated depreciation and amortization (3,754,533) (3,321,466)
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3,745,756 4,139,964
Capitalized software development costs, net of accumulated
amortization of $965,228 and $920,228, respectively 779,701 749,701
Other 91,340 98,633
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$ 15,673,302 $ 17,485,050
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</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
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(Unaudited) (Audited)
April 30, January 31,
1999 1999
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Current liabilities:
Accounts payable $ 590,952 $ 474,189
Accrued compensation 339,668 543,790
Accrued other expenses 2,425,595 3,105,021
Deferred revenues 1,405,061 1,083,837
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Total current liabilities 4,761,276 5,206,837
Long-term debt 6,000,000 6,000,000
Long-term accrued interest 624,000 431,167
Convertible redeemable preferred stock, $.01 par value per share
5,000,000 shares authorized -- --
Stockholders' equity:
Common stock, $.01 par value per share, 25,000,000 shares
authorized, 8,896,500 shares issued 88,965 88,965
Capital in excess of par value 35,102,459 35,102,459
Treasury stock, at cost, 81,980 shares (389,692) (389,692)
Accumulated (deficit) (30,513,706) (28,954,686)
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Total stockholders' equity 4,288,026 5,847,046
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$ 15,673,302 $ 17,485,050
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended April 30,
(Unaudited)
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Three Months Ended
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1999 1998
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Revenues:
Systems sales $ 926,970 $ 2,106,930
Services, maintenance and support 1,290,153 1,435,600
Service bureau operations 154,925 62,500
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Total revenues 2,372,048 3,605,030
Operating expenses:
Cost of systems sales 435,464 778,721
Cost of services, maintenance and support 930,045 1,526,676
Cost of service bureau operations 426,419 622,269
Selling, general and administrative 1,261,239 2,466,221
Product research and development 546,012 1,450,491
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Total operating expenses 3,599,179 6,844,378
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Operating (loss) (1,227,131) (3,239,348)
Interest income 48,944 103,263
Interest expense (380,833) --
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Net (loss) $(1,559,020) $(3,136,085)
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Basic net (loss) per common share $ (0.18) $ (0.36)
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Diluted net (loss) per common share $ (0.18) $ (0.36)
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Number of shares used in per common share computations 8,814,520 8,806,000
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 30,
(Unaudited)
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1999 1998
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Operating activities:
Net (loss) $(1,559,020) $(3,136,085)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 478,067 477,623
Increase in long-term accrued interest 192,833 --
Cash provided by (used for) assets and liabilities:
Accounts and unbilled receivables 225,970 (986,996)
Other current assets (83,240) 74,514
Accounts payable and accrued expenses (766,785) (405,018)
Deferred revenues 321,224 14,228
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Net cash (used for) operating activities (1,190,951) (3,961,734)
Investing activities:
Purchases of investment securities -- (3,610,144)
Sales of investment securities -- 7,718,764
Purchases of property and equipment (38,859) (577,324)
Capitalization of software development costs (75,000) (99,000)
Other 7,293 (13,464)
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Net cash (used for) provided by investing activities (106,566) 3,418,832
Increase (decrease) in cash (1,297,517) (542,902)
Cash and cash equivalents at beginning of period 5,445,498 2,142,881
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Cash and cash equivalents at end of period $ 4,147,981 $ 1,599,979
=========== ===========
Supplemental cash flow disclosures:
Interest paid $ 180,000 $ --
</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 months ended April 30, 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 and purchase additional fixed assets.
The decrease in receivables is due to lower revenues in the current quarter
compared to the prior quarter ended January 31, 1999 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 service bureau 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.
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During the first quarter of 1998, VHS began production at The DMC. However,
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 initiated settlement discussions with
The DMC. However, at the present time, the Company is unable to predict the
outcome of these discussions. At April 30, 1999, LanVision's receivables due
from The DMC approximated $667,000. Management believes it has adequately
provided for any possible uncollectible amounts.
Other current assets consist primarily of prepaid expenses, including
commissions, and acquired software and hardware awaiting installation. The
increase is due to the payment of prepaid maintenance expenses.
The increase in accounts payable is due to the purchase of certain equipment for
installation at customer sites just prior to the end of the quarter.
The decrease in accrued compensation results from the payment of year-end
bonuses.
The decrease in accrued other expenses results from the settlement of
contractual issues relating to certain aspects of implementation on several
contracts.
Note 4 - STOCK OPTIONS
During the first three months of the current fiscal year, the Company granted no
stock options under any Stock Option Plan. During the same period 178,387
options were forfeited under all plans.
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 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 April 30, 1999, approximately $388,000 of the accrual has
been used for the restructuring and approximately $312,000 remains for the
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.
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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:
Three months ended April 30,
---------------------------------
1999 1998
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Net (loss) $(1,559,020) $(3,136,085)
Unrealized holding gains (losses)
arising during the period -- (3,811)
Reclassification adjustment for
gains included in Net (loss) -- (37,514)
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Comprehensive (loss) $(1,559,020) $(3,177,410)
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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 produced from third party vendors, the healthcare
regulatory environment, healthcare information systems budgets, availability of
healthcare information systems trained personnel for implementation of new
systems, as well as maintenance of legacy systems, 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.
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RESULTS OF OPERATIONS
GENERAL
LanVision Systems, Inc. ("LanVision"(TM) or the "Company") is a leading supplier
of Healthcare Information Access Systems and services that enable healthcare
providers to access, on a real-time basis, all the various forms of clinical and
financial patient information from a single permanent health information
repository. The Company's solutions integrate a proprietary document imaging
platform, application suites, and image and web-enabling tools, that allow for
the seamless merger of "back office" functionality with existing Clinical
Information Systems at the desktop. The Company offers a robust document
imaging/management infrastructure that is built for high volume transaction
processing and is optimized for the healthcare industry. In addition to
providing the clinician access to information not previously available at the
desktop, the Company's applications fulfill the administrative and legal needs
of the Medical Records and Patient Financial Services departments. Furthermore,
these systems have been specifically designed to integrate with any Clinical
Information System. For example, the Company has integrated its products with
selected systems from 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.
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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 located throughout the enterprise, 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.
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 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 later in fiscal 1999, as more of the SMS organization is
trained to sell and implement the LanVision products. To date SMS has sold five
systems to end users through April 30, 1999.
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 three 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, Year 2000 Compliance, etc., 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 personnel
within the healthcare organizations. 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.
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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 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. Contingency
plans have not yet been developed. However, if needed, contingency plans will be
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 and no contingency plan has been
developed based upon our current review of the systems, software and
telecommunications services. However, if needed, contingency plans will be
developed.
With regard to internal use software and hardware, the Company has reviewed
substantially all of the internally used software and equipment, and has
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 be upgraded, in 1999, 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. The major vendors have advised the Company they are
currently Year 2000 Compliant. No contingency plan has been developed. However,
if needed, contingency plans will be 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 not
considered to be material, 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 the 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 the 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
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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 is currently
installing 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 first fiscal quarter ended April 30, 1999, were $2,372,048,
compared with $3,605,030 reported in the comparable quarter of 1998. Revenues
for the first quarter of fiscal 1999 do not include approximately $1,270,000 of
revenues for previously announced sales made by our Remarketing Partner Shared
Medical Systems Corporation. As noted, at year-end, revenues on the contracts
have been deferred until certain integration is completed, which is expected to
occur in the second quarter when the final integration testing is completed.
Sales activity has been slower than planned as many healthcare institutions are
focused on resolving Year 2000 Compliance problems with legacy 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 the LanVision
products, these systems do compete for capital budget dollars and the available
time
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of information systems personnel within the healthcare industries. Management
believes the healthcare industry's focus on Year 2000 Compliance will continue
to adversely affect potential sales opportunities for its direct sales force
through at least the first half of fiscal 1999. Also, the Remarketing Agreement
with Shared Medical Systems Corporation has developed more slowly than expected.
However, management believes revenue from this Remarketing Agreement will
represent a greater percentage of the Company's total revenues in the future.
After an agreement is executed, LanVision does not record revenues until it
delivers the hardware and software or performs the agreed upon services. The
commencement of revenue recognition varies depending on the size and complexity
of the system and the scheduling of the implementation, training, interface
development and other services requested by the customer. Accordingly,
significant variations in revenues can result as more fully discussed under
"Uneven Patterns of Quarterly Operating Results." Three customers accounted for
approximately 36% of the revenues for the first quarter of 1999 compared with
47% of revenues in the comparable period of the prior year.
OPERATING EXPENSES
Cost of Systems Sales
The cost of systems sales includes amortization of capitalized software
development costs on a straight-line basis, royalties and the cost of
third-party software and hardware. Cost of systems sales as a percentage of
systems sales may vary from period to period depending on the mix of hardware
and software of the systems or add-on sales delivered. The cost of systems sales
as a percentage of systems sales for the first quarter of 1999 and 1998 were 47%
and 37%, respectively. The higher cost reflects the lower mix of LanVision
software with higher margins relative to the hardware and third party software
components with lower margins and higher costs.
Cost of Services, Maintenance and Support
The cost of services, maintenance and support includes compensation and benefits
for support and professional services personnel and the cost of third-party
maintenance contracts. As a percentage of services, maintenance and support
revenues, the cost of such services, maintenance and support was 72% and 106%
for the first quarter of fiscal 1999 and 1998, respectively. The 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.
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
15
<PAGE> 16
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. 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.
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
first quarter of fiscal 1999, Selling, General and Administrative expenses
decreased to $1,261,239 compared with $2,466,221 in the comparable prior
quarter. 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
Product research and development expenses consist primarily of: compensation and
related benefits; the use of independent contractors for specific development
projects; and an allocated portion of general overhead costs, including
occupancy. During the first quarter of fiscal 1999, research and development
expenses decreased to $546,012 compared with $1,450,491 in the comparable prior
quarter 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, $75,000 and $99,000 of product research and
development costs in the first quarter 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 to fund
operations and acquire fixed assets.
Interest expense relates to the long-term debt.
Net loss
The net loss for the first quarter of fiscal 1999 was $1,559,020 ($.0.18 per
share) compared with a net loss of $3,136,085 ($.0.36 per share) in the first
quarter of fiscal 1998. The decrease in the net loss for the period 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.
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
16
<PAGE> 17
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.
Since commencing operations in 1989, the Company has 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 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.
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 $1,909,000,
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. However, for certain new customers VHS will operate one or more
onsite document capture centers and will 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. Although the Company
17
<PAGE> 18
has increased its revenues, reduced staffing levels and related expenses, and
improved operating performance, 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 continue to increase its revenues. However, there
can be no assurance the Company will be able to continue to increase its
revenues.
At April 30,1999, the Company had cash and cash equivalents of $4,147,981. Cash
equivalents consist primarily of overnight bank repurchase agreements. Under the
terms of its loan agreement, the Company has agreed to maintain a minimum cash
and investment balance of $2,400,000.
Management has significantly reduced operating expenses throughout 1998 and the
first quarter of fiscal year 1999, and believes the Company could achieve
break-even or profitability in fiscal year 1999, before interest expense, on a
revenue increase similar to 1998. 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.
In December, 1998, the Company retained CIBC Oppenheimer Corp. as a financial
advisor to help the Company plan for future capital needs and assist the Company
with decisions that maximize shareholder value.
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 April 30, 1999.
SIGNED AGREEMENTS - BACKLOG
LanVision enters into master agreements with its customers to specify the scope
of the system to be installed and 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. Historically, customers have
18
<PAGE> 19
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 April 30, 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 $7,900,000, compared with $7,000,000 at the end of fiscal 1998.
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 bureau fees are dependent upon the customer's
schedule and usage, the Company is unable to predict accurately the amount of
revenues in future periods.
The Company's master agreements also generally provide for an initial
maintenance period and give the customer the right to subscribe for maintenance
and support services on a monthly, quarterly or annual basis. Maintenance and
support revenues for fiscal years 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 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.
Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan Agreement
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
19
<PAGE> 20
At the Annual Meeting of Stockholders held on May 26, 1999, the
following members were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
J. Brian Patsy 8,371,339 65,499
Eric S. Lombardo 8,372,059 64,779
Z. David Patterson 8,376,059 60,779
George E. Castrucci 8,370,339 66,499
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
None.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LANVISION SYSTEMS, INC.
DATE: June 1, 1999 By: /s/ J. BRIAN PATSY
------------- ------------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: June 1, 1999 By: /s/ THOMAS E. PERAZZO
------------- ------------------------------------
Thomas E. Perazzo
Vice President, Chief Operating
Officer, Chief Financial Officer and
Treasurer
21
<PAGE> 22
INDEX TO EXHIBITS
Exhibit No. Exhibit
----------- -------
11 Computation of Earnings (Loss) Per Common Share
27 Financial Data Schedule
22
<PAGE> 1
Exhibit 11
LANVISION SYSTEMS, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended April 30,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net (loss) $(1,559,020) $(3,136,085)
=========== ===========
Average shares outstanding 8,814,520 8,806,000
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 8,814,520 8,806,000
=========== ===========
Basic net (loss) per share of common stock $ (0.18) $ (0.36)
=========== ===========
Diluted net (loss) per share of common stock $ (0.18) $ (0.36)
=========== ===========
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 4,147,981
<SECURITIES> 0
<RECEIVABLES> 6,135,469
<ALLOWANCES> (340,000)
<INVENTORY> 0
<CURRENT-ASSETS> 11,056,505
<PP&E> 7,500,289
<DEPRECIATION> (3,754,533)
<TOTAL-ASSETS> 15,673,302
<CURRENT-LIABILITIES> 4,761,276
<BONDS> 6,000,000
0
0
<COMMON> 88,965
<OTHER-SE> 4,199,061
<TOTAL-LIABILITY-AND-EQUITY> 15,673,302
<SALES> 2,372,048
<TOTAL-REVENUES> 2,372,048
<CGS> 1,791,928
<TOTAL-COSTS> 3,599,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 380,833
<INCOME-PRETAX> (1,559,020)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,559,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,559,020)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
