UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 Z - 24196
MEDPLUS, INC.
(Exact name of registrant as specified in its charter)
Ohio 48-1094982
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8805 Governor's Hill Drive, Suite 100
Cincinnati, OH 45249
(Address of principal executive offices)
(513) 583-0500
(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 report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of November 1, 1997, there were 5,922,272 shares of the
registrant's common stock without par value issued and
outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
_____________ _____________ _____________ _____________
Revenues:
Systems
sales $ 3,492,456 1,792,370 9,401,152 5,151,830
Service,
consulting,
and other
revenues 1,079,845 1,014,109 3,218,265 2,750,952
_____________ _____________ _____________ _____________
Total
Revenues 4,572,301 2,806,479 12,619,417 7,902,782
_____________ _____________ _____________ _____________
Cost of
revenues:
Systems
sales 1,943,894 807,395 4,921,809 2,241,780
Service,
consulting,
and other
revenues 772,516 620,008 2,261,206 1,599,788
_____________ _____________ _____________ _____________
Total cost
of revenues 2,716,410 1,427,403 7,183,015 3,841,568
_____________ _____________ _____________ _____________
Gross
profit 1,855,891 1,379,076 5,436,402 4,061,214
Operating
expenses:
Sales and
marketing 1,564,837 1,101,191 4,665,983 2,841,295
Research and
development 219,841 223,847 662,482 466,027
General and
administra-
tive 832,037 789,506 2,520,392 2,331,657
Universal
Document
offering
expenses 137,791 - 144,876 -
_____________ _____________ _____________ _____________
Total
operating
expenses 2,754,506 2,114,544 7,993,733 5,638,979
_____________ _____________ _____________ _____________
Operating
loss (898,615) (735,468) (2,557,331) (1,577,765)
Other income
(expense), net (83,475) 58,520 (99,786) 241,003
_____________ _____________ _____________ _____________
Loss before
income
taxes (982,090) (676,948) (2,657,117) (1,336,762)
Income taxes - - - -
_____________ _____________ _____________ _____________
Net
loss $ (982,090) (676,948) (2,657,117) (1,336,762)
_____________ _____________ _____________ _____________
_____________ _____________ _____________ _____________
Net loss
per share $ (0.17) (0.11) (0.45) (0.23)
_____________ _____________ _____________ _____________
_____________ _____________ _____________ _____________
Weighted
average number
of shares of
common stock
and common stock
equivalents
outstanding 5,918,533 5,913,749 5,918,855 5,862,371
_____________ _____________ _____________ _____________
_____________ _____________ _____________ _____________
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
1997 1996
_______________ ______________
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 306,287 2,700,607
Investment securities - 300,510
Accounts receivable,
less allowance for
doubtful accounts
of $115,000 in 1997
and $100,000 in 1996 6,689,759 3,676,614
Other receivables 39,268 463,098
Inventories 1,164,396 827,619
Unbilled service contracts 380,227 325,352
Prepaid expenses and other
current assets 619,227 617,737
Deferred acquisition
and offering costs 1,484,716 -
_______________ ______________
Total current assets 10,683,880 8,911,537
_______________ ______________
Unbilled service contracts 1,380,272 1,137,575
Other receivables 1,431,832 -
Capitalized software
development costs, net 2,584,767 2,278,358
Fixed assets, net 1,574,513 1,462,818
Excess of cost over fair
value of net assets
acquired, net 834,784 911,402
Other assets 77,364 145,454
_______________ ______________
$ 18,567,412 14,847,144
_______________ ______________
_______________ ______________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments
of obligations under
capital leases 32,066 38,154
Borrowings on line of credit 3,637,553 -
Accounts payable 3,194,901 1,417,760
Accrued expenses 1,243,996 1,063,109
Deferred revenue 1,283,538 897,224
Deferred revenue on
unbilled service contracts 380,227 325,352
_______________ ______________
Total current liabilities 9,772,281 3,741,599
_______________ ______________
Obligations under
capital leases,
excluding current
installments 58,233 81,229
Deferred revenue - 28,748
Deferred revenue on unbilled
service contracts 1,380,272 1,137,575
_______________ ______________
Total liabilities 11,210,786 4,989,151
_______________ ______________
Shareholders' equity:
Common stock, no par value,
authorized 15,000,000 shares;
issued and outstanding
5,920,726 shares in 1997
and 5,919,206 shares in 1996 1,076 1,076
Additional paid-in capital 14,947,310 14,734,036
Accumulated deficit (7,506,697) (4,849,580)
Unrealized gains on
investment securities - 1,824
Deferred compensation (85,063) (29,363)
_______________ ______________
Total shareholders'
equity 7,356,626 9,857,993
_______________ ______________
Commitments and contingency $ 18,567,412 14,847,144
_______________ ______________
_______________ ______________
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1997 1996
_____________ _____________
Cash flows from
operating activities:
Net loss $(2,657,117) (1,336,762)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Amortization of capitalized
software development costs 471,243 274,791
Depreciation and amortization 256,079 162,920
Amortization of deferred
compensation costs 131,981 64,478
Amortization of excess of cost
over fair value of net
assets acquired 79,386 75,178
Realized gain on sales
of investment securities
and fixed assets (8,423) (13,846)
Provision for loss on
doubtful accounts 89,674 50,582
Changes in assets
and liabilities:
Accounts receivable (3,102,819) (906,624)
Other receivable 54,430 (69,401)
Inventories (336,777) (214,801)
Prepaid expenses and
other assets 53,080 97,359
Accounts payable and
accrued expenses 1,958,028 (57,581)
Deferred revenue 357,566 168,044
_____________ _____________
Net cash used in
operating activities (2,653,669) (1,705,663)
_____________ _____________
Cash flows from
investing activities:
Capitalization of software
development costs (777,652) (1,074,619)
Purchases of fixed assets (393,969) (514,779)
Proceeds from sales of
investment securities
and fixed assets 332,278 515,385
Payments made for acquisitions
of businesses (2,768) (952,782)
Other advances and investments (2,502,606) -
_____________ _____________
Net cash used in
investing activities (3,344,717) (2,026,795)
_____________ _____________
Cash flows from financing activities:
Proceeds from issuance of
common stock, net of issuance
costs 49,150 462,509
Purchases of treasury stock (53,552) -
Proceeds from borrowings
on line of credit 6,537,279 1,311,969
Repayments on line of credit (2,899,726) (1,311,969)
Principal payments on capital
lease obligations (29,085) (43,620)
_____________ _____________
Net cash provided by
financing activities 3,604,066 418,889
_____________ _____________
Net decrease in cash
and cash equivalents (2,394,320) (3,313,569)
Cash and cash equivalents,
beginning of period 2,700,607 7,494,094
_____________ _____________
Cash and cash equivalents,
end of period $ 306,287 4,180,525
_____________ _____________
_____________ _____________
Interest paid $ 74,753 12,412
_____________ _____________
_____________ _____________
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(1) Description of the Business
MedPlus, Inc. (the "Company") provides state-of-the-art
information management technology products and consulting services
to customers predominantly in the healthcare industry. The
Company's products presently consist of the IntelliCode[tm]
Intelligent Bar Code System ("IntelliCode"), the OptiMaxx[tm]
Archival System ("OptiMaxx"), the ChartMaxx Electronic Patient
Record System ("ChartMaxx"), and Step2000[tm] Workflow, Document
Management, and Application Development System ("Step2000").
IntelliCode is an intelligent bar coding system for hospitals and
other healthcare organizations. OptiMaxx is an optical disk-based
archival system. ChartMaxx is an enterprise-wide electronic
patient record system. Step2000 is workflow, document management,
and application development software that enhances the utilization
of information on an enterprise-wide basis, regardless of hardware
platform or operating environment. The Company's FutureCORE
subsidiary provides process improvement and automation services,
primarily in the areas of patient care and laboratory services.
(2) Summary of Significant Accounting Policies
(a) Interim Financial Information
The consolidated financial statements and the related
notes thereto are unaudited and have been prepared on the same
basis as the audited consolidated financial statements. In the
opinion of management, such unaudited financial statements include
all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the information set forth therein.
(b) Significant Accounting Policies
A description of the Company's significant accounting
policies can be found in the footnotes to the Company's 1996
annual consolidated financial statements included in its Annual
Report on Form 10-KSB dated March 27, 1997. The accompanying
consolidated financial statements should be read in conjunction
with those footnotes.
(c) Net Loss Per Share
Net loss per share is based on the weighted average
number of shares of common stock and common stock equivalents
outstanding for each period. During periods of net loss, common
stock equivalents are not included in weighted average shares
outstanding.
(d) Supplemental Cash Flow Information
In January and February 1997, the Company issued 5,000
shares of restricted common stock valued at $30,000 to a vendor in
exchange for services rendered. The Company also granted options
to purchase 85,000 shares of the Company's common stock as
compensation to several consultants to the Company. These options
have a fair value of approximately $188,000 which is being
amortized into expense over the related service periods of one to
two years. As these are non-cash transactions, they have not been
presented in the Consolidated Statements of Cash Flows.
(e) Reclassifications
Certain reclassifications have been made to the
consolidated financial statements for 1996 to conform to the
current year presentation.
(3) Bank Agreements
On September 9, 1997, the Company and the Company's Universal
Document Management Systems, Inc. ("Universal Document")
subsidiary entered into a line of credit agreement ("Universal
line of credit") with a bank to fund the costs associated with
Universal Document's acquisitions and initial public offering
discussed in Note 4 and for working capital. The Universal line
of credit allows for maximum borrowings of up to $1,500,000
subject to a combined borrowing limit with the Company's separate
$10,000,000 revolving line of credit agreement ("MedPlus line of
credit") based on defined net worth and collateral formulas.
Borrowings under the Universal line of credit bear interest at the
bank's prime rate and mature upon the earlier of March 31, 1998 or
the completion of Universal Document's initial public offering.
The Universal line of credit requires Universal Document to pay a
$15,000 monthly commitment fee through December 31, 1997 which
then decreases to $10,000 a month until Universal Document
receives a specified minimum capitalization or maturity. The
Universal line of credit also contains various restrictive and
financial covenants and is secured by all tangible and intangible
assets of the Company and Universal Document. Prior to entering
into the Universal line of credit, the Company and Universal
Document entered into an agreement under which the Company agreed
to act as co-borrower under the Universal line of credit, and
Universal Document agreed to repay the outstanding borrowings
under the Universal line of credit as soon as possible following
its initial public offering.
The maximum amounts available at September 30, 1997 under the
MedPlus and Universal lines of credit were approximately 4,522,000
and $1,500,000, respectively, for a total combined borrowing limit
of $6,022,000. Amounts outstanding under the MedPlus and
Universal lines of credit at September 30, 1997 were $3,007,232
and $632,322, respectively, for total combined outstanding
borrowings of $3,637,553.
As of September 30, 1997, the Company and Universal Document
were in default of a covenant of the Universal line of credit. On
November 14, 1997, the bank waived this event of default and
amended the covenant through March 31, 1998. The bank also
required the Company to agree to additional monitoring procedures
by the bank.
(4) Commitments and Contingency
(a) Universal Document Acquisitions, Public Offering and
Consulting Agreements
The Company's Universal Document subsidiary has entered
into agreements with two consulting firms to assist it in the
identification and recruitment of certain design automation and
document management software resellers and integrators that
Universal Document may acquire or combine with, and to assist
Universal Document in an initial public offering of its common
stock. In September and October 1997, Universal Document entered
into definitive agreements, which are contingent upon a successful
initial public offering, to acquire nine such companies. On
October 10, 1997, Universal Document filed a registration
statement on Form S-1 with the Securities and Exchange Commission
to offer its common stock to the public. Under the terms of the
initial public offering as disclosed in the registration
statement, Universal Document and the Company would offer to sell
1,850,000 and 750,000 shares, respectively. Universal Document
would use a portion of its proceeds from the sale of shares in the
offering and issue an additional 875,508 shares to acquire the
nine companies with which it has entered into acquisition
agreements. The Company would retain a minority interest in
Universal Document after the initial public offering.
Universal Document has capitalized $1,484,716 of direct,
incremental costs as of September 30, 1997 related to the
potential acquisitions and initial public offering for
accountants', attorneys', and consultants' fees ("acquisition and
offering costs") that will become a cost of the acquired companies
upon the completion of the acquisitions or costs of the initial
public offering. These acquisition and offering costs have been
recorded as deferred acquisition and offering costs in the
Company's Consolidated Balance Sheet. The Company has entered into
a reimbursement agreement with Universal Document whereby proceeds
from the initial public offering will be used to repay, within
thirty days of the initial public offering, funds advanced to
Universal Document for these acquisition and offering costs except
for the Company's share of offering costs which is not to exceed
$433,000. If for any reason the initial public offering should not
take place and the acquisitions should not occur, then these
acquisition and offering costs will be charged to expense in the
period that it is determined that the initial public offering and
acquisitions will not take place. Similar costs incurred in future
periods will be treated in a consistent manner. Universal
Document has also incurred additional costs of $144,876 which have
been recorded as operating expenses for a new senior management
team brought on to manage the initial public offering and
Universal Document's operations subsequent to the offering.
Pursuant to one of the consulting agreements mentioned above,
Universal Document had granted the consulting firm a warrant to
acquire up to 15% of the common shares of Universal Document
outstanding at the date of grant. That agreement was subsequently
amended to provide that in lieu of the warrant granted by
Universal Document, the Company would grant to the consulting firm
a warrant to acquire up to 15% of the common shares of Universal
Document then owned by the Company. The Company and the
consulting firm are currently negotiating a second amendment to
the consulting agreement. Pursuant to this amendment, the Company
will agree to pay to the consulting firm a sum of cash equal to
the net value of 15% of the common shares of Universal Document
being sold by the Company in the initial public offering; the net
value shall be the difference between the initial public offering
price per share and the consulting firm's exercise price per share
under the warrant. The consulting firm will continue to have a
warrant to purchase 15% of the common shares still owned by the
Company after the initial public offering.
The Company has also entered into an agreement, as amended,
with one of the two consulting firms whereby the Company will pay
that firm $500,000 if the public offering of Universal Document
common stock occurs on or before March 31, 1998. The payment,
which is contingent upon the initial public offering occurring, is
payable within sixty days of the initial public offering. This
payment to the consulting firm is not subject to the reimbursement
agreement discussed in the preceding paragraph, and it would be
charged to expense in the period in which the initial public
offering occurs, if at all.
(b) Amendment of HWB, Inc. Purchase Agreement
Effective December 14, 1995, the Company acquired all
of the outstanding shares of HWB, Inc. ("HWB"). HWB was the owner
and licensor of the principal software product of Universal
Document. Under the terms of the HWB Stock Purchase Agreement
("Purchase Agreement") dated December 29, 1995, the consideration
for the shares of HWB consisted solely of contingent consideration
payable over three years based upon the revenue performance of
Universal Document over that period. Effective August 12, 1997,
Universal Document and the former shareholders of HWB amended the
Purchase Agreement, contingent upon the initial public offering of
Universal Document common stock occurring, to provide for the
following: (i) a $390,000 payment due January 1, 1998 to the
former shareholders as consideration for the purchase of HWB
stock, (ii) extension of the period during which additional
consideration contingent on the future revenue performance of
Universal Document could be earned from the year ending December
31, 1998 to the year ending December 31, 2000, (iii) reduction of
the maximum future potential payments for contingent consideration
from $3,000,000 to $2,610,000,(iv) allowing Universal Document
common stock to be issued as part of the contingent consideration
payments rather than MedPlus common stock, and (v) defining the
audited net revenues used to measure the contingent consideration
payable. The $390,000 payment would be paid by Universal Document
after receiving a capital contribution from the Company for the
same amount. If the initial public offering does not occur, the
amendment to the Purchase Agreement would not become effective.
The former majority shareholder of HWB has been a director of the
Company since 1994.
(c) DiaLogos Commitment and Guarantee
The Company signed a letter of agreement with DiaLogos,
Inc. ("DiaLogos"), dated July 12, 1996, which was subsequently
amended on January 31, 1997, in which the Company, on or before
March 31, 1998, agreed to either (a) pay $1.65 million to DiaLogos
in return for 75% of the common shares of DiaLogos, (b) secure a
funding commitment for DiaLogos' operations in the amount of $1.65
million from investors and/or lenders, or (c) pay a portion of the
$1.65 million as consideration for less than 75% of the common
shares of DiaLogos, and secure a funding commitment for the
remainder of the $1.65 million from investors or lenders. In the
event the Company secures a funding commitment from investors
and/or lenders, then DiaLogos will grant the Company the option to
purchase 75% of the common shares of DiaLogos less any shares
already purchased by the Company and/or investors identified by
the Company. The Company's option would be immediately
exercisable and remain in effect until December 31, 1999.
Under the agreement, the Company will continue to fund the
operations of DiaLogos until funding has been obtained as
discussed in the preceding paragraph. If the Company or
investors identified by the Company decide to directly fund any
portion of the $1.65 million, then, at the Company's or investors'
option, any amount paid to DiaLogos shall be considered payment
for a percentage of common shares of DiaLogos. If the Company
secures funding for DiaLogos from investors and/or lenders for
$1.65 million, then upon DiaLogos' receipt of such funding,
DiaLogos will immediately reimburse the Company for any funds
previously paid to it plus interest. Interest will be equal to
the prime rate announced by the Company's primary bank lender plus
1% per annum.
As of September 30, 1997, the Company had advanced
approximately $1,432,000 to DiaLogos which is included in other
receivables, noncurrent. The Company has also converted an
additional $110,000 of advances into an equity interest in
DiaLogos' common shares. This investment has been accounted for
on the equity method, and it has been included in other assets at
the net amount of $40,000 at September 30, 1997. The Company has
arranged for approximately $400,000 of funding for DiaLogos from
investors, which consist of officers and directors of the Company.
It is the Company's current intention to fulfill part or all of
funding commitment to DiaLogos, including funding already
advanced, through the current and/or other investors. DiaLogos
provides software, education and services to corporations that are
implementing object-oriented systems in the design and redesign of
their business processes.
(5) Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, which establishes standards for computing and presenting
earnings per share. SFAS No. 128 simplifies the standards for
computing earnings per share previously found in APB Opinion No.
15. It replaces the presentation of primary earnings per share
with a presentation of basic earnings per share. It also requires
dual presentation of basic and diluted earnings per share on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation.
SFAS No. 128 will be effective for the Company's consolidated
financial statements for the year ending December 31, 1997 and it
will require restatement of all prior period earnings per share
data presented. The implementation of SFAS No. 128 is not
expected to have a material effect on the Company's calculation of
net income (loss) per share.
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants has recently issued
Statement of Position ("SOP") 97-2, Software Revenue Recognition,
which supercedes SOP 91-1, Software Revenue Recognition. SOP 97-2
provides guidance on recognizing revenue on software transactions
including arrangements which consist of multiple elements, for
example, additional software products, upgrades/enhancements,
post-contract customer support, or services, and arrangements to
deliver software or software systems which require significant
production, modification, or customization of software. SOP 97-2
will be effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company is currently
completing its review of SOP 97-2, but at present, it does not
expect the implementation of SOP 97-2 to have a material effect on
the Company's financial statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three Months Ended September 30, 1997 and September 30, 1996
Revenues for the third quarter ended September 30, 1997 were
$4,572,301, an increase of $1,765,822 or 63% over the $2,806,479
reported for the comparable period in 1996. Systems sales
increased 95% from the third quarter of 1996 primarily as a result
of increased sales from the Company's Data Management (ChartMaxx
and OptiMaxx products) and IntelliCode divisions. The Company
recorded sales of three new ChartMaxx systems during the quarter.
Service, consulting and other revenues increased 6% from the third
quarter of 1996 due to increased service revenues from the
Company's Data Management and IntelliCode divisions as the number
of installed sites of each division's products continues to
increase. The results for the third quarter of 1997, however,
reflected lower than expected consulting revenues for the
FutureCORE, Inc. ("FutureCORE") subsidiary and lower than expected
label revenues for IntelliCode.
Gross profit for the third quarter of 1997 was $1,855,891, or 41%
of revenues, compared to $1,379,076, or 49% of revenues, in the
third quarter of 1996. The gross profit percentage on systems
sales decreased from 55% in the third quarter of 1996 to 44% in
the third quarter of 1997 due to a higher proportion of lower
margin third party hardware and software relative to proprietary
software included in certain sales, competitive pricing pressures
and increased software amortization. The gross profit percentage
on service, consulting and other revenues decreased from 39% in
the third quarter of 1996 to 28% in the third quarter of 1997. The
decrease in this gross profit percentage was primarily a result of
lower than expected utilization of consulting and implementation
personnel associated with the Data Management, Universal Document
and FutureCORE product lines partly offset by the increased
service revenues noted above.
Operating expenses for the third quarter of 1997 were $2,754,506
compared to $2,114,544 for 1996, an increase of 30%. Excluding
$137,791 of Universal Document offering expenses, operating
expenses increased only $502,171 or 24% over the comparable period
of 1996. Operating expenses as a percent of revenues decreased
from 75% in the third quarter of 1996 to 60% in the third quarter
of 1997 primarily due to the increased revenues noted above and
the increased spending levels noted below. The Company has
continued to increase its investment in its sales and marketing
efforts, particularly for its Data Management division, in the
areas of direct sales, channel partner programs, national
accounts, and general marketing activities as evidenced by the 42%
increase in sales and marketing expenditures over the third
quarter of 1996. The increase is also a result of an increase in
personnel in the areas of product development, customer support,
administration and the Company's subsidiaries, Universal Document
and FutureCORE. General and administrative expenses increased only
5% over the comparable period of 1996. Universal Document offering
expenses represent personnel and other costs associated with
Universal Document's new senior management team which has been
hired to manage Universal Document's initial public offering and
operations after the offering.
Other income (expense) decreased to $83,475 of expense in the
third quarter of 1997 from income of $58,520 in the comparable
quarter of 1996. This decrease is primarily a result of the
decline in the Company's cash and investment securities balances
from 1996 and increased borrowings on its lines of credit in 1997.
The Company's net loss for the third quarter of 1997 was $982,090
compared to a net loss in 1996 of $676,948. The increase in the
net loss is a result of lower gross profit margins, increased
operating expenses, and increased net interest expense offsetting
the effect of the increased revenues.
Nine Months Ended September 30, 1997 and September 30, 1996
Revenues for the nine months ended September 30, 1997 were
$12,619,417, an increase of $4,716,635 or 60% over the $7,902,782
reported for the comparable period in 1996. Systems sales
increased 82% over the nine months ended September 30, 1996
primarily as a result of increased sales from the Company's Data
Management (ChartMaxx and OptiMaxx products) and IntelliCode
divisions. The Company recorded sales of nine new ChartMaxx
systems during the nine months ended September 30, 1997. Service,
consulting and other revenues increased 17% from the nine months
ended September 30, 1996 due to increased service revenues from
the Company's Data Management and IntelliCode divisions as the
number of installed sites of each division's products continues to
increase. The results for the first nine months of 1997, however,
reflected lower than expected total revenues for all of the
Company's product lines.
Gross profit for the nine months ended September 30, 1997 was
$5,436,402 or 43% of revenues, compared to $4,061,214, or 51% of
revenues for the comparable period in 1996. The gross profit
percentage on systems sales decreased from 56% for the nine months
ended September 30, 1996 to 48% for the nine months ended
September 30, 1997 due to a higher proportion of lower margin
third party hardware and software relative to proprietary software
included in certain sales, competitive pricing pressures and
increased software amortization. The gross profit percentage on
service, consulting and other revenues decreased from 42% for the
nine months ended September 30, 1996 to 30% for the nine months
ended September 30, 1997. The decrease in this gross profit
percentage was primarily a result of lower than expected
utilization of consulting, installation, and implementation
personnel associated with the Data Management, Universal Document
and FutureCORE product lines partly offset by the increased
service revenues noted above.
Operating expenses for the nine months ended September 30, 1997
were $7,993,733 compared to $5,638,979 for the comparable period
of 1996, an increase of 42%. Operating expenses as a percent of
revenues decreased from 71% in 1996 to 63% in 1997 primarily due
to the increased revenues noted above and the increased spending
levels noted below. The Company has continued to increase its
investment in its sales and marketing efforts, particularly for
its Data Management division, in the areas of direct sales,
channel partner programs, national accounts, and general marketing
activities as evidenced by the 64% increase in sales and marketing
expenditures over the comparable period of 1996. The increase is
also a result of an increase in personnel in the areas of product
development, customer support, administration and the Company's
subsidiaries, Universal Document and FutureCORE. General and
administrative expenses increased 8% over 1996. Universal Document
offering expenses represent personnel and other costs associated
with Universal Document's new senior management team which has
been hired to manage Universal Document's initial public offering
and operations after the offering.
Other income (expense) decreased to $99,786 of expense for the
nine months ended September 30, 1997 from income of $241,003 for
the nine months ended September 30, 1996. This decrease is
primarily a result of the decline in the Company's cash and
investment securities balances from 1996 and increased borrowings
on its lines of credit in 1997.
The Company's net loss for the nine months ended September 30,
1997 was $2,657,117 compared to a net loss in 1996 of $1,336,762.
The increase in the net loss is a result of lower gross profit
margins, increased operating expenses, and higher interest expense
offsetting the effect of the increased revenues.
Liquidity and Capital Resources
The Company's business requires significant amounts of working
capital to finance new product development, the expansion of its
sales and marketing organization and anticipated revenue growth.
The Company has financed its operations and working capital needs
through the sale of common stock, bank borrowings and capital
lease financing agreements. The Company's principal uses of cash
since inception have been for funding operations, capital
expenditures, research and development activities, and investments
in and advances to companies which are deemed to have strategic
value to the Company.
The Company's revolving line of credit agreement ("MedPlus line of
credit") with a bank permits the Company to borrow a maximum of
$10,000,000 subject to a defined net worth formula. The term of
the MedPlus line of credit extends through December 31, 1998, and
the MedPlus line of credit is secured by substantially all of the
Company"s assets.
On September 9, 1997, the Company and Universal Document entered
into a line of credit agreement ("Universal line of credit") with
a bank to fund the costs associated with Universal Document's
acquisitions and initial public offering discussed in Note 4 and
for working capital. The Universal line of credit allows for
maximum borrowings of up to $1,500,000 subject to a combined
borrowing limit with the MedPlus line of credit based on defined
net worth and collateral formulas. Borrowings under the Universal
line of credit bear interest at the bank's prime rate and mature
upon the earlier of March 31, 1998 or the completion of Universal
Document's initial public offering. The Universal line of credit
requires Universal Document to pay a $15,000 monthly commitment
fee through December 31, 1997 which then decreases to $10,000 a
month until Universal Document receives a specified minimum
capitalization or maturity. The Universal line of credit also
contains various restrictive and financial covenants and is
secured by all tangible and intangible assets of the Company and
Universal Document. Prior to entering into the Universal line of
credit, the Company and Universal Document entered into an
agreement under which the Company agreed to act as co-borrower
under the Universal line of credit, and Universal Document agreed
to repay the outstanding borrowings under the Universal line of
credit as soon as possible following its initial public offering.
The maximum amounts available at September 30, 1997 under the
MedPlus and Universal lines of credit were approximately
$4,522,000 and $1,500,000, respectively, for a total combined
borrowing limit of $6,022,000. Amounts outstanding under the
MedPlus and Universal lines of credit at September 30, 1997 were
$3,007,232 and $632,322, respectively, for total combined
outstanding borrowings of $3,637,553.
As of September 30, 1997, the Company and Universal Document were
in default of a covenant of the Universal line of credit. On
November 14, 1997, the bank waived this event of default and
amended the covenant through March 31, 1998. The bank also
required the Company to agree to additional monitoring procedures
by the bank.
The Company believes that its cash and cash equivalents, available
line of credit, and cash generated from operations will be
sufficient to finance its expected growth and cash requirements
for at least the next twelve months provided that the public
offering of Universal Document common stock, discussed below,
occurs and the Company returns to profitability, or the Company
modifies its existing lending arrangements and completes a private
placement or public offering of its stock. There can be no
assurance that additional financing will not be required sooner,
or if required, that it will be available on a timely basis or on
terms satisfactory to the Company. The Company's ability to meet
its cash requirements on a long-term basis will depend on
profitable operations, consistent and timely collections of
accounts receivable and additional sources of liquidity such as
additional equity offerings or debt financings.
Universal Document Transactions
Universal Document has entered into agreements with two consulting
firms to assist it in the identification and recruitment of
certain design automation and document management software
resellers and integrators that Universal Document may acquire or
combine with, and to assist Universal Document in an initial
public offering of its common stock. In September and October
1997, Universal Document entered into definitive agreements, which
are contingent upon a successful initial public offering, to
acquire nine such companies. On October 10, 1997, Universal
Document filed a registration statement on Form S-1 with the
Securities and Exchange Commission to offer its common stock to
the public. Under the terms of the initial public offering as
disclosed in the registration statement, Universal Document and
the Company would offer to sell 1,850,000 and 750,000 shares,
respectively. Universal Document would use a portion of its
proceeds from the sale of shares in the offering and issue an
additional 875,508 shares to acquire the nine companies with which
it has entered into acquisition agreements. The Company would
retain a minority interest in Universal Document after the initial
public offering.
Universal Document has capitalized $1,484,716 of direct,
incremental costs as of September 30, 1997 related to the
potential acquisitions and initial public offering for
accountants', attorneys', and consultants' fees ("acquisition and
offering costs") that will become a cost of the acquired companies
upon the completion of the acquisitions or costs of the initial
public offering. These acquisition and offering costs have been
recorded as deferred acquisition and offering costs in the
Company's Consolidated Balance Sheet. The Company has entered into
a reimbursement agreement with Universal Document whereby proceeds
from the initial public offering will be used to repay, within
thirty days of the initial public offering, funds advanced to
Universal Document for these acquisition and offering costs except
for the Company's share of offering costs which is not to exceed
$433,000. If for any reason the initial public offering should not
take place and the acquisitions should not occur, then these
acquisition and offering costs will be charged to expense in the
period that it is determined that the initial public offering and
acquisitions will not take place. Similar costs incurred in future
periods will be treated in a consistent manner.
Universal Document has also incurred additional costs of $144,876
which have been recorded as operating expenses for a new senior
management team brought on to manage the initial public offering
and Universal Document's operations subsequent to the offering.
Pursuant to one of the consulting agreements mentioned above,
Universal Document had granted the consulting firm a warrant to
acquire up to 15% of the common shares of Universal Document
outstanding at the date of grant. That agreement was subsequently
amended to provide that in lieu of the warrant granted by
Universal Document, the Company would grant to the consulting firm
a warrant to acquire up to 15% of the common shares of Universal
Document then owned by the Company. The Company and the
consulting firm are currently negotiating a second amendment to
the consulting agreement. Pursuant to this amendment, the Company
will agree to pay to the consulting firm a sum equal to the net
value of 15% of the common shares of Universal Document being sold
by the Company in the initial public offering; the net value shall
be the difference between the initial public offering price per
share and the consulting firm's exercise price per share under the
warrant. The consulting firm will continue to have a warrant to
purchase 15% of the common shares still owned by the Company after
the initial public offering.
The Company has also entered into an agreement, as amended, with
one of the two consulting firms whereby the Company will pay that
firm $500,000 if the public offering of Universal Document common
stock occurs on or before March 31, 1998. The payment, which is
contingent upon the initial public offering occurring, is payable
within sixty days of the initial public offering. This payment to
the consulting firm is not subject to the reimbursement agreement
discussed in the preceding paragraph, and it would be charged to
expense in the period in which the initial public offering occurs,
if at all.
DiaLogos Commitment and Guarantee
The Company signed a letter of agreement with DiaLogos, Inc.
("DiaLogos"), dated July 12, 1996, which was subsequently amended
on January 31, 1997, in which the Company, on or before March 31,
1998, agreed to either (a) pay $1.65 million to DiaLogos in return
for 75% of the common shares of DiaLogos, (b) secure a funding
commitment for DiaLogos' operations in the amount of $1.65 million
from investors and/or lenders, or (c) pay a portion of the $1.65
million as consideration for less than 75% of the common shares of
DiaLogos, and secure a funding commitment for the remainder of the
$1.65 million from investors or lenders. In the event the
Company secures a funding commitment from investors and/or
lenders, then DiaLogos will grant the Company the option to
purchase 75% of the common shares of DiaLogos less any shares
already purchased by the Company and/or investors identified by
the Company. The Company's option would be immediately
exercisable and remain in effect until December 31, 1999.
Under the agreement, the Company will continue to fund the
operations of DiaLogos until funding has been obtained as
discussed in the preceding paragraph. If the Company or
investors identified by the Company decide to directly fund any
portion of the $1.65 million, then, at the Company's or investors'
option, any amount paid to DiaLogos shall be considered payment
for a percentage of common shares of DiaLogos. If the Company
secures funding for DiaLogos from investors and/or lenders for
$1.65 million, then upon DiaLogos' receipt of such funding,
DiaLogos will immediately reimburse the Company for any funds
previously paid to it plus interest. Interest will be equal to
the prime rate announced by the Company's primary bank lender plus
1% per annum.
As of September 30, 1997, the Company had advanced approximately
$1,432,000 to DiaLogos which is included in other receivables,
noncurrent. The Company has also converted an additional
$110,000 of advances into an equity interest in DiaLogos' common
shares. This investment has been accounted for on the equity
method, and it has been included in other assets at the net amount
of $40,000 at September 30, 1997. The Company has arranged for
approximately $400,000 of funding for DiaLogos from investors,
which consist of officers and directors of the Company. It is the
Company's current intention to fulfill part or all of funding
commitment to DiaLogos, including funding already advanced,
through the current and/or other investors. DiaLogos provides
software, education and services to corporations that are
implementing object-oriented systems in the design and redesign of
their business processes.
Recently Issued Accounting Pronouncement
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, which establishes standards for computing and presenting
earnings per share. SFAS No. 128 simplifies the standards for
computing earnings per share previously found in APB Opinion No.
15. It replaces the presentation of primary earnings per share
with a presentation of basic earnings per share. It also requires
dual presentation of basic and diluted earnings per share on the
face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the
numerator and denominator of the diluted earnings per share
computation.
SFAS No. 128 will be effective for the Company's consolidated
financial statements for the year ending December 31, 1997 and it
will require restatement of all prior period earnings per share
data presented. The implementation of SFAS No. 128 is not
expected to have a material effect on the Company's calculation of
net income (loss) per share.
The Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants has recently issued
Statement of Position ("SOP") 97-2, Software Revenue Recognition,
which supercedes SOP 91-1, Software Revenue Recognition. SOP 97-2
provides guidance on recognizing revenue on software transactions
including arrangements which consist of multiple elements, for
example, additional software products, upgrades/enhancements,
post-contract customer support, or services, and arrangements to
deliver software or software systems which require significant
production, modification, or customization of software. SOP 97-2
will be effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company is currently
completing its review of SOP 97-2, but at present, it does not
expect the implementation of SOP 97-2 to have a material effect on
the Company's financial statements.
PART II. OTHER INFORMATION
Items 1-5. None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is hereby filed as part of this Form
10-QSB:
Exhibit Sequentially
Number Description of Exhibits Numbered
Page
27 Financial Data Schedule --
(b) No reports were filed on Form 8-K during the period for which
this report is filed.
SIGNATURE
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.
MedPlus,
Inc.
Date: 11/14/97 By: /s/ Daniel A. Silber
Daniel A. Silber
Chief Financial Officer
* Pursuant to the last sentence of General Instruction
G to Form 10-QSB, Mr. Daniel A. Silber has
executed this Quarterly report on Form 10-QSB both
on behalf of the registrant and in his capacity as its
principal financial and accounting officer.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 306,287
<SECURITIES> 0
<RECEIVABLES> 6,804,759
<ALLOWANCES> (115,000)
<INVENTORY> 1,164,396
<CURRENT-ASSETS> 10,683,880
<PP&E> 2,285,293
<DEPRECIATION> (710,780)
<TOTAL-ASSETS> 18,567,412
<CURRENT-LIABILITIES> 9,772,281
<BONDS> 0
0
0
<COMMON> 1,076
<OTHER-SE> 7,355,550
<TOTAL-LIABILITY-AND-EQUITY> 18,567,412
<SALES> 12,619,417
<TOTAL-REVENUES> 12,619,417
<CGS> 7,183,015
<TOTAL-COSTS> 7,183,015
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,657,117)
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