MEDPLUS, INC.
1996 Annual Report
and Form 10-KSB
March 27, 1997
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended: December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to
Commission file number: Z-24196
MEDPLUS, INC.
(Name of small business issuer 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) (Zip Code)
Issuer's telephone number 513-583-0500
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
(Title of class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
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
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its fiscal year ended December 31, 1996
were $10,940,456.
The aggregate market value of the voting stock held by
non-affiliates of the issuer as of December 31, 1996 was
$18,143,097 based on the closing price of such stock on that date
as reported on the Nasdaq National Market.
There were 5,919,206 shares of the issuer's no par value common
stock outstanding as of December 31, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the issuer's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 15, 1997, are incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes No X
INTEGRATED REPORTS TO SECURITY HOLDERS
Pursuant to General Instruction F of Form 10-KSB and Regulation
240.14a(d) of the Securities Exchange Act of 1934, the Issuer's
Annual Report to Security Holders for its fiscal year ended
December 31, 1996 has been combined with the required information
of Form 10-KSB and is being filed with the U.S. Securities and
Exchange Commission and submitted to the registrant's shareholders
on an integrated basis.
A list of the exhibits to this Form 10-KSB is included in Part III
hereof under the caption "Exhibits and Reports on Form 8-K."
MedPlus, Inc. will provide a copy of any such exhibit to any of
its shareholders upon written request and payment of a copying
charge of $.10 per page. Requests for copies should be directed
to: Investor Relations, MedPlus, Inc., 8805 Governor's Hill
Drive, Suite, 100, Cincinnati, Ohio 45249.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
MedPlus, Inc. (the "Company") was incorporated in 1991. The
Company's principal executive offices are located at 8805
Governor's Hill Drive, Suite 100, Cincinnati, Ohio, 45249. The
Company's telephone number is (513) 583-0500.
MedPlus provides state-of-the-art information management
technology products and consulting services to customers
predominantly in the health care industry. The Company sells and
supports hardware and software solutions to meet the needs of
health care organizations. The Company's products include
electronic record patient systems, optical archival systems,
intelligent bar coding systems, object-oriented workflow and
document management systems and laboratory, business office and
physician office integration services. The Company's products and
services are designed to allow health care providers to easily and
quickly achieve quality and productivity enhancements and cost
containment goals which are increasingly imposed upon them by
legal and regulatory requirements as well as economic and consumer
pressures.
Industry Background
The health care industry has entered a period of profound change
involving economic, regulatory and operational factors. The
Company's strategy is intended to capitalize on the trend toward
more spending by the health care industry on information systems
and services such as those offered by the Company.
Economic. The dramatic increase in health care costs in the
United States has caused significant change in the health care
industry. Managed care organizations (such as health maintenance
organizations, preferred providers and independent physician
associations) and other payers have developed alternative payment
models to control costs, including procedure-based cost
limitations, contractually approved providers and capitation (a
fixed monthly fee for members as payment for all required
services). The result has been a continuing shift of financial
risk from the payers to both the physician/provider and the
institutional/provider (hospitals, clinics, long-term care, acute
providers and rehabilitative care centers). In response, health
care organizations are aligning themselves with one another in
order to form integrated delivery systems in an effort to lower
costs and compete more effectively in the changing health care
environment.
The economic viability of many providers will be dependent upon
their ability to continue to provide quality health care services
while dramatically cutting costs and increasing productivity. The
delivery of health care services is both labor and information
intensive because the functions of tracking, organizing,
retrieving, evaluating and generally managing the high volume of
data that providers generate are essential to any provider.
Compared to other industries, the health care industry has been
slow to automate its information management needs.
Hospitals, because of the lack of efficiency incentives,
historically have underinvested in information technology,
spending only 1-2% of their operating budgets on information
technology compared to the 6-8% allocated by other industries for
information technology. However, in a report issued by Smith
Barney, spending on health care information technology is growing
at an accelerating rate. According to Sheldon Dorenfest and
Associates, hospital expenditures for computer related products
and services have increased more than 70% since 1990. U.S.
hospitals plan to invest more than $14 billion in information
systems in the next three years according to the Input Study,
Revolutionary Changes in Hospital IT Applications.
Regulatory. Various regulatory bodies have begun to focus on the
information management function. For example, the Joint
Commission for Accreditation of Health Care Organizations
("JCAHO"), which is responsible for accrediting all hospitals, has
determined that records management can have an important clinical
impact. JCAHO has begun to impose specific information management
requirements for accreditation. Most of the new requirements
mandate performance levels which will be difficult to achieve
without computerization. The Company's products and services are
specifically designed to help providers comply with these
requirements.
Operational. Hospitals and other health care organizations are
comprised of numerous departments, such as the accounting,
laboratory, radiology, pharmacy, medical records, business office
and clinical areas. The information management requirements of
these departments tend to be quite distinct. To the extent they
have purchased computerized systems, most hospitals have
historically acquired a collection of separate, stand-alone
information systems for their various departments. Moreover, even
within a particular systems category, such as the laboratory,
there are no system standards. Numerous vendors sell proprietary
systems which often are not directly compatible with either
competitive systems or the systems of other departments. MedPlus
products and services enhance the capabilities of these systems by
adding functionality not otherwise resident on these systems.
Strategy
Recognizing all of these factors, the Company's business strategy
since its inception has been to focus on specific health care
information problems that the Company believes have not been
adequately addressed by other vendors. It is the Company's goal
to develop appropriate information management systems which
address the market needs, are affordable, and can be easily
integrated with the major systems currently in place at most
health care organizations in the United States. MedPlus products
and services are designed to permit customers to leverage their
existing investments in computerized information systems rather
than forcing them to replace entire systems at a much greater
cost.
MedPlus concentrates on five specific segments of information
technology for the health care industry: automated data
collection, data storage and retrieval, electronic patient
records, document management and workflow solutions and process
engineering and consulting services. These technologies and
services offer immediate benefits to health care organizations on
a cost-efficient basis. The Company considers these five areas to
be key subsets which directly affect the health care provider's
efficiency at utilizing its existing information systems. The
Company believes this niche has enabled it to provide high
technology solutions at an affordable user cost. Over time, it is
the Company's intention to adapt its current products to changing
needs, to develop or acquire new products and services, and to
address selected information management needs throughout the
typical health care organization.
Products and Services
The Company pursues the automated data collection segment of the
health care industry through its IntelliCode Intelligent Bar Code
System product line, the automated data storage and retrieval
segment through its OptiMaxx Archival System product line, the
computerized electronic patient record system segment through its
ChartMaxx Electronic Patient Record System and the document
management and workflow solutions through its Step2000 Process
Manager. Its product strategy is to design systems with open
architecture and modular functionality which are compatible with
most existing systems to which they will interface, without
requiring any support or cooperation from the systems vendors. By
designing products to be entirely independent of other system
vendors, potential customer acceptance of MedPlus products is not
limited in any way by their existing information system
configurations, and the Company's ability to market its products
is generally not subject to the cooperation of third party systems
vendors. In July 1996, the Company acquired FutureCORE Ltd.,
which specializes in health care automation, systems integration,
and business process engineering and consulting. FutureCORE will
also assist the Company in its strategic role as an integrator of
electronic patient record systems between hospital and physician
offices.
IntelliCode Intelligent Bar Code Systems
MedPlus offers an array of data collection devices including
hand-held scanners and direct thermal and thermal transfer bar
code label printers that are "intelligent." Each printer's
intelligence is derived from resident software, which runs on the
Company's proprietary microprocessor or "board" within the
printer. By providing custom programming with its proprietary
software, MedPlus fulfills the particular requirements of each
user. The software allows immediate interface with virtually any
computer information system and allows the printer to print in all
prevalent bar code symbologies. As a result of this "plug and
play" capacity, the Company's printers generally do not require
any system modifications or system manufacturer special support.
In 1996, the Company introduced a line of bar code label printers
that feature an on-board modem which enables the Company to
remotely capture and perform programming procedures on its bar
code printers. The product launch also included a new hand-held
data collection unit and two products offered as options with the
printers - a network module which enables the bar code printers to
print from multiple information systems on a Token Ring or
Ethernet network and software which allows users to develop and
modify their own bar code label formats. The Company believes
this independence from other vendors, which its printer
intelligence permits, in addition to its new products and
enhancements, provide a significant competitive advantage over
other printer companies whose products can be used only with the
assistance and cooperation of information system sellers.
OptiMaxx Archival System
The Company offers an optical disk storage and retrieval system
under the name OptiMaxx which is specially configured for
hospitals, medical practices and other health care providers. It
consists of hardware (optical drives, disk "jukeboxes", personal
computers) and software purchased from outside vendors, combined
with the Company's software in a manner that provides specific
benefits to health care industry users. At its most basic level,
OptiMaxx permits a user to automatically store on an optical disk
any data that it previously would have printed out of its system
and then stored as paper or on microfilm/microfiche. OptiMaxx can
also scan in and manage existing paper documents.
A key feature of OptiMaxx is its ability to capture data directly
from existing computer information systems without special
software or other interfaces and without any data manipulation.
Most optical storage systems must have the "host" information
system computer configure files in a specific manner or convert
the electronic format of the outgoing data into a particular
format, often proprietary, which the optical system can then
recognize and use when the data is received. OptiMaxx, which was
designed to act as a system peripheral (such as a printer), can
work with most host systems without the need for data
configuration by the host system. Every host system must have the
capacity to output data to a printer, and OptiMaxx can accept any
such output "as is" without any special treatment by the host
system. Moreover, OptiMaxx itself does not convert or change the
incoming data. OptiMaxx stores the data and can retrieve it in
its native format, without conversion. In 1996, the Company
introduced a beta version of OptiMaxx which operates on the
Windows NT operating system. The Company believes the addition of
Windows NT, which is considered to be one of the most robust and
open operating systems in the software industry, will provide a
significant competitive advantage in the future.
ChartMaxx Electronic Patient Record System
The ChartMaxx system, which has been installed and is operational
in four hospital locations, is a turnkey medical records
information system which combines multiple technical and
functional approaches to computer-based patient records
development. The result is an integrated software and hardware
platform which:
- - Creates complete, digital medical records which meet all
administrative and legal requirements.
- - Manages multimedia digital data (structured and unstructured)
in both report-oriented and discreet data element formats.
- - Manages scanned documents (imaging).
- - Manages workflow and the work processes associated with health
information management.
- - Builds a data repository based on an SQL (an industry
standard)database and mass storage.
- - Forms a system which has both enterprise-wide and remote
connections.
- - Provides application software to further automate the medical
records and patient accounts departments.
- - Is useful to providers of care and other health care staff
members.
- - Facilitates communication of clinical information within the
health care organization and to external sources.
Beyond the immediate benefits of automating an organization's
medical records department and creating an electronic patient
record, MedPlus is creating a data repository which can encompass
the entire integrated delivery system. MedPlus has also created
the interface to integrate the physician office into the network
and create a patient record that is seamless throughout a total
delivery system. The integrated hospital/physician office medical
records system will be beta tested at a Florida hospital beginning
in April 1997.
Workflow, Document Management, and Application Systems
In December 1995, the Company acquired Universal Document
Management Systems, Inc. ("Universal Document"). The principal
product of this entity is the Step2000 Process Manager, which
transparently integrates existing hardware and software into a
complete, fully functional workflow, document management and
application development system for a variety of vertical markets.
Functions such as data base connectivity, security, screen
creation and related sign-off procedures can be implemented in the
graphical environment of this product.
Step2000 has a high level point-and-click approach whereby custom
applications can be built without programming. The open
architecture is a universal system allowing customers to mix and
match a wide variety of platforms, networks, operating systems and
databases. Step2000 is a complete client/server solution in one
system that spans marketing, sales, general office, engineering
and manufacturing applications. Step2000 improves product and
service quality and meets market standards and government
regulations. The Company believes Step2000's ability to provide
workflow, document management and application development
capabilities in one integrated product provides a significant
advantage over competitors that only provide one or two of these
capabilities. The product's open architecture is also seen as a
competitive advantage.
Consulting Services
The acquisition of FutureCORE, in July 1996, significantly
enhanced the Company's product lines by providing consultative
system analysis and process improvement methodologies in
laboratories, physician offices, hospitals, major health care
instrumentation firms and integrated delivery networks. Now,
rather than just providing new technology for health care
providers, the Company has the unique advantages of being able to
assist the health care providers in re-engineering their existing
processes while implementing the Company's product lines so as to
maximize the return on the investment in technology. The services
provided by FutureCORE include program management involving
project planning, analysis and planning involving workflow
analysis, process flow charting, productivity improvements,
modeling and process simulation.
Sales and Marketing
The Company utilizes selected strategic resellers and reference
selling arrangements and also employs a direct sales force to
market its products. Its sales philosophy is to provide
consultative selling services to end users, conducted by both
direct and indirect sales sources who are knowledgeable about the
health care industry and information management technologies.
Because of the "plug and play" nature of its products, the Company
is able to market its products directly to end users, and is not
required to enter into costly technical support, joint selling or
other collaborative selling arrangements with vendors of health
information systems merely to obtain access to the market.
However, the Company has found it to be advantageous to enter into
reseller and reference seller agreements for strategic reasons,
including increased acceptance by customers due to the association
with familiar vendors and exposure to the existing customer bases
of the resellers and reference sellers. Presently, the Company
has entered into strategic reseller, reference selling and
preferred vendor arrangements with health care industry suppliers
including Abbott Laboratories Diagnostic Division (instrumentation
to clinical laboratories), Transcend Services, Inc. (medical
records systems), Columbia/HCA (laboratory information systems),
Beckman Instruments (chemistry instrumentation to clinical
laboratories), Sunquest Information Systems (laboratory
information systems), Shared Medical Systems (hospital information
systems), Continental Health care Systems (pharmacy systems) and
Medicus Systems Corporation (medical records systems).
Product Manufacturing and Sources
The Company does not possess substantial internal manufacturing
capacity and instead relies upon third party manufacturers to
fulfill its hardware requirements. This reliance on outside
suppliers involves several risks, including limited control over
pricing, availability, quality and delivery schedules. Bar code
printers are contractually manufactured by third parties with
appropriate nondisclosure and other protections the Company deems
appropriate. The other hardware incorporated into the Company's
products, such as bar code scanners, optical disk drives and
computers, are non-proprietary items which are potentially
available from multiple sources, although the Company currently
has limited its purchases to certain vendors based on delivery,
service and cost factors. To the extent the Company relies on
single sources of components, it is vulnerable to potential
disruptions in supply should such a manufacturer become insolvent
or otherwise experience production problems. The Company
believes, however, that any such disruption would be temporary
since there are numerous alternative sources of supply available.
The Company relies to a large extent on licensed third party
software which is integrated through the use of proprietary
software. The Company's internal software development capacity is
limited, and the Company therefore concentrates its efforts on
developing and enhancing proprietary software that enables various
third party software products to work together. MedPlus must rely
on the third party suppliers for enhancements and ongoing support
for the acquired products. The failure of one or more of such
vendors to provide services for any reason could, at least
temporarily, adversely affect the Company's business.
Product Development
The Company believes that continued investment in research and
development is critical to its long-term growth and success. The
Company's product development strategy is to continue to focus on
specific health care related information management requirements
and to expand its existing product lines by adapting them to
additional but related health care applications. The Company is
presently concentrating its developmental efforts on the ChartMaxx
Electronic Patient Record System, as well as enhancing the
capabilities of the IntelliCode Intelligent Bar Code Systems, the
OptiMaxx Archival System, and the Step2000 Process Manager.
The Company's total product development expenditures were
$2,030,271, $1,497,751 and $631,012 for the years ended December
31, 1996, 1995 and 1994, respectively.
Competition
The market for information technology in the health care industry
is intensely competitive. The Company believes that the principal
competitive factors in this market include the breadth and
quality of system and product offerings, product pricing, the
reputation and stability of the information systems provider, the
features and capabilities of the information systems, ongoing
support for such systems, the potential for enhancements thereto
and, technical and financial resources. Certain MedPlus
competitors have significantly greater resources than the Company.
In addition, the Company's products compete with other
technologies as well as similar products developed by other
companies, and other major information management companies may
enter the markets in which the Company competes. Competitive
pressures and other factors, such as new product introductions by
the Company or its competitors, or the entry into new geographic
markets, may result in significant pricing pressures that could
have a material adverse effect on the Company's business.
There can be no assurance that the Company will be able to
continue to compete successfully with its existing or any future
competitors. However, the Company believes that it possesses
certain competitive advantages, in particular its concentration on
the health care market which enables it to tailor all of its
products for that particular market, rather than attempting to
design and sell products of a more generic nature. The "plug and
play" compatibility of its products with most of the information
systems with which they must interact also constitutes an
advantage over its present competitors, most of whom must secure
the support and cooperation of third party vendors in order for
their products to operate. Also, any future enterprise-wide
systems will likely be quite expensive and may not be attractive
to hospitals which already have substantial investments in
numerous departmental systems and may have limited budgets for
future purchases.
Licenses and Proprietary Rights
To a significant degree, the Company's products consist of third
party hardware and software integrated with some proprietary
hardware and software of the Company. The Company does not hold
any patents or copyrights with respect to any of its products, nor
does it expect to apply for any patents or copyrights in the
foreseeable future. To the extent possible, the Company attempts
to protect its use of third party hardware and software with
contractual exclusivity and nondisclosure provisions, but because
the Company does not own the rights to these third party products,
there can be no assurance that competitors or others will not
attempt to integrate the same or similar products into systems
competitive with those sold by the Company. To protect its
proprietary product components, the Company relies upon the law of
trade secrets, nondisclosure agreements with employees and others,
and restrictions incorporated into agreements with customers.
Notwithstanding these safeguards, it could be possible for
competitors to obtain and/or imitate the Company's software and/or
hardware. Further, there can be no assurance that others will not
independently develop products similar or superior to those of the
Company. The Company also explores technology developed by other
entities that may be licensed or acquired in an effort to reduce
the product development cycle or to complement existing product
lines.
Federal trademark protection has been obtained for the MedPlus
name and the name that the Company uses for its printer labels,
Flexilabel. Federal trademark protection is also pending for the
name "IntelliCode." The Company has entered into an agreement to
use the name ChartMaxx with the owner of the trademark, and has
applied for trademark protection for the name OptiMaxx.
Employees
As of December 31, 1996 the Company had 112 full-time employees.
The Company's future success will depend, in part, on its ability
to continue to attract, retain and motivate highly qualified
technical, marketing and management personnel who are in great
demand.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently leases approximately 33,000 square feet of
high quality office space in Cincinnati, Ohio where it maintains
its principal offices. The lease term runs through June 2002 with
annual base rents ranging from $231,500 to $317,000.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is traded in the over-the-counter
market under the symbol "MEDP." On May 24, 1994, the common stock
commenced trading on the Nasdaq Small Cap Market ("NSM").
Beginning November 21, 1995, the Company's common stock commenced
trading on the Nasdaq National Market ("NNM") tier of the Nasdaq
Stock Market. There were approximately 102 record holders and
approximately 1100 beneficial owners of the Company's common stock
as of March 26, 1997.
The following table sets forth, for the periods indicated, as
reported by Nasdaq, the range of high and low closing bids of the
Company's common stock on the NNM. All prices are rounded to the
nearest one-eighth, and bid prices reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
Calendar Year/Quarter High Low
1995
First Quarter $ 8.250 $ 6.125
Second Quarter 8.625 6.125
Third Quarter 10.750 7.375
Fourth Quarter 11.125 8.375
1996
First Quarter $12.250 $ 8.125
Second Quarter 15.625 10.625
Third Quarter 14.375 10.000
Fourth Quarter 11.250 5.000
The Company has not paid any cash dividends since its inception
and presently anticipates that earnings, if any, will be retained
for future development of the Company's business. No dividends on
its common stock will be declared in the foreseeable future.
On December 29, 1995, the Company issued 99,274 shares of the
Company's common stock valued at $868,648 to the former
shareholders of Universal Document as part of the consideration
for the acquisition of Universal Document. On April 16, 1996, the
Company issued an additional 14,249 shares of the Company's common
stock valued at $160,728 to the former shareholders of Universal
Document as part of the contingent consideration earned in 1995
for the acquisition of Universal Document. A complete description
of the terms of the Universal Document acquisition is hereby
incorporated by reference to the Company's Report on Form 8-K
filed on January 2, 1996. The transaction in connection with
which these shares were issued did not involve any public offering
and as such the issuance of these shares was exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933. The securities were purchased with no view to distribution
thereof by the sole shareholders of a closely-held company
acquired by the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
General
Since its inception in 1991, the Company has provided
state-of-the-art information management technology products and
services to customers predominantly in the health care industry.
The Company has continued to develop systems that enable health
care providers to more efficiently collect, store and retrieve
medical information. It has been the Company's practice to
continue to develop new products, enhance existing applications,
make selected strategic acquisitions, and introduce consulting
services, which has led to significant revenue growth since the
commencement of operations. The Company's products presently
consist of the IntelliCode [tm] Intelligent Bar Code System
("IntelliCode"), the OptiMaxx[tm] Archival System ("OptiMaxx"),
the ChartMaxx [tm]Electronic Patient Record System ("ChartMaxx"),
and Step 2000 Workflow, Document Management, and Application
Development System (Step 2000). IntelliCode is an intelligent bar
coding system for hospitals and other health care organizations.
OptiMaxx is an optical disk-based archival system. ChartMaxx is
an enterprise-wide electronic patient record system. Step 2000 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. With its acquisition of FutureCORE, Ltd.
("FutureCORE"), the Company has also begun to provide process
improvement and automation consulting services, primarily in the
areas of patient care and laboratory services.
The Company's revenues are derived from systems sales, bar code
label sales, service contracts and consulting services. System
sales consist of software licenses for proprietary software, third
party software and hardware, and related installation. The gross
profit on system sales may vary among customers based upon the
relative proportion of proprietary software and third party
software and hardware included in a sale. Revenues from service
contracts include software and hardware maintenance and support.
Consulting services include implementation, training, custom
software development and process improvement. Sales of bar code
labels are made to customers who have installed the Company's
IntelliCode Intelligent Bar Code Systems. Revenues from service
contracts, consulting services and bar code labels are expected to
increase as the number of installed systems increases. Gross
profit on service contracts, consulting services and bar code
labels may fluctuate based upon the negotiated terms of each
contract and the Company's ability to fully utilize its customer
service, implementation and consulting personnel.
The decision by a health care 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. The sales cycle for the Company's
systems is typically six to eighteen months from initial contact
to the execution of a sales agreement. As a result, the sales
cycle causes variations in quarter to quarter results. These
agreements cover the entire implementation of the system and
specify the implementation schedule, which typically takes place
in one or more phases. The agreements generally provide for the
licensing of the Company's 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 usually sold outright, with a one-time fee charged for
installation and training. Site specific customization,
interfaces with existing customer systems and other consulting
services are sold on a fixed fee or a time and material basis.
Revenue is recognized in accordance with the provisions of
Statement of Position 91-1, Software Revenue Recognition. For
intelligent bar coding systems and workflow and document
management software licenses, revenue is recognized at the time of
shipment. For optical disk-based archival systems, revenue is
recognized upon delivery and customer acceptance of the system.
Revenue is recognized on electronic patient record systems using a
percentage-of-completion method based on meeting specified
performance milestones over the term of the contract. Revenues
from labels are recognized at the time of shipment and service
contract revenues are recognized ratably over the term of the
contracts. Revenues from consulting services are recognized in
the period in which the services are performed.
Results of Operations
The following table presents, for the periods indicated,
information derived from the Company's Consolidated Statements of
Operations, expressed as a percentage of total revenues, with the
exception of the cost of system sales and the cost of service,
consulting and other revenues which are expressed as a percentage
of the respective revenue components:
Years ended December 31,
1996 1995 1994
Revenues:
System sales 65.9% 76.3% 73.6%
Service, consulting
and other revenues 34.1 23.7 26.4
_____ _____ _____
Total revenues 100.0 100.0 100.0
Cost of revenues 50.1 46.1 44.2
_____ _____ _____
Gross profit 49.9 53.9 55.8
_____ ____ ____
Operating expenses (1) 74.8 83.0 51.6
_____ ____ ____
Operating income (loss) (24.9) (29.1) 4.2
Other income (expense), net 2.3 (1.1) 1.5
_____ ____ ____
Income (loss) before
income taxes (22.6) (30.2) 5.7
Income taxes - 0.2 2.1
_____ ____ ____
Net income (loss) (22.6)% (30.4)% 3.6%
_____ ____ ____
_____ ____ ____
Cost of system sales 45.7% 42.8% 38.6%
Cost of service,
consulting and other
revenue 58.5 56.7 59.7
(1) Because a significant percentage of the Company's operating
costs are expensed as incurred, a variation in the timing of
system sales and installations and the resulting revenue
recognition can cause significant variations in operating results.
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.
Instead, the data in the table is presented solely for the purpose
of reflecting the relationship of operating expenses to total
revenues for the periods indicated.
Years Ended December 31, 1996 and 1995
Revenues. Revenues for the year ended December 31, 1996 were
$10,940,456, an increase of $2,335,885, or 27% over the $8,604,571
reported for the comparable period in 1995. System sales
increased $640,533 or 10% from 1995. Service, consulting and
other revenues increased $1,695,352 or 83% from 1995. The
increase from service, consulting and other revenues resulted
primarily from higher service revenues as the Company's installed
systems base continues to grow and higher consulting revenues
related to the Universal Document and FutureCORE subsidiaries.
Gross Profit. Gross profit for the year ended December 31, 1996
was $5,462,524 and $4,636,755 for the year ended December 31,
1995, an increase of 18%. The overall gross profit margin
decreased from 54% in 1995 to 50% in 1996. Competitive pricing
pressures and higher capitalized software amortization led to a
decrease in gross profit margin on systems sales from 57% in 1995
to 54% in 1996. Gross profit margins on service, consulting, and
other revenues decreased from 43% to 41% due to lower than
expected utilization of consulting and implementation personnel as
margins on service contracts and label sales remained even with
prior year.
Operating Expenses. Operating expenses increased from $7,139,620
in 1995 to $8,185,200 in 1996, an increase of $1,045,580 or 15%.
Excluding a non-recurring charge of $1,465,697 in 1995 related to
the in-process technology acquired in the acquisition of Universal
Document, operating expenses increased $2,511,277 or 44% from
1995. The increase is a result of an increase in personnel
related to employees in the areas of sales, marketing, product
development, administration and the Company's new subsidiaries,
Universal Document and FutureCORE. Substantial expenditures were
also made in the current year to increase market awareness of the
Company's products.
Net Loss. The Company's net loss for 1996 was $2,472,192 compared
to a net loss of $2,616,277 in 1995. The net loss in 1996 is a
result of the increased operating expenses discussed in the
preceding paragraph and lower than expected revenues. No income
tax benefit has been recorded related to the 1996 net loss. The
Company is in a loss carryforward position with approximately
$5,129,000 of net operating loss carryforwards as of December 31,
1996 available to offset future Federal taxable income.
The weighted average number of shares outstanding for 1996 was
5,876,482 shares compared to 4,906,530 shares for 1995. The
increase in the weighted average number of shares outstanding is
primarily due to the issuance of 900,000 shares of stock in the
Company's the secondary offering in November 1995.
Years Ended December 31, 1995 and 1994
Revenues. Revenues for the year ended December 31, 1995 were
$8,604,571, an increase of $1,961,879, or 30% over the $6,642,692
reported for the comparable period in 1994. System sales increased
$1,675,339 or 34% from 1994 primarily due to enhanced market
awareness of the OptiMaxx system, additional OptiMaxx sales
personnel, the initial installations of ChartMaxx systems, and
Step2000 sales subsequent to the date of acquisition for Universal
Document. Service, consulting and other revenues increased
$286,540 or 16% from 1994 due to higher service revenues resulting
from an increase in the installed base of all systems.
Gross Profit. Gross profit for the year ended December 31, 1995
was $4,636,755 and $3,705,849 for the year ended December 31,
1994, an increase of 25%. The overall gross profit margin
decreased from 56% in 1994 to 54% in 1995. The gross profit margin
on systems sales decreased from 61% in 1994 to 57% in 1995. Gross
profit margins on service, consulting, and other revenues
increased from 40% in 1994 to 43% in 1995 due to an increase in
revenues from service contracts.
Operating Expenses. Operating expenses increased from $3,427,088
in 1994 to $7,139,620 in 1995, an increase of 108%. Included in
operating expenses in 1995 is a non-recurring charge of $1,465,697
related to the in-process technology acquired in the acquisition
of Universal Document which was expensed at the date of
acquisition. Technological feasibility had not been reached for
the acquired in-process technology, as further development
activities such as validation, quality assurance and beta testing
were required to be completed. The acquired technology represented
proprietary software and had no alternative future use. The
Company added a significant number of employees in the areas of
development, sales, marketing and administration. Substantial
expenditures were made in 1995 to increase market awareness of the
Company's products, especially the commercial release of the
ChartMaxx product. The Company also incurred significant expenses
to expand the direct and indirect channels of distribution and to
recruit senior management personnel to direct and support the
Company's anticipated growth.
Net Loss. While net revenues increased 30% over the comparable
year, the significant increases in operating expenses and the
charge for the acquired in-process technology resulted in a loss
of $2,616,277 in 1995. Net income in 1994 was $238,889. In
addition, as a result of the operating loss and the tax
ramifications of the Universal Document acquisition, the Company
did not record a tax benefit related to the 1995 net loss.
The weighted average number of shares outstanding for 1995 was
4,906,530 shares compared to 4,178,757 shares for 1994. The
increase in the weighted average number of shares outstanding is
attributable to the Company's secondary offering in November 1995.
Inflation
To date, inflation has not had a material impact on the Company's
operations.
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 currently maintains a $10,000,000 line of credit which
is secured by substantially all of its assets. In December 1996,
the Company amended the credit agreement to extend the term to
December 31, 1998. At December 31, 1996, the maximum amount
available under the line of credit was approximately $6,950,000.
No amounts were outstanding under this line of credit at December
31, 1996 and 1995.
The Company's Board of Directors authorized a common stock
repurchase program in November 1996. Under the program, the
Company may purchase up to 500,000 shares of the Company's common
stock. As of December 31, 1996, no shares have been purchased
under this program.
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 December 31, 1996, the Company had advanced $369,000 to
DiaLogos. 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 $85,000
at December 31, 1996. Subsequent to December 31, 1996, the
Company arranged for approximately $400,000 of funding for
DiaLogos from investors, which consisted of officers and directors
of the Company. The proceeds of this funding will be used to
repay advances made by the Company prior to December 31, 1996.
It is the Company's current intention to find other investors to
fulfill part or all of the remaining funding commitment to
DiaLogos.
The Company has also provided a guarantee to a leasing company
under which the Company has guaranteed the payments due by
DiaLogos under certain lease agreements for equipment and
furniture. The future amounts due under the leases, which
terminate in 1999 and 2001, are approximately $135,000. DiaLogos
provides software, education and services to corporations that are
implementing object-oriented systems in the design and redesign of
their business processes.
Universal Document has entered into agreements with two consulting
firms to assist it in the identification and recruitment of
certain software resellers and integrators that Universal Document
may acquire or combine with, and to assist Universal Document in
an initial public offering of the combined companies. The
acquisition of or combination with these resellers and integrators
would be concurrent with and contingent upon a successful public
offering. The consulting agreements grant the consulting firms
warrants to acquire up to 20% of the common shares of Universal
Document outstanding prior to a public or private offering of
Universal Document stock. One warrant is exercisable for a period
of three years from the date that Universal Document completes a
public or private offering while the other warrant expires
February 19, 2000. The warrants will cease to be effective,
however, if a public offering of stock of Universal Document is
not completed or if the consulting agreements are terminated prior
to a public or private offering.
The Company believes that its cash and cash equivalents,
investment securities, 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. 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.
ITEM 7. FINANCIAL STATEMENTS.
Information called for by this item is set forth in the Company's
Consolidated Financial Statements contained in this report and is
herein incorporated by this reference. Specific financial
statements and supplemental data can be found at the pages listed
in the following index:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number
Description In This Report
Independent Auditors' Report
of KPMG Peat Marwick LLP F-2
Consolidated Balance Sheets as
of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations
for the years ended December 31, 1996,
1995 and 1994 F-4
Consolidated Statements of
Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 to F-23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
KPMG Peat Marwick LLP
1600 PNC Center
201 E. 5th Street
Cincinnati, OH 45202
Independent Auditors' Report
The Board of Directors
MedPlus, Inc.:
We have audited the accompanying consolidated balance sheets of
MedPlus, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of MedPlus, Inc. and subsidiaries as of December 31, 1996
and 1995, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 28, 1997
F-2
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
ASSETS 1996 1995
Current assets:
Cash and cash equivalents 2,700,607 7,494,094
Investment securities 300,510 500,020
Accounts receivable, less allowance
for doubtful accounts of $100,000
in 1996 and $50,000 in 1995 3,676,614 2,848,495
Other receivables 463,098 215,688
Inventories 827,619 538,274
Unbilled service contracts 325,352 279,410
Prepaid expenses and
other current assets 617,737 456,360
__________ __________
Total current assets 8,911,537 12,332,341
Investment securities - 302,730
Unbilled service contracts 1,137,575 943,446
Capitalized software development
costs, net 2,278,358 1,265,906
Fixed assets, net 1,462,818 905,365
Excess of cost over fair value
of net assets acquired, net 911,402 940,149
Other assets 145,454 166,704
__________ __________
$ 14,847,144 16,856,641
__________ __________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of
obligations under capital leases $ 38,154 53,093
Accounts payable 1,417,760 1,003,714
Accrued expenses 1,063,109 1,181,263
Payable to selling shareholders
of Universal Document - 1,011,353
Deferred revenue 897,224 560,802
Deferred revenue on unbilled
service contracts 325,352 279,410
_________ _________
Total current liabilities 3,741,599 4,089,635
Obligations under capital leases,
excluding current installments 81,229 103,565
Deferred revenue 28,748 96,446
Deferred revenue on unbilled
service contracts 1,137,575 943,446
_________ _________
Total liabilities 4,989,151 5,233,092
_________ _________
Shareholders' equity:
Common stock, no par value, authorized
15,000,000 shares; issued and outstanding
5,919,206 shares in 1996 and
5,808,524 shares in 1995 1,076 1,056
Additional paid-in capital 14,734,036 14,035,728
Accumulated deficit (4,849,580) (2,377,388)
Unrealized gains on investment
securities 1,824 3,258
Deferred compensation under employee
stock award plan (29,363) (39,105)
___________ ___________
Total shareholders' equity 9,857,993 11,623,549
___________ ___________
Commitments
$ 14,847,144 16,856,641
___________ ___________
See accompanying notes to consolidated financial statements.
F-3
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
Revenues:
Systems sales $ 7,205,316 6,564,783 4,889,444
Service, consulting, and
other revenues 3,735,140 2,039,788 1,753,248
__________ _________ _________
Total revenues 10,940,456 8,604,571 6,642,692
Cost of revenues:
Systems sales 3,291,373 2,812,184 1,889,449
Service, consulting, and
other revenues 2,186,559 1,155,632 1,047,394
__________ _________ _________
Total cost of revenues 5,477,932 3,967,816 2,936,843
__________ _________ _________
Gross profit 5,462,524 4,636,755 3,705,849
Operating expenses:
Sales and marketing 4,083,250 3,392,359 2,070,034
Research and development 660,424 692,033 187,143
General and administrative 3,441,526 1,589,531 1,169,911
Acquired in-process technology - 1,465,697 -
__________ _________ _________
Total operating
expenses 8,185,200 7,139,620 3,427,088
__________ _________ _________
Operating income(loss) (2,722,676)(2,502,865) 278,761
Other income(expense), net 252,381 (91,796) 97,885
__________ _________ _________
Income(loss)before
income taxes (2,470,295)(2,594,661) 376,646
Income taxes 1,897 21,616 137,757
__________ _________ _________
Net income(loss) $ (2,472,192)(2,616,277) 238,889
__________ _________ _________
Net income(loss)per share $ (0.42) (0.53) .06
__________ _________ _________
Weighted average number
of shares of common
stock and common stock
equivalents outstanding 5,876,482 4,906,530 4,178,757
__________ _________ _________
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<CAPTION>
Deferred
Unrealized comp-
Retained gains ensation
earnings (losses) under Total
Additional (accumu- on employee share-
Common Stock paid-in lated investment stock holders'
Shares Amount capital deficit) securities award plan equity
__________ _________ _________ ________ __________ __________ _________
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 3,355,000 $ 610 330,150 (27,374) - - 303,386
Change in tax status
to C Corporation - - (27,374) 27,374 - - -
Shares surrendered (41,250) (8) - - - - (8)
Issuances of common stock,
net of issuance costs 1,265,000 230 4,866,631 - - - 4,866,861
Options exercised 165,000 30 14,220 - - - 14,250
Tax benefit associated
with exercise of options - - 40,400 - - - 40,400
Net income - - - 238,889 - - 238,889
Unrealized losses on
investment securities,
net of income tax benefit - - - - (36,129) - (36,129)
Balances at December 31, 1994 4,743,750 862 5,224,027 238,889 (36,129) - 5,427,649
Issuances of common stock,
net of issuance costs 1,058,774 193 8,766,282 - - - 8,766,475
Net loss - - - (2,616,277) - - (2,616,277)
Unrealized gains on
investment securities,
net of income taxes - - - - 39,387 - 39,387
Deferred compensation
under employee stock award
plan, net of amortization 6,000 1 45,419 - - (39,105) 6,315
Balances at December 31, 1995 5,808,524 1,056 14,035,728(2,377,388) 3,258 (39,105)11,623,549
Issuances of common stock 64,749 12 403,874 - - - 403,886
Options exercised 36,933 7 220,186 - - - 220,193
Net loss - - - (2,472,192) - - (2,472,192)
Unrealized losses on
investment securities, net
of income taxes - - - - (1,434) - (1,434)
Deferred compensation
under employee stock award
plan, net of amortization 9,000 1 74,248 - - 9,742 83,991
Balances at December 31, 1996 5,919,206 $ 1,076 14,734,036 (4,849,580) 1,824 (29,363) 9,857,993
See accompanying notes to consolidated financial statements. F-5
</TABLE>
<PAGE>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
Cash flows from operating
activities:
Net income (loss) $(2,472,192)(2,616,277) 238,889
Adjustments to reconcile
net income (loss) to
net cash used in
operating activities:
Amortization of
capitalized software
development costs 357,395 312,510 100,614
Acquired in-process
technology - 1,465,697 -
Depreciation and
amortization 241,838 144,408 70,909
Amortization of excess of
cost over fair value of
net assets acquired 101,982 6,335 -
Amortization of deferred
compensation costs 85,689 6,311 -
Provision for loss on
doubtful accounts 50,000 25,000 15,000
Deferred income taxes 36,825 (21,616) 91,866
Realized (gain) loss on sale
of investment securities and
fixed assets (6,740) 244,991 -
Changes in assets and
liabilities, net of
business acquisitions:
Accounts receivable (878,119)(1,075,437)(1,186,173)
Other receivables 121,990 (4,542) (188,087)
Inventories (289,345) (204,365) 78,738
Prepaid expenses and
other assets (90,757) (260,902) (186,466)
Accounts payable and
accrued expenses 295,892 841,210 168,022
Deferred revenue 268,724 62,582 66,222
__________ _________ _________
Net cash used in
operating activities (2,176,818)(1,074,095) (730,466)
__________ _________ _________
Cash flows from investing
activities:
Capitalization of software
development costs (1,369,847) (805,718) (443,869)
Purchases of equipment,
furniture and fixtures (776,058) (430,284) (356,296)
Purchases of investment
securities - (236,256)(3,773,267)
Proceeds from sales of
investment securities
and fixed assets 518,507 1,643,312 1,280,870
Payments to selling
shareholders of
Universal Document (850,625) - -
Cash acquired in (payments
made for) business
acquisitions (108,235) 15,758 -
Other advances and
investments (454,789) - -
Investment in convertible
debenture - - (299,500)
__________ _________ __________
Net cash provided by
(used in) investing
activities (3,041,047) 186,812 (3,592,062)
__________ _________ __________
Cash flows from financing activities:
Proceeds from issuance
of common stock, net of
issuance costs 461,653 7,897,828 4,881,103
Proceeds from borrowings on
line of credit 1,587,815 829,564 -
Repayments on line of credit (1,587,815) (829,564) -
Principal payments on capital
lease obligations and
notes payable (37,275) (63,449) (104,709)
__________ _________ __________
Net cash provided by
financing activities 424,378 7,834,379 4,776,394
__________ _________ __________
Net increase (decrease)
in cash and cash
equivalents (4,793,487) 6,947,096 453,866
Cash and cash equivalents,
beginning of period 7,494,094 546,998 93,132
__________ _________ __________
Cash and cash equivalents,
end of period $ 2,700,607 7,494,094 546,998
__________ _________ __________
Interest paid $ 25,845 30,432 30,347
__________ _________ __________
Income taxes paid
(refunds received) $ (66,192) (67,928) 143,798
__________ _________ __________
See accompanying notes to consolidated financial statements.
F-6
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(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 health care 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 health care organizations. OptiMaxx is an optical
disk-based archival system. ChartMaxx is an enterprise-wide
electronic patient record system. Step 2000 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. With its
acquisition of FutureCORE, Ltd. ("FutureCORE"), the Company has
also begun to provide process improvement and automation services,
primarily in the areas of patient care and laboratory services.
Substantially all of the Company's operations, including its
headquarters, are located in Cincinnati, Ohio.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the
accounts of MedPlus, Inc. and its wholly-owned subsidiaries,
Universal Document Management Systems, Inc. ("Universal Document")
and FutureCORE. All intercompany accounts and transactions have
been eliminated in consolidation.
(b) Cash and Cash Equivalents
Cash equivalents of $2,669,617 and $7,430,032 at December
31, 1996 and 1995, respectively, consist of overnight repurchase
agreements and investments in money market funds with initial
terms of less than three months. The carrying value of cash and
cash equivalents approximates fair value. For purposes of the
statements of cash flows, the Company considers all highly liquid
debt instruments with original maturities of three months or less
to be cash equivalents.
Interest income from cash equivalents and investment
securities was $327,499 in 1996, $179,863 in 1995, and $128,232 in
1994.
(Continued)
F-7
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2)Summary of Significant Accounting Policies, Continued
(c) Investment Securities
The Company accounts for its investment securities under the
provisions of Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The Company's investment securities are classified
under SFAS No. 115 as "available-for-sale," and accordingly, are
carried at fair market value. Unrealized holding gains and losses
are included as a component of shareholders' equity, net of income
tax effects, until realized.
(d) Revenue Recognition
The Company's revenues are derived from systems sales, which
include software licenses, bar code label sales, service contracts
and consulting services. Revenue is recognized in accordance with
the provisions of Statement of Position 91-1, Software Revenue
Recognition. For intelligent bar coding systems and workflow and
document management software licenses, revenue is recognized at
the time of shipment. For optical disk-based archival systems,
revenue is recognized upon delivery and customer acceptance of the
system. Revenue is recognized on electronic patient record
systems using a percentage-of-completion method based on meeting
specified performance milestones over the term of the contract.
Revenues from labels are recognized at the time of shipment and
service contract revenues are recognized ratably over the term of
the contracts. Revenues from consulting services are recognized
in the period in which the services are performed.
Deferred revenues primarily represent service contracts that
have or will be billed in advance of the service to be provided.
(e) Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, consist
primarily of investment securities and trade accounts receivable.
The Company's investment securities consist of U.S. government or
agency obligations and corporate obligations. The Company's
receivables are concentrated in the health care industry.
However, the Company's credit risk is limited due to the
geographic dispersion and large numbers of customers making up the
Company's receivable portfolio.
(f) Inventories
Inventories are stated at the lower of cost or market and
cost is determined by the first-in, first-out (FIFO) method.
(Continued)
F-8
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Summary of Significant Accounting Policies, Continued
(g) Capitalized Software Development Costs
The Company accounts for software development costs in
accordance with the provisions of SFAS No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise
Marketed. Costs incurred in designing and developing computer
software products are expensed as research and development until
technological feasibility has been established. Technological
feasibility is established upon completion of a detail program
design or, in its absence, completion of a working model. Upon
the achievement of technological feasibility, software production
costs are capitalized and subsequently reported at the lower of
unamortized cost or net realizable value.
Annual amortization expense is the greater of the amount
computed, using the ratio of the current year's revenues to the
total of current and anticipated future revenues, or the
straight-line method over the remaining economic life which does
not exceed five years. Amortization of capitalized software
development costs amounted to $357,395, $312,510 and $100,614 for
the years ended December 31, 1996, 1995 and 1994, respectively.
In 1995, amortization of capitalized software development costs
included an additional $148,000 related to a product that was not
expected to provide significant future economic benefit.
Accumulated amortization for capitalized software development
costs was $814,574 and $457,179 at December 31, 1996 and 1995,
respectively.
(h) Fixed Assets
Fixed assets are stated at cost, except for equipment held
under capital leases which is stated at the present value of
minimum lease payments. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets
which range from five to ten years. Leasehold improvements and
equipment held under capital leases are amortized using the
straight-line method over the shorter of the lease term or
estimated useful life of the asset.
(i) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of the cost over fair value of net assets acquired
from business acquisitions is being amortized on the straight-line
method over the expected periods to be benefited, which range from
five to ten years. Accumulated amortization of the excess of the
cost over the fair value of net assets acquired was $108,317 and
$6,335 at December 31, 1996 and 1995, respectively. The Company
assesses the recoverability of this intangible asset by
determining whether the amortization of the intangible balance
over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount
of the intangible impairment, if any, is measured based on
(Continued)
F-9
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Summary of Significant Accounting Policies, Continued
(i) Excess of Cost Over Fair Value of Net Assets Acquired,
Continued
projected discounted future operation cash flows using a discount
rate reflecting the Company's average cost of funds. The
assessment of the recoverability of the intangible asset will be
impacted if estimated future operating cash flows are not
achieved.
(j) Income Taxes
At inception, the shareholders of the Company elected to be
taxed under Subchapter S of the Internal Revenue Code. As a
result of that election, Federal income taxes were the
responsibility of the Company's shareholders, as were certain
state income taxes. The S Corporation election was terminated on
January 1, 1994.
The provisions for income taxes are accounted for in
accordance with SFAS No. 109, Accounting for Income Taxes. Under
the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled.
(k) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. As such,
compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No.
123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for
employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
(Continued)
F-10
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Summary of Significant Accounting Policies, Continued
(l) Net Income (Loss) Per Share
Net income (loss) per share is based on the weighted average
number of shares of common stock and common stock equivalents
outstanding for each period. Common stock equivalents have not
been included in the weighted average shares during periods of net
loss. The per share calculations include the effect of the
Company's 5,500-for-1 stock split of common stock effective April
8, 1994.
(m) Supplemental Cash Flow Information
In April 1996 and December 1995, the Company issued 14,249
and 99,274 shares of common stock, valued at $160,728 and
$868,648, respectively, in connection with the acquisition of
Universal Document. The Company entered into capital leases for
equipment totaling approximately $128,000 and $6,500 in 1995 and
1994, respectively. In 1996 and 1995, the Company granted
employees 8,900 and 6,000 shares of common stock, respectively,
under a stock award plan. The market value of the stock at the
dates of grant was approximately $74,000 and $45,000 in 1996 and
1995, respectively, and is being amortized over periods of one to
three years in accordance with the terms of the awards. In 1994,
the Company realized $40,400 of tax benefits associated with the
exercise of stock options. The tax benefit reduced the income tax
liability and was credited to additional paid-in capital. As
these are non-cash transactions, they are not presented in the
Consolidated Statements of Cash Flows.
(n) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(o) Reclassifications
Certain reclassifications have been made to the 1995 and 1994
consolidated financial statements to conform with the current
period presentation.
(3) Acquisitions
Effective June 28, 1996, the Company acquired all of the
assets of FutureCORE, a hospital, laboratory and physician
services consulting firm. The acquisition has been accounted for
under the purchase method; accordingly, the results of operations
of FutureCORE have been included in the Company's consolidated
financial statements since the date of the acquisition.
(Continued)
F-11
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Acquisitions, Continued
The total consideration paid for these assets consisted of
cash of $61,250. The asset purchase agreement also provides for
additional consideration contingent upon future net revenue and
contribution margin performance of FutureCORE as it relates to its
backlog as of June 28, 1996. The purchase price for FutureCORE has
been allocated to the identifiable tangible and intangible assets
acquired based on their fair market value. The additional
contingent consideration, if earned, would be accounted for as an
additional cost of the acquisition. Contingent consideration
earned in 1996 was not material.
Effective December 14, 1995, the Company acquired all of the
outstanding shares of Universal Document, a developer of document
and workflow management software. The Company also purchased all
of the outstanding shares of HWB, Inc. the owner and licensor of
the principal software product of Universal Document. The
acquisitions have been accounted for under the purchase method;
accordingly, results of operations of these entities have been
included in the Company's consolidated financial statements since
the date of acquisition.
Total consideration for the acquisition of Universal Document
and HWB consisted of $1,700,000, including cash of $831,352 and
99,274 shares of Company common stock valued at $868,648. The
agreements also provide for additional consideration contingent
upon future revenue performance of Universal Document, which if
earned, would be accounted for as an additional cost of the
acquired companies. For the period from December 14, 1995 to
December 31, 1995, the contingent consideration earned was
$277,845. No additional contingent consideration was earned in
1996. Maximum future potential payments under these agreements
for the remaining two-year period ending December 31, 1998 total
$3,000,000.
The purchase price for the acquired companies has been
allocated to the identifiable tangible and intangible assets
acquired based on their estimated fair values. Acquired in-process
technology related to Universal Document and HWB has been expensed
at the date of acquisition. The excess of cost over fair value of
net assets acquired is being amortized on the straight line method
over ten years. To determine the fair market value of the acquired
in-process technology, the Company utilized the income approach
which focuses on the income producing capability of the assets
acquired and best represents the present value of the future
economic benefits expected to be derived from these assets.
Technological feasibility for the acquired in-process technology
had not been reached based on design and development activities in
place, requiring further refinement and testing. The development
activities required to complete the acquired in-process technology
include validation, quality assurance programs and beta test. The
acquired technology represents unique and emerging technology, the
application of which is limited to the Company's workflow and
document management software strategy. Accordingly, the acquired
technology has no alternative future use. The total amount of
acquired in-process technology that was charged to the results of
operations at the date of acquisition was $1,465,697.
(Continued)
F-12
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) Acquisitions, Continued
The following unaudited pro forma data presents the results
of operations as if the acquisitions of Universal Document and HWB
had occurred at the beginning of each period. This summary is
provided for information purposes only. It does not necessarily
reflect the actual results that would have occurred had the
acquisitions been made as of those dates or of results that may
occur in the future. The effect of FutureCORE on the results of
operations for periods prior to its acquisition would not have
been material.
1995 1994
Revenues $ 9,023,192 7,101,023
Net loss (2,940,717) (1,551,248)
Net loss per share $ (.59) (.36)
____________ ___________
(4) Investment Securities
Investment securities at December 31, 1996 consisted entirely
of a General Electric Capital Corporation bond with a market value
of $300,510, cost of $297,660, unrealized gain of $2,850, and a
maturity date in May 1997.
Investment securities at December 31, 1995 include the
following:
Market Unrealized
Value Cost Gains
_________ __________ ___________
Federal Home Loan Bank note $ 500,020 500,000 20
General Electric Capital
Corporation bond 302,730 297,660 5,070
_________ __________ ___________
Total investment securities $ 802,750 797,660 5,090
_________ __________ ___________
The fair values of investment securities are based on the
quoted market prices at the reporting date for those investments.
Other income (loss) in 1996 and 1995 include, respectively, a
gain on sale of approximately $19,000 and a permanent impairment
loss of approximately $230,000 related to an investment security
acquired in 1995.
(Continued)
F-13
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Fixed Assets
Fixed assets consist of the following at December 31, 1996 and
1995:
1996 1995
Equipment $1,271,600 782,764
Furniture and fixtures 400,906 267,305
Leasehold improvements 157,742 31,957
Purchased software 91,860 59,542
__________ _________
1,922,108 1,141,568
Accumulated depreciation
and amortization (459,290) (236,203)
__________ _________
$1,462,818 905,365
__________ _________
(6) Bank Agreements
In February 1995, the Company executed a $3,000,000 line of
credit agreement with a bank. Interest is payable at the bank's
prime rate. The line of credit is secured by all assets of the
Company, and the Company must maintain a net worth of $4,000,000
and a maximum leverage ratio, both as defined in the credit
agreement.
In November 1995, the Company amended the credit agreement
with the bank that permits the Company to borrow a maximum of
$10,000,000, subject to a defined net worth formula, and retains
the existing maximum leverage ratio, also as defined. The amended
credit agreement was scheduled to expire on December 31, 1997.
In December 1996, the Company amended the credit agreement to
extend the term to December 31, 1998. The amended credit
agreement requires the Company to pay a .25% commitment fee per
annum payable quarterly in arrears on the unused portion of the
line of credit. At December 31, 1996, the maximum amount
available under the line of credit was approximately $6,950,000.
No amounts were outstanding under this line of credit at December
31, 1996 and 1995.
(7) Common Stock and Common Stock Warrants
In March 1994, the Board of Directors approved the filing of
a Registration Statement under the Securities Act of 1933 in
connection with the initial public offering of shares of common
stock of the Company.
In April 1994, the Board of Directors authorized a
5,500-for-1 stock split of common stock. All common share and per
share amounts in the accompanying consolidated financial
statements have been adjusted retroactively to give effect to this
stock split.
(Continued)
F-14
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Common Stock and Common Stock Warrants, Continued
MedPlus, Inc. became a publicly traded company in May 1994
with the issuance of 1,265,000 shares of common stock from which
the Company received $4,866,861, net of issuance costs. The
Company also sold to the underwriter a five-year warrant for $50
to purchase up to 110,000 shares of common stock. The warrant was
not exercisable during the first year following the effective date
of the offering but was then exercisable at prices increasing from
$4.815 to $5.76 per share, depending on the date of exercise.
During August and September 1995, the underwriter exercised its
right to purchase 59,500 shares of the Company's common stock for
$286,493. The underwriter exercised its right to purchase the
remaining 50,500 shares for $243,148 during May 1996. At December
31, 1996, no shares remain exercisable under the warrant
agreement.
In October 1995, the Board of Directors approved the filing
of a Registration Statement under the Securities Act of 1933 in
connection with a secondary offering of 1,000,000 shares of the
Company's common stock, 100,000 shares of which were sold by an
officer of the Company. The secondary offering was completed on
November 24, 1995, and the Company received $7,611,171, net of
issuance costs. In addition, the Company also agreed to sell to
the underwriters for $50 a five-year warrant to purchase up to
25,000 shares of common stock.
The Company's Board of Directors authorized a common stock
repurchase program in November 1996. Under the program, the
Company may purchase up to 500,000 shares of the Company's common
stock. As of December 31, 1996, no shares have been purchased
under this program.
(8)Stock Incentive Plans
In March 1994, the Company adopted the 1994 Long-Term Stock
Incentive Plan (Long-Term Plan) and the Directors'
Nondiscretionary Stock Option Plan (Directors' Plan), collectively
the "Option Plans." The Long-Term Plan provides for the grant of
stock-based incentives to employees in the form of stock options,
stock appreciation rights, stock awards, or any combination
thereof. The maximum number of shares with respect to which stock
incentives may be granted under the Long-Term Plan is currently
1,000,000 shares. A total of 100,000 shares is reserved for
issuance under the Directors' Plan.
Options granted under the Long-Term Plan may be either
nonqualified or incentive options. Under the terms of both the
Long-Term Plan and the Directors' Plan, options may not be granted
at less than fair market value on the date of the grant. Options
granted under both plans are exercisable in installments; however,
no options are exercisable earlier than six months or later than
ten years from the date of the grant.
(Continued)
F-15
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Stock Incentive Plans, Continued
At December 31, 1996, there were 553,600 additional shares
available for grant under the Option Plans. The per share
weighted average fair value of stock options granted during 1996
and 1995 was $4.83 and $3.15 on the date of grant using the Black
Scholes option-pricing model with the following weighted average
assumptions: 1996 - expected dividend yield 0%, risk-free
interest rate of 6.09%, expected volatility of 38%, and an
expected life of 4.78 years; 1995 - expected dividend yield 0%,
risk-free interest rate of 6.33%, expected volatility of 34%, and
an expected life of 4.48 years.
The Company applies APB Opinion No. 25 in accounting for the
Option Plans; accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial
statements. The Company recognized $85,689 of compensation cost
in 1996 related to stock awards granted under the Long-Term Plan.
Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123,
the Company's net loss would have been increased to the pro forma
amounts indicated below:
1996 1995
Net loss As reported $(2,472,192) (2,616,277)
Pro forma (3,321,232) (2,826,115)
Net loss per share As reported $ (0.42) (0.53)
Pro forma (0.56) (0.58)
Pro forma net loss reflects only options granted in 1996 and
1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro
forma net loss amounts presented above because compensation cost
is reflected over the options' vesting periods of six months to
five years and compensation cost for options granted prior to
January 1, 1995 is not considered.
Transactions with respect to stock options for years ended
December 31, 1996, 1995 and 1994 were as follows:
Number of Weighted Average
Shares Exercise Price
__________ ________________
Shares under option, December 31, 1993 165,000 $0.0864
Options exercised (165,000) 0.0864
Options granted 60,000 5.58
__________ ________________
Shares under option, December 31, 1994 60,000 5.58
Options granted 177,500 7.47
__________ ________________
Shares under option, December 31, 1995 237,500 6.99
Options exercised (36,933) 5.96
Options forfeited (6,667) 7.56
Options granted 352,500 11.34
__________ ________________
Shares under option, December 31, 1996 546,400 9.86
(Continued) __________
F-16
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Stock Incentive Plans, Continued
The following table summarizes information about stock
options at December 31, 1996:
Options Outstanding Options Exercisable
_______________________________________________ __________________
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Contractual Exercise of Exercise
Prices Options Life Price Options Price
_______________________________________________ __________________
$5.75-8.56 228,400 3.6 $ 7.10 105,562 $ 6.68
9.37-12.81 283,000 4.3 11.58 110,832 11.25
13.94-14.13 35,000 4.4 13.97 - -
_______ _________
546,400 4.0 9.86 216,394 9.02
_______ _________
At December 31, 1995, there were 86,665 options exercisable
with a weighted average exercise price of $6.00. No options were
exercisable at December 31, 1994.
(9) Income Taxes
The Company adopted SFAS No. 109 effective January 1, 1994
and recorded a net deferred tax liability of $25,000 representing
the tax-effected cumulative temporary differences as of that date.
Total income tax expense for the years ended December 31,
1996, 1995 and 1994 was allocated as follows:
Years Ended December 31,
1996 1995 1994
Income (loss) from operations $ 1,897 21,616 137,757
Shareholders' equity, for
compensation expense for
tax purposes in excess of
amounts recognized for
financial reporting purposes - - (40,400)
Shareholders' equity,
unrealized gains (losses)
on marketable securities
recorded for financial
reporting purposes (806) 20,290 (18,613)
________ ______ ________
$ 1,091 41,906 78,744
________ ______ ________
(Continued)
F-17
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
Income tax expense attributable to income (loss) from
operations was as follows:
Years Ended December 31,
1996 1995 1994
Federal:
Current $ - - 38,691
Deferred 1,897 20,416 83,566
______ ______ _______
1,897 20,416
122,257
State:
Current - - 7,200
Deferred - 1,200 8,300
______ ______ _______
- 1,200 15,500
______ ______ _______
$ 1,897 21,616 137,757
______ ______ _______
Income tax expense differs from the amounts computed by
applying the Federal statutory rate to pre-tax income (loss) as a
result of the following:
Years Ended December 31,
1996 1995 1994
Computed "expected" tax expense
(benefit) $ (839,900) (882,185) 128,060
Acquired in-process technology - 498,337 -
Change in valuation allowance 826,518 424,424 -
Research and experimentation
tax credit (38,879) (42,935) (26,569)
Change in tax status from
S Corporation to C Corporation - - 25,000
Amortization of excess of cost
over fair value of net assets
acquired 33,744 2,154 -
Other 20,414 21,821 11,266
________ _______ ________
$ 1,897 21,616 137,757
________ _______ _______
The significant components of deferred income tax expense
(benefit) attributable to income (loss) from operations for the
years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995
1994
Deferred tax expense (benefit)
(exclusive of the effects of
other components listed below) $ (824,621) (402,808) 91,866
Increase in the beginning-
of-the-year balance of the
valuation allowance for
deferred taxes 826,518 424,424 -
__________ ________ _______
$ 1,897 21,616 91,866
(Continued)F-18
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Income Taxes, Continued
The tax effects of temporary differences that give rise to
deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows:
December 31,
1996 1995
Deferred tax assets:
Net operating loss carryforward $ 1,847,491 624,502
Various accruals, deductible
when paid 92,083 30,682
Research and experimentation
credit carryforward 85,018 69,504
Capital loss carryforward 78,390 83,220
Other 66,460 84,320
_________ _______
Total gross deferred
tax assets 2,169,442 892,228
Less valuation allowance (1,326,286) (424,424)
_________ _______
Net deferred tax assets 843,156 467,804
_________ _______
Deferred tax liabilities:
Software costs capitalized
for financial reporting purposes,
expensed for tax purposes (662,636) (309,545)
Equipment, principally due to
differences in depreciation (128,055) (65,810)
Other (52,465) (56,430)
_________ _______
Total gross deferred
tax liabilities (843,156) (431,785)
_________ _______
Net deferred tax assets $ - 36,019
_________ _______
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible.
At December 31, 1996, the Company has net operating loss
carryforwards for Federal income tax purposes of approximately
$5,129,000, which are available to offset future Federal taxable
income, if any, through 2011. In addition, the Company has
research and experimentation credit carryforwards of approximately
$85,000 which are also available to offset future Federal taxes
payable, if any, through 2011. The Company, also has a capital
loss carryforward of approximately $218,000, which is available to
offset future capital gains, if any, through 2001.
(Continued)F-19
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Related Party Transaction
As discussed in Note 3, the Company purchased all of the
outstanding common stock of Universal Document Management Systems,
Inc. in December, 1995. The majority owner and president of that
company has been a director of the Company since 1994.
(11) Retirement Savings and Investment Plan
The Company has a Retirement Savings and Investment Plan (401
(k) Plan) in which employees may participate by contributing
specified percentages of qualified compensation subject to
Internal Revenue Service limitation. The Company may make
discretionary contributions to a maximum of 100% of each
participant's contribution. There were no expenses recorded
related to this Plan in 1996 and 1995 and approximately $25,000 in
1994.
(12)Commitments
(a) 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.
(Continued)
F-20
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Commitments, Continued
(a) DiaLogos Commitment and Guarantee, Continued
As of December 31, 1996, the Company had advanced $369,000 to
DiaLogos which is included in other receivables. 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 $85,000 at December 31, 1996.
Subsequent to December 31, 1996, the Company arranged for
approximately $400,000 of funding for DiaLogos from investors,
which consisted of officers and directors of the Company. The
proceeds of this funding will be used to repay advances made by
the Company prior to December 31, 1996. It is the Company's
current intention to find other investors to fulfill part or all
of the remaining funding commitment to DiaLogos.
DiaLogos leases office space from the Company under a
sublease expiring June 30, 2002, which requires annual rental
payments of $61,000. The Company has also provided a guarantee to
a leasing company under which the Company has guaranteed the
payments due by DiaLogos under certain lease agreements for
equipment and furniture. The future amounts due under the leases,
which terminate in 1999 and 2001, are approximately $135,000.
DiaLogos provides software, education and services to
corporations that are implementing object-oriented systems in the
design and redesign of their business processes.
(b) Universal Document Consulting Agreements
Universal Document has entered into agreements with two
consulting firms to assist it in the identification and
recruitment of certain software resellers and integrators that
Universal Document may acquire or combine with, and to assist
Universal Document in an initial public offering of the combined
companies. The acquisition of or combination with these resellers
and integrators would be concurrent with and contingent upon a
successful public offering. The consulting agreements grant the
consulting firms warrants to acquire up to 20% of the common
shares of Universal Document outstanding prior to a public or
private offering of Universal Document stock. One warrant is
exercisable for a period of three years from the date that
Universal Document completes a public or private offering while
the other warrant expires February 19, 2000. The warrants will
cease to be effective, however, if a public offering of stock of
Universal Document is not completed or if the consulting
agreements are terminated prior to a public or private offering.
(Continued)
F-21
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12)Commitments, Continued
(c) Leases
Future minimum lease payments under non-cancelable operating
leases for the next five fiscal years, net of future minimum
rentals under noncancelable subleases of $61,000 annually, are as
follows: 1997: $189,000; 1998: $262,000; 1999: $274,000; 2000:
$268,000; and 2001: $262,000. Rent expense amounted to $168,000,
$81,000 and $98,400 for the years ended December 31, 1996, 1995
and 1994, respectively.
(d) Service Contracts
The Company has multi-year contracts with various customers
to provide service in future periods as follows at December 31,
1996:
1997 $ 989,468
1998 538,219
1999 358,521
2000 206,599
2001 59,521
_________
$ 2,152,328
_________
The Company has recorded these contracts as deferred revenue
and unbilled service contracts in the accompanying consolidated
financial statements.
(e) employment Agreements
The Company has entered into an employment agreement with an
officer that expires on June 30, 2001. In addition to a defined
base salary, the officer is entitled to discretionary bonus and
stock incentive arrangements, as approved by the Board of
Directors. The annual discretionary bonus is to be determined by
the Board of Directors and cannot exceed 100% of the annual base
salary. This individual is also entitled to defined termination
benefits under specified employment or change in control
conditions.
The Company has also entered into employment agreements with
other officers and employees that generally provide annual salary,
discretionary bonus and stock incentive provisions, all subject to
the approval of the Board of Directors.
(Continued)
F-22
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Quarterly Results of Operations (Unaudited)
The following tables set forth selected financial information
for 1996 and 1995.
First Second Third Fourth
Quarter Quarter Quarter Quarter 1996
Revenues $2,324,757 2,772,548 2,806,479 3,036,672 10,940,456
Operating
loss (446,783) (399,825) (735,468)(1,140,600)(2,722,676)
Net loss (345,561) (313,251) (676,948)(1,136,432)(2,472,192)
Net loss
per share(a) (0.06) (0.05) (0.11) (0.19) (0.42)
Weighted
average
shares
outstanding 5,808,392 5,858,669 5,913,749 5,918,510 5,876,482
First Second Third Fourth
Quarter Quarter Quarter Quarter 1995
Revenues $1,858,790 1,943,572 2,596,883 2,205,326 8,604,571
Operating
income
(loss) (220,332) 6,058 27,209 (2,315,799)(2,502,864)
Net income
(loss)(b) (116,164) 29,308 33,376 (2,562,797)(2,616,277)
Net income
(loss) per
share (a) (0.02) 0.01 0.01 (0.49) (0.53)
Weighted
average
shares
outstanding 4,743,750 4,743,750 4,827,298 5,238,447 4,906,530
(a) Quarterly amounts are not additive.
(b) During the fourth quarter of 1995 and in conjunction with the
Company's acquisition of Universal Document, approximately
$1,466,000 of in-process research and development was charged to
the results of operations as of the date of acquisition.
F - 23
PART III
ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Company's executive officers and directors are as follows:
Name Age Position
Richard A. Mahoney 49 Chairman of the Board,
Chief Executive Officer and
President
Philip S. Present II 46 Senior Vice President and
Chief Operating Officer
E. Andrew Mayo 43 Executive Vice President
Gary L. Price 42 Senior Vice President of
Business Development
Timothy P. McMullen 42 Vice President of Sales and
Marketing
Daniel A. Silber 48 Vice President of Finance and
Chief Financial Officer
Jay Hilnbrand 63 Director and General Manager
of subsidiary
Robert E. Kenny III 41 Secretary and Director
Paul J. Stein 49 Director
Paul A. Martin 42 Director
Directors are elected annually by the shareholders and serve for
one year terms. Officers serve at the discretion of the Board of
Directors and are elected on an annual basis.
Richard A. Mahoney has been the Company's President and a director
of the Company since January 1991.
Philip S. Present II joined the Company in April 1995 as Vice
President of Corporate Development. Mr. Present was named the
Chief Operating Officer of the Company in June 1996. From
September 1973 to March 1995, Mr. Present was employed by the
certified public accounting firm of KPMG Peat Marwick LLP. Mr.
Present was elected to the partnership of KPMG Peat Marwick LLP in
1983 and served as Partner-in-Charge of the Information,
Communications and Entertainment practice responsible for the Ohio
Valley and Southeast areas of the United States.
E. Andrew Mayo joined the Company in October 1991 as Executive
Vice President.
Gary L. Price joined the Company as Vice President, Sales in
January 1992 and in June 1996 was named Senior Vice President,
Business Development.
Timothy P. McMullen joined the Company as Vice President,
Corporate Accounts and Managed Care in June 1996 after sixteen
years with the Hill-Rom Co. Inc. At Hill-Rom Co., the worlds
largest manufacturer and distributor of patient beds and patient
environments, he held several senior positions including Vice
President of Corporate Accounts, Merchandising, International, and
Domestic Sales. Prior to Hill-Rom, he held sales and management
positions with Johnson & Johnson and Carnation Corporation.
Daniel A. Silber joined the Company as Vice President of Finance
and Chief Financial Officer in May 1995. From 1993 until he
joined the Company, he was Chief Financial Officer for Saturday
Knight LTD, a manufacturer and distributor of bathroom
accessories. From 1990-1993, Mr. Silber was Chief Financial
Officer for Tipton Associates, a real estate development and
management company.
Jay Hilnbrand has been a director of the Company since April 1994.
Mr. Hilnbrand is the General Manager and a director of Universal
Document Management Systems, Inc., a document management software
development company, positions he has held since 1990. Universal
Document Management Systems, Inc. became a wholly-owned subsidiary
of MedPlus in December of 1995.
Robert E. Kenny III, an attorney engaged in the private practice
of law since 1980, has served as Secretary and a director of the
Company since its inception.
Paul J. Stein has been a director of the Company since 1991. Mr.
Stein has been a self-employed marketing consultant and
manufacturer's representative since October 1990.
Paul A. Martin has been a director of the Company since August 29,
1996. Mr. Martin has been the Accounts Receivable Manager for
CommuniCare Inc., a home health care agency which also owns and
operates a nursing home, since 1995. Prior to his position with
CommuniCare he was the Director of the business office for
Dimensions Health Corp., a hospital and out-patient center
management company.
Compliance with Section 16(a) of the Securities Exchange Act of
1934
The information set forth under the caption "Compliance With
Section 16(a) of the Securities Exchange Act of 1934" of the Proxy
Statement for the Company's Annual Meeting of Shareholders to be
held on May 15, 1997, is incorporated herein by reference. Such
Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year
covered by the Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive
Compensation" of the Proxy Statement for the Company's Annual
Meeting of Shareholders to be held on May 15, 1997, is
incorporated herein by reference. Such Proxy Statement will be
filed with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by the Form 10-KSB.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" of the Proxy Statement
for the Company's Annual Meeting of Shareholders to be held on May
15, 1997, is incorporated herein by reference. Such Proxy
Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year
covered by the Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Relationships
and Related Transactions" of the Proxy Statement for the Company's
Annual Meeting of Shareholders to be held on May 15, 1997, is
incorporated herein by reference. Such Proxy Statement will be
filed with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by the Form 10-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are hereby filed as part of this Form
10-KSB:
Sequentially
Exhibit Number Description of Exhibit Numbered Page
2 Merger Agreement dated December 29, 1995
between MedPlus, Inc. and Universal
Document Management Systems, Inc. *
3 Amended Articles of Incorporation
and Code of Regulations, as amended **
10.1 Executive Employment Agreement dated
October 31, 1995 between MedPlus, Inc.
and Richard A. Mahoney ***
10.2 Employment Agreement dated April 3, 1995
between MedPlus, Inc. and Philip S.
Present II ***
10.3 Employment Agreement dated October 2,
1991 between E. Andrew Mayo and
MedPlus, Inc. ***
10.4 Employment Agreement dated December 23,
1994 between Gary L. Price and
MedPlus, Inc. ***
10.5 Lease between MedPlus, Inc. and Duke
Realty Limited Partnership for principal
offices, dated April 24, 1995 ***
10.6 First Lease Amendment between MedPlus,
Inc. and Duke Realty Limited Partnership
for principal offices, dated May 31, 1996 --
10.7 Second Lease Amendment between MedPlus,
Inc. and Duke Realty Limited Partnership
for principal offices, dated December 6,
1996 --
10.8 Letter Agreement between MedPlus, Inc.
and Dialogos, Inc. dated January 31, 1997 --
10.9 Consulting Agreement between Universal
Document and Madison Financial Group Ltd.
/f/k/a/ DMG Equity Partners LLC dated
September 1, 1996 --
13 Annual Report to Shareholders ****
21 Subsidiaries of MedPlus, Inc. --
23 Consent of KPMG Peat Marwick --
* Incorporated by reference to the Registrant's Report on Form 8-K
filed on January 2, 1996.
** Incorporated by reference to the Registration Statement on Form
SB-2, Registration No. 33-77896C, effective May 24, 1994.
***Incorporated by reference to the Registration Statement on Form
S-1, Registration No. 33-98696, effective November 21, 1995.
**** Pursuant to General Instruction F of Form 10-KSB and
Regulation 240.14a(d) of the Securities Exchange Act of 1934, the
Issuer's Annual Report to the Security Holders for its fiscal year
ended December 31, 1996 has been combined with the required
information of Form 10-KSB and is being filed with the U.S.
Securities and Exchange Commission and submitted to the
registrant's shareholders on an integrated basis.
(b)No reports on Form 8-K were filed during the three-month period
ended December 31, 1996.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MEDPLUS, INC., Registrant
By: /s/ Richard A. Mahoney
Richard Mahoney, President
Date: March 27, 1997
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
/s/ Richard A. Mahoney Chairman of the Board,
Richard A. Mahoney Chief Executive Officer
and President(Principal
Executive Officer) March 27, 1997
/s/ Daniel A. Silber Vice President of Finance
Daniel A. Silber andChief Financial Officer
(Principal Financial and
Accounting Officer) March 27, 1997
/s/ Jay Hilnbrand Director March 27, 1997
Jay Hilnbrand
/s/ Paul A. Martin Director March 27, 1997
Paul Martin
/s/ Paul J. Stein Director March 27, 1997
Paul J. Stein
/s/ Robert E. Kenny III Director March 27, 1997
Robert E. Kenny III
FIRST LEASE AMENDMENT
THIS FIRST LEASE AMENDMENT (the "Amendment") is executed this
31st day of May, 1996, by and between GOVERNOR'S HILL PARTNERS, an
Ohio partnership ("Landlord"), and MEDPLUS, INC., an Ohio
corporation ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into a certain Lease
dated April 24, 1995 (the "Lease"), whereby Tenant leased from
Landlord certain premises consisting of approximately 15,000
square feet of space (the "Original Premises") located in an
office building commonly known as 8805 Governor's Hill; 8805
Governor's Hill Drive, Suite 100, Cincinnati, Ohio 45249; and
WHEREAS, Landlord and Tenant desire the expand the Original
Premises over the Term of this Lease; and
WHEREAS, Landlord and Tenant desire to amend certain
provisions of the Lease to reflect such expansion and changes to
the Lease;
NOW, THEREFORE, in consideration of the foregoing premises,
the mutual covenants herein contained and each act performed
hereunder by the parties, Landlord and Tenant hereby enter into
this Amendment.
1. Amendment of Article 1.
(a) Commencing July 1, 1996, Section 1.01 of Article 1
of the Lease is hereby amended by substituting Exhibit A-1,
attached hereto and incorporated herein by reference, on which the
Original Premises are illustrated, and an expansion of an
additional 5,000 rentable square feet (the "First Additional
Space") is illustrated, in lieu of Exhibit A attached to the
Lease.
(b) Commencing July 1, 1996, Subsections A, B, C, D, E
and K of Section 1.02 of the Lease are hereby deleted and the
following are substituted in lieu thereof:
A. Building Name: 8805 Governor's Hill;
Address: 8805 Governor's Hill Drive, Suite 100 and 220,
Cincinnati, Ohio 45249;
B. Rentable Area: 20,000 square feet;
Landlord shall use commercially reasonable standards,
consistently applied, in determining the Rentable Area and the
rentable area of the Building. The Rentable Area shall include
the area within the Leased Premises plus a pro rata portion of
the area covered by the common areas within the Building, as
reasonably determined by Landlord from time to time. Landlord's
determination of Rentable Area made in good faith shall
conclusively be deemed correct for all purposes hereunder,
including without limitation the calculation of Tenant's Building
Expense Percentage and Tenant's Minimum Annual Rent.
C. Building Expense Percentage: 14.87%
D. Minimum Annual Rent:
July 1, 1996 - June 30, 1997 $172,500.00;
E. Monthly Rent Installments:
July 1, 1996 - June 30, 1997 $14,375.00;
K. Addresses for payments and notices:
Landlord: Governor's Hill Partners
c/o Duke Realty Limited Partnership
8044 Montgomery Road, Suite 600
Cincinnati, OH 45236
With Payments to: Governor's Hill Partners
c/o Duke Realty Limited Partnership
8044 Montgomery Road, Suite 600
Cincinnati, OH 45236
Tenant: MedPlus, Inc.
8805 Governor's Hill Drive
Suite 100
Cincinnati, OH 45249
(c) Commencing July 1, 1997, Section 1.01 of Article 1
of the Lease is hereby amended by adding an additional 4,419
rentable square feet (the "Second Additional Space") which is
illustrated on Exhibit A-1 attached hereto.
(d) Commencing July 1, 1997, Subsections A, B, C, D and
E of Section 1.02 of the Lease are hereby deleted and the
following are substituted in lieu thereof:
A. Building Name: 8805 Governor's Hill;
Address: 8805 Governor's Hill Drive, Suite 100 and 220
Cincinnati, Ohio 45249;
B. Rentable Area: 24,419 square feet;
Landlord shall use commercially reasonable standards,
consistently applied, in determining the Rentable Area and the
rentable area of the Building. The Rentable Area shall include
the area within the Leased Premises plus a pro rata portion of
the area covered by the common areas within the Building, as
reasonably determined by Landlord from time to time. Landlord's
determination of Rentable Area made in good faith shall
conclusively be deemed correct for all purposes hereunder,
including without limitation the calculation of Tenant's Building
Expense Percentage and Tenant's Minimum Annual Rent.
C. Building Expense Percentage: 18.15%
D. Minimum Annual Rent:
July 1, 1997 - June 30, 1998 $234,624.00;
E. Monthly Rental Installments:
July 1, 1997 - June 30, 1998 $19,552.00;
(e) Commencing July 1, 1998, Section 1.01 of Article 1
of the Lease is hereby amended by adding an additional 2,239
rentable square feet (the "Third Additional Space") which is
illustrated on Exhibit A-1 attached hereto.
(f) Commencing July 1, 1998, Subsections A, B, C, D and
E of Section 1.02 of the Lease are hereby deleted and the
following are substituted in lieu thereof:
A. Building Name: 8805 Governor's Hill;
Address: 8805 Governor's Hill Drive, Suites 100 and 220
Cincinnati, Ohio 45249;
B. Rentable Area: 26,658 square feet;
Landlord shall use commercially reasonable standards,
consistently applied, in determining the Rentable Area and the
rentable area of the Building. The Rentable Area shall include
the area within the Leased Premises plus a pro rata portion of the
area covered by the common areas within the Building, as
reasonably determined by Landlord from time to time. Landlord's
determination of Rentable Area made in good faith shall
conclusively be deemed correct for all purposes hereunder,
including without limitation the calculation of Tenant's Building
Expense Percentage and Tenant's Minimum Annual Rent.
C. Building Expense Percentage: 19.82%;
D. Minimum Annual Rent:
July 1, 1998 - June 30, 1999 $258,133.56
July 1, 1999 - June 30, 2000 $258,133.56
July 1, 2000 - June 30, 2001 $258,133.56
July 1, 2001 - June 30, 2002 $258,133.56;
E. Monthly Rental Installments:
July 1, 1998 - June 30, 2002 $21,511.13;
2. Incorporation into Section 2.02. The following shall be
added to Section 2.02 of the Lease:
"Tenant has personally inspected the First Additional
Space, Second Additional Space and Third Additional Space and
accepts the same "as is" without representation or warranty by
Landlord of any kind and with the understanding that Landlord
shall have no responsibility with respect thereto."
3. Tenant's Representations and Warranties. The undersigned
represents and warrants to Landlord that (i) Tenant is duly
organized, validly existing and in good standing in accordance
with the laws of the state under which it was organized; (ii) all
action necessary to authorize the execution of this Amendment has
been taken by Tenant; and (iii) the individual executing and
delivering this Amendment on behalf of Tenant has been authorized
to do so, and such execution and delivery shall bind Tenant.
Tenant, at Landlord's request, shall provide Landlord with
evidence of such authority.
4. Examination of Amendment. Submission of this instrument
for examination or signature to Tenant does not constitute a
reservation or option, and it is not effective until execution by
and delivery to both Landlord and Tenant.
5. Definitions. Except as otherwise provided herein, the
capitalized terms used in this Amendment shall have the
definitions set forth in the Lease.
6. Incorporation. This Amendment shall be incorporated into
and made a part of the Lease, and all provisions of the Lease not
expressly modified or amended hereby shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to
be executed on the day and year first written above.
LANDLORD:
GOVERNOR'S HILL PARTNERS,
an Ohio partnership
WITNESSES:
/s/ By: /s/ Jeffrey G. Tulloch
____________________________ Jeffrey G. Tulloch
(Printed) General Manager
/s/
____________________________
(Printed) TENANT:
MEDPLUS, INC., an Ohio corporation
WITNESSES:
/s/ Jennifer A. Vonasek
Jennifer A. Vonasek By: /s/ Daniel A. Silber
(Printed)
/s/ Melissa L. Walker Printed: Daniel A. Silber
Melissa L. Walker
(Printed) Title: Vice President, Finance
STATE OF OHIO )
) SS:
COUNTY OF HAMILTON )
Before me, a Notary Public in and for said County and State,
personally appeared Jeffrey G. Tulloch, by me known and by me
known to be the General Manager of Governor's Hill Partners, an
Ohio partnership, who acknowledged the execution of the foregoing
"First Lease Amendment" on behalf of said partnership.
WITNESS my hand and Notarial Seal this ______ day of
__________, 1996.
/s/
Notary Public
_________________________________
(Printed signature)
My Commission Expires:
My County of Residence: ________________
STATE OF OHIO )
) SS:
COUNTY OF HAMILTON )
Before me, a Notary Public in and for said County and State,
personally appeared Daniel A. Silber, by me known and by me known
to be the Vice-President, Finance of MedPlus, Inc., an Ohio
corporation, who acknowledged the execution of the foregoing
"First Lease Amendment" on behalf of said corporation.
WITNESS my hand and Notarial Seal this 31st day of May1996.
/a/ Jennifer A. Vonasek
Notary Public
Jennifer A. Vonasek
(Printed signature)
My Commission Expires: 8-18-97
My County of Residence: Hamilton
SECOND LEASE AMENDMENT
THIS SECOND LEASE AMENDMENT ( the "Amendment" ) is executed
this 6th day of December, 1996 by and between GOVERNOR'S HILL
PARTNERS, an Ohio general partnership ("Landlord"), and MEDPLUS,
INC., an Ohio corporation ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into a certain Lease
dated April 24, 1995 as amended May 31, 1996 (collectively, the
"Lease" ), whereby Tenant leased from Landlord certain premises
consisting of approximately 20,000 rentable square feet of space
(the "Leased Premises" ) located in a building commonly known as
8805 Governor's Hill Drive, Suites 100 and 200, Cincinnati, Ohio
45249; and
WHEREAS, Landlord and Tenant desire to terminate Tenant's
option to terminate this Lease for the reason that Landlord has
accommodated Tenant's expansion needs; and
WHEREAS, Landlord and Tenant desire to amend certain
provisions of the Lease to reflect such termination, changes and
addition to the Lease;
NOW, THEREFORE, in consideration of the foregoing premises,
the mutual covenants herein contained and each act performed
hereunder by the parties, Landlord and Tenant hereby agree that
the Lease is amended as follows:
1. Amendment of Section 18.19. Right of First Refusal.
Section 18.19 of the Lease is hereby amended to add the following:
"Provided that Tenant is not in default hereunder and subject
to any rights of other tenants to the Refusal Space, Tenant shall
have the right of first refusal ("Refusal Option") to lease any
additional space in the Building ("Refusal Space")as such space
becomes available for leasing during the Lease Term. The term for
the Refusal Space shall be coterminous with the Lease Term,
provided however, that the minimum term for the Refusal Space
shall be five (5) years. The Refusal Space shall be offered to
Tenant at the rental rate and upon such other terms and
conditions, excluding free rent and other concessions, as are then
being offered by Landlord to a specific third party prospective
tenant for such space, but in no event shall such rental rate be
less than the then current rental rate under this Lease. In the
event that the Refusal Space is not leased to the initial third
party prospective tenant, then this Refusal Option shall remain in
effect in the event of an offer to any other specific third party
prospective tenant and the Refusal Space shall again be offered to
Tenant in accordance herewith.
Upon notification in writing by Landlord that the Refusal
Space is available, Tenant shall have five (5) business days in
which to notify Landlord in writing of its election to lease the
Refusal Space at such rental rates described above, in which event
this Lease shall be amended to incorporate such Refusal Space.
In the event Tenant declines or fails to elect to lease the
Refusal Space, then this Refusal Option shall automatically
terminate and shall thereafter be null and void as to such space.
It is understood and agreed that this Refusal Option shall
not be construed to prevent any tenant in the building from
extending or renewing its lease."
2. Amendment of Section 18.20. Termination Option. Section 18.20
of the Lease is hereby deleted in its entirety and is of no
further force or effect.
3. Additional Provisions. The following new sections shall be
added to the Lease:
"18.23. Parking. Landlord hereby agrees to provide Tenant
with two (2) additional reserved parking spaces designated by
Landlord.
18.24 Storage Space. Landlord hereby leases to Tenant and
Tenant hereby Leases from Landlord 2,200 rentable square feet of
storage space in the area designated on the attached Exhibit A-1
("Storage Space" ) at a gross rental rate equal to Seventeen
Thousand Six Hundred Dollars and Four Cents ($17,600.04) per year
payable in monthly installments of One Thousand Four Hundred
Sixty-six Dollars and Sixty-seven Cents ($1,466.67) for the term
of the Lease. Landlord shall deliver the Storage Space to Tenant
and Tenant accepts the Storage Space "As Is" except that Landlord
shall add one (1) HVAC box and remove piping and slabs on which
equipment was placed in the Storage Space. Tenant shall pay the
rent for such Storage Space in the same manner as provided in
Section 3.01. The Storage Space rent includes all operating
expenses associated with such Storage Space."
4. Tenant's Representatives and Warranties. The undersigned
represents and warrants to Landlord that (i) Tenant is duly
organized, validly existing and in good standing in accordance
with the laws of the state under which it was organized; (ii) all
action necessary to authorize the execution of this Amendment has
been taken by Tenant; and (iii) the individual executing and
delivering this Amendment on behalf of Tenant has been authorized
to do so, and such execution and delivery shall bind Tenant.
Tenant, at Landlord's request, shall provide Landlord with
evidence of such authority.
5. Examination of Amendment. Submission of this instrument for
examination or signature to Tenant does not constitute a
reservation or option, and it is not effective until execution by
and delivery to both Landlord and Tenant.
6. Definitions. Except as otherwise provided herein, the
capitalized terms used in this Amendment shall have the
definitions set forth in the Lease.
7. Incorporation. This Amendment shall be incorporated into and
made a part of the Lease, and all provisions of the Lease not
expressly modified or amended hereby shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed on the day and year first written above.
LANDLORD:
GOVERNOR'S HILL PARTNERS, an
WITNESSES: Ohio general partnership
/s/ Alice Battaglia
Alice Battaglia By:/s/ Jeffrey G. Tulloch
(Printed) Jeffrey G. Tulloch
/s/ Nicole C. Stevens Manager
Nicole C. Stevens
(Printed)
TENANT:
WITNESSES: MEDPLUS, INC., an Ohio corporation
/s/ Steven W. Neiheisel
Steven W. Neiheisel
(Printed) By: /s/ Daniel A. Silber
/s/ Candace W. Levine
Candace W. Levine Printed: Daniel E. Silber
(Printed)
Title: Vice President, Finance
STATE OF OHIO )
) SS:
COUNTY OF HAMILTON )
Before me, a Notary Public in and for said County and State,
personally appeared Jeffrey G. Tulloch, by me known and by be
known to be the Manager of Governor's Hill Partners, and Ohio
general partnership, who acknowledged the execution of the
foregoing "Second Lease Amendment" on behalf of said partnership.
WITNESS my hand and Notarial Seal this 31st day of December,
1996.
/s/ Nicole C. Stevens
Notary Public
Nicole C. Stevens
(Printed Signature)
My Commission Expires: 10-31-00
My County of Residence: __________________
STATE OF OHIO )
) SS:
COUNTY OF HAMILTON )
Before me, a Notary Public in and for said County and State,
personally appeared Daniel A. Silber, by me known and by me known
to be the Vice President, Finance of MedPlus, Inc., an Ohio
corporation, who acknowledged the execution of the foregoing
"Second Lease Amendment" on behalf of said corporation.
WITNESS my hand and Notarial Seal this 6th day of December,
1996.
/s/ Amy J. Seltz
Notary Public
Amy J. Seltz
(Printed Signature)
My Commission Expires: 9-5-01
My County of Residence: Warren
January 31, 1997
Joseph C. Williams
President
Dialogos, Inc.
3674 Clifton Avenue
Cincinnati, Ohio 45220
RE: AMENDMENT TO LETTER OF AGREEMENT: MedPlus, Inc. Financing
Commitment to and Possible Acquisition of Common Stock of
Dialogos, Inc.
Dear Mr. Williams:
This letter shall serve as an amendment to that certain
Letter of Agreement between MedPlus, Inc., an Ohio corporation
("MedPlus") and Dialogos, Inc., a Delaware corporation (the
"Company"), dated July 12, 1996 (the "Letter of Agreement")
pursuant to which MedPlus agreed to provide or obtain specified
financing for the operations of the Company, and the Company
agreed to issue to MedPlus or grant MedPlus an option to purchase,
as the case may be, a certain percentage of the Company's common
stock (all of the Company's common stock hereinafter referred to
as the "Common Shares") in exchange for such financing. Now,
therefore, and in consideration of the mutual covenants and
agreements herein contained, the Company and MedPlus hereby agree
that the Letter of Agreement shall be amended and restated in its
entirety as follows:
1. MedPlus shall, on or before March 31, 1998, either (a)
agree to pay $1.65 million (the "Total Funding Amount") to the
Company as consideration for 75% of the Common Shares, (b) secure
a funding commitment for the Company's operations in an amount
equal to the Total Funding Amount from investors ("Investors"),
some of which may be designated by MedPlus as "Initial Investors"
for purposes hereof, and/or lenders ("Lenders") with financing
terms reasonably agreed to by the Company and MedPlus or (c) agree
to pay a portion of the Total Funding Amount to the Company as
consideration for less than 75% of the Common Shares, as more
specifically described in paragraph 4 hereof, and secure a funding
commitment for the remainder of the Total Funding Amount from
Investors and/or Lenders as described in paragraph 1(b) above
((a), (b) and (c) collectively are the "Obligation"). In the
event MedPlus satisfies the Obligation by securing a funding
commitment from Investors and/or Lenders for any portion of the
Total Funding Amount, the Company shall grant MedPlus the option,
which option shall be immediately exercisable and remain open
until December 31, 1999, to purchase that percentage of the Common
Shares which equals 75% less any percentage of the Common Shares
already purchased by MedPlus and/or the Initial Investors (the
"Option Percentage") (the "MedPlus Option").
2. Prior to exercising the MedPlus Option, MedPlus shall
have entered into an agreement to either (a) pay to any Investors,
except the Initial Investors, and/or Lenders an amount equal to
their investment, including appreciation thereof as indicated in
such agreement, or their loan, including any interest accrued with
respect thereto, made by them in or to the Company (such payment
hereinafter referred to as the "Buy-Out Amount") or (b) pay to the
Company an amount equal to the Buy-Out Amount. The exercise price
of the MedPlus Option shall be equal to the Buy-Out Amount.
Immediately upon actual payment of the Buy-Out Amount to either
the Investors and/or Lenders or the Company, MedPlus shall receive
that number of the Common Shares which equals the Option
Percentage thereof.
3. The Common Shares will be transferred to MedPlus and/or
the Initial Investors free, clear and unencumbered.
4. MedPlus shall fund the general operations of the Company
from the date of this Letter of Agreement until the Obligation has
been satisfied and funding has actually begun pursuant to either
paragraph 1(a), (b) or (c) above (the "Interim Funding"). The
Interim Funding shall be provided from time to time in amounts
reasonably requested by the Company, which amounts are consistent
with funding required to execute the financial plan provided to
MedPlus by the Company during June, 1996. If MedPlus or any of
the Initial Investors decides or decide to fund directly any
portion of the Total Funding Amount, then, at any time prior to
March 31, 1998 and at MedPlus' or such Initial Investor's option,
as the case may be, any amount so paid to the Company, including
the Interim Funding (with Interest thereon, as hereinafter
defined), shall be considered payment for a certain percentage of
the Common Shares (an "Interim Option"). Upon exercise of an
Interim Option, MedPlus or an Initial Investor shall immediately
be issued 1% of the Common Shares for every $22,000 paid to the
Company as a portion of the Total Funding Amount or as Interim
Funding. In the alternative, if MedPlus secures a funding
commitment for the Company's operations for any portion of the
Total Funding Amount from Investors and/or Lenders pursuant to
paragraph 1(b) above, then, immediately upon the Company's receipt
of such funding and at MedPlus' request, the Company shall
reimburse MedPlus in the amount of such funding for any and all
monies paid to or on behalf of the Company by MedPlus to effect
the Interim Funding, plus Interest. For purposes of this
paragraph 4, "Interest" shall mean interest equal to the prime
rate, as announced from time to time by the Provident Bank,
Cincinnati, Ohio, plus 1% per annum.
5. The Company shall require each employee and/or consultant
thereto to execute a confidentiality agreement, reasonably similar
to confidentiality agreements executed by employees and/or
consultants in the technology industry, with respect to
information obtained by him or her as a result of his or her
relationship with the Company.
6. It is a condition precedent to the obligations of MedPlus
hereunder that Joseph C. Williams, President and majority
stockholder of the Company ("Williams"), shall have executed a
voting agreement, in the form attached hereto as Exhibit A,
whereby Williams agrees to vote all Common Shares owned by him in
favor of electing one person designated by MedPlus as member of
the Company's Board of Directors. In addition, the holders of any
and all shares issued by the Company before the earlier of (i) the
exercise of the MedPlus Option or any Interim Option, (ii) the
Rejection, as hereinafter defined, or (iii) the expiration of the
MedPlus Option shall be required by the Company to execute a
voting agreement in substantially the form attached hereto as
Exhibit A. The failure to enforce any portion of this Section 6
at any time by MedPlus shall not be construed as a waiver of its
rights hereunder.
7. In the event MedPlus exercises the MedPlus Option and
MedPlus and/or the Initial Investors acquire(s) greater than 50%
of the Common Shares, MedPlus and the Company agree that the
Company shall amend any existing employment agreements with
Williams and other key employees of the Company (the "Key
Employees") to provide that, for each year during the three-year
period ending December 31, 1999, the Key Employees may be granted
options to purchase Common Shares ("Incentive Options").
Incentive Options may only be granted by the Company pursuant to
the following terms and conditions:
(a) The determination of whether to grant Incentive
Options in either 1997, 1998 or 1999 shall be based on the
achievement of a certain "Contribution Margin" of the Company as
budgeted for that fiscal year. (For purposes hereof,
"Contribution Margin" shall mean "pre-tax income" as used by
MedPlus in its internal financial reporting system).
Specifically, prior to January 15th of 1997, 1998 and 1999,
MedPlus and the Company shall calculate the Contribution Margin to
be used as the basis for determining whether any Incentive Options
shall be granted to the Key Employees following the close of such
year. The Contribution Margin to be achieved so that Incentive
Options may be granted following the close of 1997 is described on
Exhibit B hereto.
(b) The exercise price per share of any options granted
as Incentive Options shall be determined by an independent
appraiser selected by the Company; in no event, however, shall
such exercise price be less than the price per share paid by
MedPlus in exercising the MedPlus Option.
(c) In no event shall the number of shares subject to
Incentive Options granted to all Key Employees for each of the
following years exceed in the aggregate (i) for 1997 and 1998, 3%
of all Common Shares outstanding at December 31, 1997 and 1998,
respectively and (ii) for 1999, 4% of all Common Shares
outstanding at December 31, 1999.
(d) If any Incentive Options are issued, then at the
time of issuance the Company shall issue to Williams and any Key
Employees who are then shareholders of the Company additional
shares such that the percentage ownership interest in the Company
held by Williams and/or each Key Employee after such issuance is
equal to the percentage ownership interest in the Company held by
him or her immediately prior to such issuance, plus the percentage
increase resulting from the issuance to Williams or a Key Employee
of an Incentive Option. This paragraph 7(d) is intended to
protect the ownership of Williams and the Key Employees from
dilution as the result of the issuance of Incentive Options.
(e) If the Company conducts an initial public offering
of the Common Shares at any time prior to December 31, 1999 (an
"IPO"), then, as of the date of such IPO, the Key Employees shall
no longer be entitled to receive Incentive Options as described in
this paragraph 7; provided that, MedPlus and the Company agree
that in the event of an IPO, they will use their respective best
efforts to establish a plan pursuant to which the Key Employees
may be granted options to purchase Common Shares. The Company
acknowledges, however, that in the event of an IPO, the percentage
ownership of all shareholders of the Company, including Williams
and the Key Employees, shall be diluted and any options granted to
employees of the Company following an IPO also will be subject to
dilution.
(f) The Company agrees that prior to December 31, 1999,
except for the Incentive Options described herein, it will not
issue any form of stock incentives to its employees.
8. The Company agrees that it shall be operated in the
normal and ordinary course until January 1, 2000, that all
necessary corporate and other actions will be taken pursuant to
law, and that all applicable laws and governmental regulations
will be complied with.
9. MedPlus contemplates the expenditure of substantial sums
of time and money in connection with legal, accounting, financial,
and due diligence work to be performed in conjunction with the
transaction(s) proposed herein. As consideration therefor, during
the period from the date of acceptance of this letter to MedPlus'
satisfaction of the Obligation or March 31, 1998, whichever is
earlier, the Company shall not, directly or indirectly, initiate
or hold discussions with any person or entity (other than MedPlus)
concerning a purchase, affiliation, or other transfer of any part
of the Company's business, directly or indirectly, whether by sale
of common shares, merger, consolidation, sale or lease of material
assets, affiliation, joint venture, or other material transaction.
After March 31, 1998 and until MedPlus affirmatively declines to
exercise the MedPlus Option (the "Rejection") or until December
31, 1999, whichever is earlier, the Company shall not accept
financial support for any reason from any third party without
first offering MedPlus the opportunity to provide such financial
support on terms reasonably similar to those offered by such third
party. MedPlus shall then have 30 days from the date of such offer
to elect to provide such financial support. If the offer is
affirmatively rejected by MedPlus or such 30 day period expires,
then the Company may accept financial support from such third
party on the same terms and conditions contained in the third
party's original financing offer.
10. The Company agrees to permit MedPlus' representatives,
agents, accountants and attorneys to have reasonable access during
regular business hours to the Company's books, records and
properties for the purpose of making a detailed examination of the
financial condition, assets, liabilities, legal compliance,
affairs, business and the conduct of the Company prior to MedPlus'
exercise of the MedPlus Option or the Rejection, whichever occurs
first. In addition, prior to MedPlus' exercise of the MedPlus
Option or the Rejection, whichever occurs first, Dialogos shall
have its financial statements audited annually by KPMG Peat
Marwick LLP.
It is understood and agreed that any public announcement of
this transaction will be through a mutually agreed upon joint
release.
Very truly yours,
MEDPLUS, INC.
/s/ Daniel A. Silber
Daniel A. Silber, Vice-President
of Finance and Chief Financial Officer
Accepted by:
DIALOGOS, INC.
/s/ Joseph C. Williams
Joseph C. Williams, President
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement") is made this 1st day
of September, 1996, and is by and between Universal Document
Management Systems, Inc. ("UDMS"), an Ohio corporation, and
Madison Financial Group Ltd. /f/k/a/ DMG Equity Partners LLC
("Madison"), an Ohio limited liability company.
In consideration of the mutual promises hereinafter contained,
UDMS and Madison agree as follows.
1. Consulting Services. Madison agrees to provide the following
services to UDMS: (a) consulting services in connection with
potential acquisitions, corporate reorganizations and
restructurings, and private or public offerings, including
preparing reports, memoranda, analyses, and other documents for
management relating thereto; (b) preparing strategic plans in
connection with potential acquisitions, corporate reorganizations
and restructurings; (c) search and screening services in
connection with management personnel hirings; and (d) performing
such other activities which UDMS may reasonably request from time
to time.
2. Consulting Fees. In consideration of the services to be
provided by Madison to UDMS under this Agreement, UDMS agrees to
pay Madison the following compensation:
(a) As of September 1, 1996, UDMS grants Madison a warrant to
purchase 15% of the outstanding shares of UDMS stock as of the
date of this Agreement (the "Warrant"), at a price of $465,100 for
the Warrant (see Exhibit A). The Warrant shall be exercisable for
a period of three (3) years beginning on the date UDMS completes a
public or private offering of its stock. In the event that
MedPlus, Inc. (the parent company of UDMS) issues additional
consideration to any or all of the selling shareholders of UDMS in
connection with the terms and conditions of the Merger Agreement
between MedPlus, Inc. and UDMS dated December 29, 1995, then 15%
of such additional consideration shall be added to the price of
the Warrant. Notwithstanding the provisions of this Section 2(a),
however, if Madison terminates this Agreement prior to the
completion of a public or private offering of UDMS stock or if
UDMS terminates this Agreement more than ninety (90) days prior to
completion of a public or private offering of UDMS stock, the
Warrant shall cease to be effective and shall not be exercisable
by Madison.
(b) Provided this Agreement has been in full force and effect for
six (6) months, UDMS shall pay Madison a consulting fee of
$50,000. No consulting fee, nor any prorated consulting fee,
shall be paid to Madison if this Agreement is terminated by either
party for any reason before the expiration of said six months.
(c) In addition to the consideration described above, UDMS agrees
to reimburse Madison for all reasonable out-of-pocket expenses
incurred by Madison in connection with the performance of its
services under this Agreement. In the event the travel expenses
for any single trip are reasonably expected to exceed $2,500,
Madison shall be required to obtain prior written approval of UDMS
prior to incurring such expenses.
3. Term. The term of this Agreement shall commence as of the
date hereof and shall terminate upon the first to occur of (i)
written termination by either UDMS or Madison upon thirty (30)
days advance notice; (ii) the completion of a public or private
offering of UDMS stock; or (iii) two years from the date hereof.
4. Status of Madison. It is understood that Madison is an
independent contractor and is not an employee, agent, partner or
representative of UDMS, and shall not hold itself out to the
public as an employee, agent, partner or representative of UDMS.
5. Noncompetition and Confidentiality.
(a) Noncompetition. Madison agrees and covenants that during the
Noncompetition Period (as defined in Section 5(c)) and except for
any services performed for or on behalf of UDMS or any affiliates
thereof pursuant to the terms hereof, it will not, directly or
indirectly, engage in any business of the same nature as the
business in which UDMS or any of its affiliates now or hereafter
does business. Notwithstanding the foregoing, Madison may pursue
any business opportunity, whether or not of the same nature as the
business in which UDMS or any of its affiliates now or hereafter
engages, upon written notification from UDMS that UDMS does not
wish to engage in such business opportunity. Madison shall also
be permitted and entitled to beneficially own or acquire, for
investment purposes only, not more than five percent (5%) of the
outstanding capital stock of any publicly held enterprise engaged
in any business in which UDMS is engaged.
(b) Other Employees. Madison agrees that, during the
Noncompetition Period, it shall not, directly or indirectly, for
its own account or as agent of any business entity, employ,
engage, hire, offer to employ, engage, or hire or otherwise entice
or, in any other manner, persuade any employee, officer,
executive, or agent of UDMS or its affiliates to discontinue his
or her relationship with UDMS or its affiliates.
(c) Noncompetition Period. As used herein, the term
"Noncompetition Period" shall mean the period beginning on the
date hereof and ending six (6) months after the termination of
this Agreement pursuant to Section 3 hereof.
(d) Confidentiality. Madison acknowledges that it will come into
possession or knowledge of Confidential Information, as defined in
Section 5(e), relating to the business of UDMS. Except as
specifically provided otherwise in this Agreement, Madison shall:
(1) hold all Confidential Information in confidence; (2) not
disclose or disseminate any Confidential Information; (3) not copy
or reproduce any Confidential Information, in whole or in part;
and (4) make the Confidential Information available only to its
employees, representatives and agents who have a reasonable need
for such Confidential Information. UDMS acknowledges that it may
be necessary for Madison to disseminate certain confidential
information to third parties in the course of its duties
hereunder. Prior to disclosing any Confidential Information to
third parties, Madison shall give UDMS written notice of the
identity of the third party and the information to be disclosed,
shall require the third party to enter into a confidentiality
agreement in a form approved by UDMS, and shall deliver an
original signed copy of said confidentiality agreement to UDMS.
Madison shall not use any Confidential Information for any purpose
not related to its services under this Agreement. This Section
5(d) shall survive the termination of this Agreement.
(e) Confidential Information. "Confidential Information" shall
include, but is not limited to, the following types of information
regarding UDMS or its affiliates: corporate information,
including, without limitation, contractual arrangements, plans,
strategies, tactics, terms, conditions, policies, (written or
otherwise), resolutions, and any litigation or negotiations;
marketing information, including, without limitation, sales or
product plans, strategies, tactics, methods, customers (and any
information concerning customers), prospects, or market research
data; financial information, including, without limitation, cost
and performance data, debt arrangement, equity structure,
investors, and holdings; personnel information, including, without
limitation, personnel lists, resumes, personnel data,
organizational structure and performance evaluations; and
technical information, including, without limitation, patents,
copyrights, source codes, proprietary information, trade secrets,
methods, systems, and product specifications. Confidential
Information does not include information that:
(i) is in the public domain or becomes known in the industry other
than as a result of disclosure by Madison or its affiliates or
representatives;
(ii) was rightfully available to Madison on a non-confidential
basis prior to its disclosure to Madison by UDMS or its
affiliates, agents or representatives;
(iii) becomes rightfully available to Madison on a
non-confidential basis from a source other than UDMS or its
affiliates, agents, or representatives, provided that such source
is not bound by a confidentiality agreement with UDMS or its
affiliates, or otherwise prohibited from transmitting the
information to Madison by contractual, legal, or fiduciary
obligation.
(f) Corporate Documents. Madison agrees that all documents that
now or hereafter come into its possession relating to UDMS or its
affiliates in any manner, or to any of the foregoing matter
including, without limitation, memoranda, notebooks, data sheets,
records, financial statements, and documents, are and shall remain
the property of UDMS and that they and all copies thereof shall be
surrendered to UDMS upon termination of this Agreement.
(g) Equitable Remedies. In the event of a breach by Madison of
any of the provisions of this Section 5, UDMS, in addition to any
other remedies it may have at law or in equity, shall be entitled
to a permanent injunction in order to prevent or restrain any such
breach by the Madison and/or by Madison affiliates, employees,
partners, agents, representatives, or any and all persons directly
acting for or with Madison.
6. Indemnification. UDMS agrees to indemnify and hold harmless
Madison for any liabilities, claims, demands, or obligations
asserted against Madison or UDMS by any third party in connection
with the performance by UDMS, or any of its employees or
representatives, of consulting services pursuant to this
Agreement.
7. Entire Agreement. This Agreement contains the parties' entire
agreement regarding the consulting services to be performed by
Madison to or for the benefit of UDMS and supersedes any prior or
oral or written understandings and agreements. The parties can
modify this Agreement only by a writing signed by Madison and
UDMS.
8. Survival. The obligations contained in Sections 2 and 5 of
this Agreement shall survive termination of this Agreement.
9. Assignment. Neither party shall have the right to assign any
rights or obligations under this Agreement without the prior
written consent of the other party.
10. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC.
By: /s/ Philip S. Present II Date: September 1, 1996
Name: Philip S. Present II
MADISON FINANCIAL GROUP LTD.
By: /s/ Christopher J. Dirksing Date: September 1, 1996
Name: Christopher J. Dirksing
Exhibit A
UDMS
Calculation of Value
As of September 1, 1996
Universal Document Management Systems, Inc.
Calculation of Value of Warrant
September 1, 1996
Value of Universal Document Management Systems, Inc.
Purchase Price:
Original cash & stock consideration $1,700,000
Contingent cash & stock consideration 280,000
Net liabilities assumed by MedPlus, Inc. 357,283
_________
2,337,283
Professional fees paid by MedPlus, Inc.
related to acquisition 112,569
Contribution Margin:
Stub period, 12/13/95-12/31/95 206,179
Eight months ended 8/30/96 183,897
Goodwill amortization, 12/13/95-8/30/96 (72,616)
_________
317,460
_________
Total $2,767,312
_________
Value of Warrant
Value of UDMS as calculated above $2,767,312
15%
_________
15% of Calculated Value 415,100
MFG Consulting Fee reimbursement 50,000
_________
Value of Warrant $465,100
_________
EXHIBIT 21
Subsidiaries of MedPlus, Inc.
1. FutureCORE, Inc., an Ohio corporation, doing business as such
2. Universal Document Management Systems, Inc., an Ohio
corporation, doing business as such
3. EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
MedPlus, Inc.:
We consent to the incorporation by reference in the registration
statements of MedPlus, Inc. and subsidiaries on Form S-8 (No.
33-94426) and Form S-3 (No. 333-20547) of our report dated
February 28, 1997, relating to the consolidated balance sheets of
MedPlus, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in
the December 31, 1996 annual report on Form 10-KSB of MedPlus,
Inc. and subsidiaries.
/s/ KPMG Peat Marwick LLP
Cincinnati, Ohio
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FOR THE CONSOLIDATED
FINANCIAL STATEMENTS OF MEDPLUS, INC. AND SUBSIDIARIES AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1996 ADN IS QUALIFIED IN TIS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,700,607
<SECURITIES> 300,510
<RECEIVABLES> 4,239,712
<ALLOWANCES> (100,000)
<INVENTORY> 827,619
<CURRENT-ASSETS> 943,089
<PP&E> 1,922,108
<DEPRECIATION> (459,290)
<TOTAL-ASSETS> 14,847,144
<CURRENT-LIABILITIES> 3,741,599
<BONDS> 0
0
0
<COMMON> 1,076
<OTHER-SE> 1,824
<TOTAL-LIABILITY-AND-EQUITY> 14,847,144
<SALES> 10,940,456
<TOTAL-REVENUES> 10,940,456
<CGS> 5,477,932
<TOTAL-COSTS> 5,477,932
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,470,295)
<INCOME-TAX> 1,897
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,472,192)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> 0
</TABLE>
