UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period______________ to _______________
Commission file number Z - 24196
MEDPLUS, INC.
(Exact name of registrant as specified in its charter)
Ohio 48-1094982
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8805 Governor's Hill Drive, Suite 100
Cincinnati, OH 45249
(Address of principal executive offices)
(513) 583-0500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No_______
As of December 1, 1998, there were 6,011,117 shares of the
registrant's common stock without par value issued outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
October 31, October 31, October 31, October 31,
1998 1997 1998 1997
_____________ _____________ ______________ _____________
<S> <C> <C> <C> <C>
Revenues:
Systems sales $ 2,595,118 2,492,718 3,976,939 6,080,117
Support and consulting revenues 1,354,009 630,071 3,748,968 1,505,318
_____________ _____________ ______________ _____________
Total revenues 3,949,127 3,122,789 7,725,907 7,585,435
_____________ _____________ ______________ _____________
Cost of revenues:
Systems sales 1,235,044 1,576,989 2,289,325 3,592,775
Support and consulting revenues 1,476,529 538,024 3,451,452 1,361,600
_____________ _____________ ______________ _____________
Total cost of revenues 2,711,573 2,115,013 5,740,777 4,954,375
_____________ _____________ ______________ _____________
Gross profit 1,237,554 1,007,776 1,985,130 2,631,060
Operating expenses:
Sales and marketing 1,277,951 1,370,169 4,394,522 3,703,763
Research and development 591,655 163,171 1,474,524 461,027
General and administrative 983,129 754,395 3,056,151 2,209,216
Synergis management expenses 393,878 233,749 1,080,131 233,014
_____________ _____________ ______________ _____________
Total operating expenses 3,246,613 2,521,484 10,005,328 6,607,020
_____________ _____________ ______________ _____________
Operating loss (2,009,059) (1,513,708) (8,020,198) (3,975,960)
Other income (expense), net 5,854 (107,238) 25,493 (156,056)
Minority interest 297,000 -- 297,000 --
_____________ _____________ ______________ _____________
Loss from continuing operations
before income tax (1,706,205) (1,620,946) (7,697,705) (4,132,016)
Income tax benefit (206,147) (174,559) (1,666,370) (520,723)
_____________ _____________ ______________ _____________
Loss from continuing operations (1,500,058) (1,446,387) (6,031,335) (3,611,293)
Income from discontinued operations -- 269,036 177,299 802,489
_____________ _____________ ______________ _____________
Net loss $(1,500,058) (1,177,351) (5,854,036) (2,808,804)
_____________ _____________ ______________ _____________
_____________ _____________ ______________ _____________
Earnings (loss) per share - basic and diluted:
Continuing operations $ (0.25) (0.24) (1.00) (0.61)
Discontinued operations 0.00 0.04 0.03 0.14
_____________ _____________ ______________ _____________
Net loss per share $ (0.25) (0.20) (0.97) (0.47)
_____________ _____________ ______________ _____________
_____________ _____________ ______________ _____________
Weighted average number of
shares of common stock outstanding 6,085,537 5,919,985 6,138,572 5,918,279
_____________ _____________ ______________ _____________
_____________ _____________ ______________ _____________
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, January 31,
1998 1998
____________ ____________
(unaudited)
<C> <C>
ASSETS
<S>
Current assets:
Cash and cash equivalents $ 1,205,438 13,794,473
Accounts receivable, less allowance for doubtful accounts of
$240,000 at October 31, 1998 and $115,000 at January 31, 1998 6,385,588 4,520,333
Other receivables 688,302 71,728
Income taxes refundable 600,000 --
Inventories 740,192 757,471
Deferred tax asset 149,246 328,497
Prepaid expenses and other current assets 679,644 568,769
____________ ____________
Total current assets 10,448,410 20,041,271
____________ ____________
Capitalized software development costs, net 2,425,517 2,020,613
Fixed assets, net 1,851,621 1,484,875
Excess of cost over fair value of net assets acquired, net 741,156 781,391
Other assets 249,334 328,141
____________ ____________
$ 15,716,038 24,656,291
____________ ____________
____________ ____________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases $ 236,482 132,206
Borrowings on line of credit 2,250,123 1,496,353
Accounts payable 2,241,544 2,892,891
Accrued expenses 1,372,307 2,675,995
Accrued income taxes payable -- 1,346,869
Deferred revenue 1,016,932 635,464
Other current liabilities -- 297,000
____________ ____________
Total current liabilities 7,117,388 9,476,778
____________ ____________
Obligations under capital leases, excluding current installments 192,504 167,884
Deferred tax liability 149,246 534,644
____________ ____________
Total liabilities 7,459,138 10,179,306
____________ ____________
Shareholders' equity:
Common stock, no par value, authorized 15,000,000 shares;
issued and outstanding 6,011,117 shares at October 31, 1998
and 6,160,712 shares at January 31, 1998 -- --
Additional paid-in capital 16,785,227 17,284,557
Accumulated deficit (8,473,785) (2,619,749)
Unearned stock compensation (54,542) (187,823)
____________ ____________
Total shareholders' equity 8,256,900 14,476,985
____________ ____________
$15,716,038 24,656,291
____________ ____________
____________ ____________
See accompanying notes to consolidated financial statements. </TABLE
</TABLE>
<TABLE>
<CAPTION> MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Nine Months
Ended Ended
October 31, October 31,
1998 1997
____________ ____________
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (6,031,335) (3,611,291)
Adjustments to reconcile loss from continuing operations to net cash
used in operating activities:
Synergis acquisition and offering costs 139,143 --
Amortization of capitalized software development costs 355,732 410,499
Depreciation and amortization 389,624 170,997
Amortization of unearned stock compensation costs 168,234 151,055
Amortization of excess of cost over fair value of net assets acquired 60,093 79,386
Deferred income taxes (319,502) (520,723)
Realized (gain) loss on sales of investment securities and fixed assets 16,612 (8,423)
Provision for loss on doubtful accounts 108,962 101,274
Changes in assets and liabilities:
Accounts receivable (1,898,634) (3,123,727)
Other receivables 80,928 143,467
Inventories 17,280 (225,277)
Prepaid expenses and other assets (107,653) 51,882
Accounts payable and accrued expenses (510,116) 692,627
Income taxes (1,946,869) --
Deferred revenue 381,468 218,656
____________ ____________
Net cash used in operating activities (9,096,033) (5,469,598)
____________ ____________
Cash flows from investing activities:
Capitalization of software development costs (760,636) (723,013)
Purchases of fixed assets (503,095) (290,837)
Proceeds from sales of investment securities and fixed assets -- 332,278
Synergis acquisition and offering costs (1,684,540) (1,207,246)
Payments made for acquisitions of businesses (19,858) (2,767)
Other advances and investments (291,291) (998,164)
____________ ____________
Net cash used in investing activities (3,259,420) (2,889,749)
____________ ____________
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 58,084 63,891
Purchases of treasury stock (809,940) (53,554)
Proceeds from borrowings on line of credit 2,411,518 9,160,956
Repayments on line of credit (1,657,748) (3,359,413)
Principal payments on capital lease obligations (140,991) (46,506)
____________ ____________
Net cash provided by (used in) financing activities (139,077) 5,765,374
Discontinued operations (94,505) 1,940,869
____________ ____________
Net decrease in cash and cash equivalents (12,589,036) (653,106)
Cash and cash equivalents, beginning of period 13,794,473 1,013,020
____________ ____________
Cash and cash equivalents, end of period $ 1,205,438 359,916
____________ ____________
____________ ____________
Interest paid $ 88,678 113,796
____________ ____________
____________ ____________
Income taxes paid $ 600,000 --
____________ ____________
____________ ____________
See accompanying notes to consolidated financial statements. </TABL
MEDPLUS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(1) Description of the Business
MedPlus[r], Inc. (the "Company") provides information
technology solutions designed to enable customers to manage
information efficiently and cost effectively through innovative
technology, consulting, and education. The Company's solutions
focus on various elements of process analysis and redesign,
document imaging and management, workflow, systems integration and
technology education. Historically, MedPlus' customers have been
predominantly in the healthcare industry. However, as a result of
acquisitions and investments over the past several years, the
Company has begun to operate in other industries.
The Company's healthcare related products presently consist
of the ChartMaxx[tm] Enterprise-wide Patient Record System
("ChartMaxx") and the OptiMaxx[r] Archival System ("OptiMaxx").
ChartMaxx is an enterprise-wide electronic patient record system
that enables heath care organizations to create and manage a fully
paperless electronic patient record comprising clinical, financial
and administrative data captured from scanned paper and digital
data. OptiMaxx is an optical disk-based archival system designed
to meet the departmental needs of health care providers that
require electronic storage and quick retrieval of information.
The Company's FutureCORE[r], Inc. subsidiary ("FutureCORE")
provides process improvement and automation services, primarily in
the areas of medical records and patient accounts departments,
hospital and reference laboratories and physician offices.
The Company's Universal Document Management Systems, Inc.
subsidiary ("Universal Document") develops and sells Step2000[r],
a workflow, document management and application development
software product that enhances the utilization of information on
an enterprise-wide basis, regardless of hardware platform or
operating environment. DiaLogos[tm] Incorporated ("DiaLogos"), a
majority-owned subsidiary, specializes in assisting organizations
in the integration of enterprise-wide business systems with
existing applications and data using distributed object computing,
including CORBA and Java technologies, through education,
consulting and implementation services. DiaLogos is in the
initial phases of developing several products designed to simplify
the effort of legacy system integration. The Company's Synergis
Acquisition, Inc. ("Synergis") subsidiary will be merged with
certain value-added resellers in the design automation software
field into a new entity in which the Company will hold a minority
interest.
(2) Summary of Significant Accounting Policies
(a) Financial Information
The consolidated financial statements and the related
notes thereto are unaudited and have been prepared on the same
basis as the audited consolidated financial statements. In the
opinion of management, such unaudited financial statements include
all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the information set forth therein.
(b) Significant Accounting Policies
A description of the Company's significant accounting
policies can be found in the footnotes to the Company's annual
consolidated financial statements for the year ended January 31,
1998 included in its Annual Report on Form 10-KSB dated May 1,
1998. The accompanying consolidated financial statements should
be read in conjunction with those footnotes.
(c) Consolidation of DiaLogos Financial Statements
The Company acquired its majority interest in DiaLogos
on January 30, 1998, and it currently owns 56.5% of the
outstanding shares of DiaLogos common stock. The Company
consolidates the financial position and results of operations of
DiaLogos based on DiaLogos' fiscal year which ends on December 31.
Therefore, DiaLogos' financial position and results of operations
as of and for the three month and eight month periods ended
September 30, 1998 have been included in the accompanying
consolidated financial statements. The Company has recognized
greater than 56.5% of the results of operations of DiaLogos for
the eight month period ended September 30, 1998 as the minority
interest investment in DiaLogos has been reduced to zero.
Advances by the Company to DiaLogos during the month of October
have been included in other receivables.
(d) Fiscal Year
In December 1997, the Company changed its fiscal year
end from December 31 to January 31. Accordingly, the Company's
current fiscal year commenced on February 1, 1998; its current
fiscal quarter commenced on August 1, 1998 and ended on October
31, 1998. The Company has recast the quarterly financial
information for the fiscal year ended January 31, 1998 and has
presented the comparative financial information for the three and
nine month periods ended October 31, 1997.
(e) Earnings (Loss) Per Share
Basic earnings (loss) per share is based on the weighted
average number of shares of common stock outstanding for each
period excluding any shares related to nonvested employee stock
awards. Dilutive securities have not been included in the
weighted average shares used for the calculation of diluted
earnings per share in periods of losses from continuing operations
because the effect of such securities would be antidilutive.
(f) Supplemental Cash Flow Information
DiaLogos has entered into capital lease obligations for
equipment of $269,887 during the eight month period ended
September 30, 1998. The Company's discretionary and profit-sharing
contributions to the Company's Retirement Savings and Investment
Plan for the 1997 Plan year were funded in March 1998 through the
issuance of 32,232 shares of the Company's common stock. The
Company also granted a warrant to purchase 25,000 shares of the
Company's common stock to a consultant to the Company in June
1998. This warrant has a fair value of $34,953 which is being
amortized into expense over the related service period of one
year. Subsequent to October 31, 1998, the Company entered into a
Consulting Agreement with the same consultant for additional
consulting services. Pursuant to that agreement, and subject to
approval by the Company's Board of Directors, the Company would
revoke the warrant for 25,000 shares previously granted to the
consultant and would grant the consultant a warrant to purchase
100,000 shares. The new warrant, if approved by the Board of
Directors, would have a fair market value of approximately $50,000
which would be amortized into expense over a service period of two
years. As these are non-cash transactions, they have not been
presented in the Consolidated Statements of Cash Flows.
(3) Acquisition of DiaLogos
The following unaudited pro forma data presents the results
of operations as if the acquisition of DiaLogos had occurred at
the beginning of each period. The information reflects DiaLogos'
results of operations for the nine months ended September 30, 1998
and 1997 due to the Company consolidating DiaLogos' results of
operations based on DiaLogos' fiscal year end which ends December
31. The pro forma information for the nine months ended October
31, 1998 is provided because the Company's results of operations
for this period as reported include DiaLogos' results of
operations for only the eight months ended September 30, 1998.
This summary is provided for information purposes only. It does
not necessarily reflect the actual results that would have
occurred had the acquisition been made as of those dates or of
results that may occur in the future.
Nine Months Nine Months
Ended Ended
October 31, October 31,
1998 1997
_____________ _____________
Revenues $ 7,835,147 7,775,473
Loss from continuing
operations (6,101,715) (4,476,572)
Net loss $ (5,924,416) (3,674,086)
_____________ _____________
_____________ _____________
Earnings (loss) per share - basic
and diluted:
Continuing operations $ (0.99) (0.76)
Discontinued operations 0.03 0.14
Net loss $ (0.97) (0.62)
_____________ _____________
_____________ _____________
(4) Discontinued Operations
In January 1998, the Company decided to sell the net assets
of the Step2000 segment of Universal Document and began
negotiating with prospective buyers. The Company had expected to
complete the sale by December 1998. However, the Company's
efforts to sell the net assets of Step2000 ended in August 1998
after negotiations with the prospective buyers were terminated by
the Company. After reviewing the operations of the Step2000
segment and how it might complement a current business initiative
of the Company, the Company decided to retain the segment and
reduce operations to primarily research and development and
customer support while a new generation of products is being
developed.
The Step2000 segment had previously been accounted for as a
discontinued operation. However, as a result of the Company's
decision to retain the Step2000 segment, the results of operations
and financial position of the Step2000 segment have been included
in continuing operations in the Company's consolidated financial
statements as of and for the nine months ended October 31, 1998.
Prior years' financial statements have been presented on a
comparable basis. The Step2000 segment had assets of $546,978 and
liabilities of $418,217 as of January 31, 1998. For the year
ended January 31, 1998, Step2000 had revenues of $1,186,825 and
an operating loss of $1,620,792. Included in the operating loss
were impairment losses related to the excess of cost over fair
value of net assets acquired and capitalized software development
costs of $774,677 and $466,836, respectively. The Company had
also accrued a loss of $181,000 for the disposal of the net assets
of the segment and for its estimated net operating losses through
its expected date of disposal. The Company reversed $13,841 of
the accrual to offset operating losses for the three months ended
April 30, 1998 and reversed $167,159 of the accrual in July 1998
as a result of its decision to retain Step2000. These reversals
are included in discontinued operations for the nine months ended
October 31, 1998.
(5) Bank Agreements
The Company's line of credit agreement with a bank permits
the Company to borrow a maximum of $10,000,000 subject to a
defined net worth formula. The term of the MedPlus line of credit
extends through December 31, 1998, and the MedPlus line of credit
is secured by substantially all of the Company's assets. At
October 31, 1998, the maximum amount available under the line of
credit was approximately $5,500,000 of which the Company had
borrowed approximately $2,250,000.
On September 9, 1997, the Company and the Company's Universal
Document Management Systems, Inc. ("Universal Document")
subsidiary entered into a line of credit agreement ("Universal
line of credit") with a bank to fund the costs associated with
Universal Document's acquisitions and initial public offering
discussed in Note 6 and for working capital. The Universal line of
credit was paid in full and canceled on February 10, 1998.
(6) Commitments and Contingency - Synergis
The Company's Universal Document subsidiary hired a senior
management team and entered into agreements with two consulting
firms in 1997 to assist it in the identification and recruitment
of certain design automation software resellers and integrators
(collectively the "Founding Companies") that Universal Document
would acquire or with which it would combine (the "Acquisitions"),
and to assist Universal Document in an initial public offering of
its common stock. In September and October 1997, Universal
Document entered into definitive merger agreements, which were
contingent upon a successful initial public offering, to acquire
nine such companies. On October 10, 1997, Universal Document
filed a registration statement on Form S-1 with the Securities and
Exchange Commission to offer its common stock to the public.
Universal Document filed subsequent amendments to this
registration statement on December 15, 1997 and January 9, 1998.
Universal Document planned to use a portion of its proceeds from
the sale of shares in the offering and the issuance of additional
shares to acquire the nine companies with which it had entered
into merger agreements. The Company would retain a minority
interest in Universal Document after the initial public offering.
In connection with its initial public offering, Universal Document
planned to change its name to Synergis Technologies, Inc. Due to
adverse market conditions for initial public offerings in January
1998, Universal Document postponed the initial public offering
upon the advice of its underwriters.
During early 1998, the Company decided to reduce the business
operations of Universal Document. Because the reduced business
operations of Universal Document no longer complemented the
businesses of the Founding Companies, the Company created its
Synergis subsidiary to serve as the acquirer in the Acquisitions.
Universal Document (and, subsequently, Synergis) had expected to
complete the Acquisitions and an initial public offering of its
common stock on or before December 31, 1998. Due to adverse
conditions in the equity capital markets, Universal Document's
(subsequently Synergis') plans to conduct an initial public
offering were postponed for a second time in August 1998.
The Company and Synergis now plan to merge Synergis and three
of the Founding Companies into a new entity. The merger would
occur concurrently with the new entity obtaining private
financing. Under the terms of the proposed transaction, the
Company would receive a minority interest in the new entity. The
Company would also receive reimbursement for up to $3,000,000
previously advanced to fund costs of the public offering and the
Acquisitions. The Company would receive the reimbursement through
a long-term note receivable.
Universal Document had capitalized direct, incremental costs
during the year ended January 31, 1998 related to the Acquisitions
and initial public offering for accountants', attorneys', and
consultants' fees ("acquisition and offering costs") that were to
become a cost of the acquired companies or costs of the initial
public offering upon the completion of the transactions. As a
result of the first postponement of its initial public offering,
Universal Document expensed in January 1998 all such costs
capitalized during the fiscal year ended January 31, 1998.
During the nine months ended October 31, 1998, Universal
Document expensed $139,143 of acquisition and offering costs due
to the second postponement of its initial public offering.
Universal Document has incurred additional acquisition, merger and
debt financing costs on behalf of Synergis in the third quarter of
the current year. The Company has recorded a receivable of
approximately $400,000 related to the funding of such costs as
part of the reimbursement discussed in the preceding paragraph.
This receivable is included in other receivables in the Company's
consolidated balance sheet as of October 31, 1998. The Company
also incurred and expensed $1,080,131 of operating costs during
the nine months ended October 31, 1998 associated with the senior
management team hired to manage the Acquisitions, offering,
private financing and integration of the Founding Companies.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Fiscal Year
In December 1997, the Company changed its fiscal year end from
December 31 to January 31. Accordingly, the Company's current
fiscal year commenced on February 1, 1998; its current fiscal
quarter commenced on July 1, 1998 and ended on October 31, 1998.
The Company has recast the quarterly financial information for the
fiscal year ended January 31, 1998 and has presented the
comparative financial information for the three and nine month
periods ended October 31, 1997.
DiaLogos Acquisition
The Company acquired its majority interest in DiaLogos on January
30, 1998, and it currently owns 56.5% of the outstanding shares of
DiaLogos common stock. The Company consolidates the financial
position and results of operations of DiaLogos based on DiaLogos'
fiscal year which ends on December 31. Therefore, DiaLogos'
financial position and results of operations as of and for the
three month and eight month periods ended September 30, 1998 have
been included in the accompanying consolidated financial
statements. The Company has recognized greater than 56.5% of the
results of operations of DiaLogos for the eight month period ended
September 30, 1998 as the minority interest investment in DiaLogos
has been reduced to zero. Advances by the Company to DiaLogos
during the month of October have been included in other
receivables.
Discontinued Operations
In January 1998, the Company decided to sell the net assets of the
Step2000 segment of Universal Document and began negotiating with
prospective buyers. The Company had expected to complete the sale
by December 1998. However, the Company's efforts to sell the net
assets of Step2000 ended in August 1998 after negotiations with
the prospective buyers were terminated by the company. After
reviewing the operations of the Step2000 segment and how it might
complement a current business initiative of the Company, the
Company decided to retain the segment and reduce operations to
primarily research and development and customer support while a
new generation of products is being developed.
The Step2000 segment had previously been accounted for as a
discontinued operation. However, as a result of the Company's
decision to retain the Step2000 segment, the results of operations
and financial position of the Step2000 segment have been included
in continuing operations in the Company's consolidated financial
statements as of and for the nine months ended October 31, 1998.
Prior years' financial statements have been presented on a
comparable basis. The Step2000 segment had assets of $546,978 and
liabilities of $418,217 as of January 31, 1998. For the year
ended January 31, 1998, Step2000 had revenues of $1,186,825 and
an operating loss of $1,620,792. Included in the operating loss
were impairment losses related to the excess of cost over fair
value of net assets acquired and capitalized software development
costs of $774,677 and $466,836, respectively. The Company had
also accrued a loss of $181,000 for the disposal of the net assets
of the segment and for its estimated net operating losses through
its expected date of disposal. The Company reversed $13,841 of
the accrual to offset operating losses for the three months ended
April 30, 1998 and reversed $167,159 of the accrual in October
1998 as a result of its decision to retain Step2000. These
reversals are included in discontinued operations for the nine
months ended October 31, 1998.
Fluctuations in Quarterly Results of Operations
The Company has historically experienced significant quarterly
fluctuations in revenues and operating results which may continue
in the future. The Company's revenues have fluctuated due to the
length of the sales cycle, the number and timing of systems sales,
and the timing of installation, implementation and consulting
services. As a significant percentage of the Company's operating
expenses are fixed, quarterly operating results will vary with the
fluctuation in revenues.
Three Months Ended October 31, 1998 and October 31, 1997
Revenues for the three months ended October 31, 1998 (or "third
quarter of fiscal 1999") were $3,949,127 as compared to $3,122,789
for the three months ended October 31, 1997 (or "third quarter of
fiscal 1998"). Systems sales increased $102,400 from the three
months ended October 31, 1997. Support and consulting revenues
increased $723,938 or 115% from the three months ended October 31,
1997 due to the addition of consulting and education revenues from
DiaLogos and increased support and consulting revenues from the
Company's ChartMaxx and OptiMaxx product lines as the number of
installed sites of these products continues to increase.
Gross profit for the three months ended October 31, 1998 was
$1,237,554, or 31% of revenues, compared to $1,007,776, or 32% of
revenues, for the three months ended October 31, 1997. The gross
profit percentage on systems sales increased from 37% in the third
quarter of fiscal 1998 to 52% in the third quarter of fiscal 1999
due to a higher proportion of proprietary software relative to
lower margin third party hardware and software included in sales
during the third quarter of fiscal 1999. The gross profit
percentage on support and consulting revenues decreased from 15%
in the third quarter of fiscal 1998 to a negative 9% in the third
quarter of fiscal 1999. The decrease in this percentage was
primarily a result of an increase in customer support,
installation, and consulting personnel in advance of related
revenues and lower than expected utilization rates of those
personnel. Future gross profit margins for support and consulting
services may continue to be depressed in the near term as a result
of the timing of systems sales, unforeseen delays in
implementation schedules, the number and timing of additions to
the implementation and consulting staff relative to when they
become billable to customers, or the need to use independent
consultants while the Company is further developing its
implementation and consulting staff.
Operating expenses for the third quarter of fiscal 1999 were
$3,246,613 compared to $2,521,484 for the third quarter of fiscal
1998, an increase of 29%. Excluding $393,878 of Synergis
management expenses, operating expenses increased $565,000 or 25%
over the comparable period of fiscal 1998. Sales and marketing
expenses decreased $92,218 or 7% from the comparable period of
1998 due to personnel reductions and changes in the Company's
marketing strategy. Research and development expenses increased
$428,484, or 263%, in the third quarter of fiscal 1999 over the
third quarter of fiscal 1998 due to an increase in personnel in
the area of product development for both ChartMaxx and OptiMaxx
and the inclusion of the research and development expenses of
DiaLogos. General and administrative expenses increased by
$228,734 or 30% over the comparable period of the prior year
primarily due to the inclusion of DiaLogos' general and
administrative expenses. Synergis management expenses represent
personnel and other costs associated with Synergis' senior
management team which has been hired to manage Synergis' initial
public offering, private financing, acquisitions and operations
after the acquisitions.
Other income (expense), net, consists primarily of interest income
and interest expense. Other income (expense), net, increased to
$5,854 in the third quarter of fiscal 1999 from expense of
$107,328 in the comparable quarter of fiscal 1998. This increase
is a result of higher interest income from an increase in the
Company's average cash and cash equivalents balances from fiscal
1998 due to cash received from the sale of the Company's
IntelliCode division and shares of the Company's common stock to
Becton, Dickinson and Company in January 1998. The interest
income was partially offset by interest expense from the Company's
borrowings on its line of credit during the third quarter of 1999.
The Company's income tax benefit increased from $174,559 in the
third quarter of fiscal 1998 to $206,147 in the third quarter of
fiscal 1999. The Company recognized a portion of the benefit of
its net operating loss for income tax purposes from the third
quarter of fiscal 1999 through the carryback of this loss against
taxable income in fiscal 1998 generated by the sale of the
IntelliCode division. The Company's ability to recognize the full
tax benefit of its net operating losses for the third quarter of
fiscal 1999 and 1998 was limited as the realization of the total
tax benefit was not assured at the end of either period. The
Company's ability to recognize the full benefit of its net
operating loss for the fourth quarter of fiscal 1999 and any
similar losses in future periods will be dependent upon the
generation of future taxable income.
Discontinued operations in the third quarter of fiscal 1998
represent the results of operations of the Company's IntelliCode
division.
The Company's net loss for the third quarter of fiscal 1999 was
$1,500,058 compared to a net loss in the third quarter of fiscal
1998 of $1,177,351. The increase in the net loss is a result of
increased operating expenses partially offset by increased
interest income and the increase in the income tax benefit.
Nine Months Ended October 31, 1998 and October 31, 1997
Revenues for the nine months ended October 31, 1998 were
$7,725,907 as compared to $7,585,435 for the comparable period in
fiscal 1998. Systems sales decreased $2,103,178 from the nine
months ended October 31, 1997 primarily as a result of a decrease
in the number and relative size of ChartMaxx and OptiMaxx systems
sold during the first two quarters of fiscal 1999. Support and
consulting revenues increased $2,243,650 or 149% from the nine
months ended October 31, 1997 due to the addition of consulting
and education revenues from DiaLogos and increased support and
consulting revenues from the Company's ChartMaxx and OptiMaxx
product lines as the number of installed sites of these products
continues to increase.
Gross profit for the nine months ended October 31, 1998 was
$1,985,130 or 26% of revenues, compared to $2,631,060, or 35% of
revenues for the comparable period of fiscal 1998. The gross
profit percentage on systems sales increased from 41% for the nine
months ended October 31, 1997 to 42% for the nine months ended
October 31, 1998 due to a higher proportion of proprietary
software relative to lower margin third party hardware and
software included in sales during the third quarter of fiscal
1999. The gross profit percentage on support and consulting
revenues decreased from 10% for the nine months ended October 31,
1997 to 8% for the nine months ended October 31, 1998. The
decrease in this percentage was primarily a result of an increase
in customer support, installation, and consulting personnel in
advance of related revenues and lower than expected utilization
rates of those personnel. These items were partly offset by the
addition of the gross profit on DiaLogos' consulting and education
revenues and the increased support revenues noted above.
Operating expenses for the nine months ended October 31, 1998 were
$10,005,328 compared to $6,607,020 for the comparable period of
1997, an increase of 51%. Excluding $1,080,131 of Synergis
management expenses, operating expenses increased $2,551,191 or
40% over the comparable period of fiscal 1998. The Company had
continued to increase its investment in sales and marketing
efforts for the ChartMaxx product line and DiaLogos in the areas
of direct sales, channel partner programs, national accounts and
general marketing activities as evidenced by the 19% increase in
sales and marketing expenditures over the nine months ended
October 31, 1997. However, the previous trend of quarterly
increases in sales and marketing expenditures was reversed in the
third quarter of fiscal 1999 as a result of personnel reductions
and changes in the Company's marketing strategy. The increase in
operating expenses is also a result of the inclusion of the
operating expenses of DiaLogos and an increase in personnel in the
area of product development for both ChartMaxx and OptiMaxx.
Synergis management expenses represent personnel and other costs
associated with Synergis' senior management team which has been
hired to manage Synergis' initial public offering, private
financing, acquisitions and operations after the acquisitions.
Other income (expense), net, increased to $25,493 of income for
the nine months ended October 31, 1998 from expense of $156,056
for the nine months ended October 31, 1997. The increase is
primarily due to an increase in interest income as a result of an
increase in the Company's average cash and cash equivalents
balances from fiscal 1998 due to cash received from the sale of
the Company's IntelliCode division and shares of the Company's
common stock to Becton, Dickinson and Company in January 1998.
The increase in interest income was partially offset by the write-
off of $139,143 of accounting and legal costs associated with the
Synergis acquisition and offering efforts in the second quarter of
1999 and interest expense from the Company's borrowings on its
line of credit in the third quarter of 1999.
The Company's income tax benefit increased from $520,723 in the
third quarter of fiscal 1998 to $1,666,370 in the third quarter of
fiscal 1999. The Company recognized a portion of the benefit of
its net operating loss for income tax purposes for the nine months
ended October 31, 1998 through the carryback of this loss against
taxable income in fiscal 1998 generated by the sale of the
IntelliCode division. The Company's ability to recognize the full
tax benefit of its net operating losses for the third quarter of
fiscal 1999 and 1998 was limited as the realization of the total
tax benefit was not assured at the end of either period. The
Company's ability to recognize the full benefit of its net
operating loss for the third quarter of fiscal 1999 and any
similar losses in future periods will be dependent upon the
generation of future taxable income.
Discontinued operations for the nine months ended October 31, 1997
represent the results of operations of the Company's IntelliCode
division. Discontinued operations for the nine months ended
October 31, 1998 represent the reversal of the accrued loss
related to the Step2000 segment which the Company decided to
retain in August 1998 and the reversal of certain reserves related
to the sale of the IntelliCode division.
The Company's net loss for the nine months ended October 31, 1998
was $5,854,036 compared to a net loss for the nine months ended
October 31, 1997 of $2,808,804. The increase in the net loss is a
result of lower gross profit margins and increased operating
expenses partially offset by increased interest income and the
increase in the income tax benefit.
Synergis
The Company's Universal Document subsidiary hired a senior
management team and entered into agreements with two consulting
firms in 1997 to assist it in the identification and recruitment
of certain design automation software resellers and integrators
(collectively the "Founding Companies") that Universal Document
would acquire or with which it would combine (the "Acquisitions"),
and to assist Universal Document in an initial public offering of
its common stock. In September and October 1997, Universal
Document entered into definitive merger agreements, which were
contingent upon a successful initial public offering, to acquire
nine such companies. On October 10, 1997, Universal Document
filed a registration statement on Form S-1 with the Securities and
Exchange Commission to offer its common stock to the public.
Universal Document filed subsequent amendments to this
registration statement on December 15, 1997 and January 9, 1998.
Universal Document planned to use a portion of its proceeds from
the sale of shares in the offering and the issuance of additional
shares to acquire the nine companies with which it had entered
into merger agreements. The Company would retain a minority
interest in Universal Document after the initial public offering.
In connection with its initial public offering, Universal Document
planned to change its name to Synergis Technologies, Inc. Due to
adverse market conditions for initial public offerings in January
1998, Universal Document postponed the initial public offering
upon the advice of its underwriters.
During early 1998, the Company decided to reduce the business
operations of Universal Document. Because the reduced business
operations of Universal Document no longer complemented the
businesses of the Founding Companies, the Company created its
Synergis subsidiary to serve as the acquirer in the Acquisitions.
Universal Document (and, subsequently, Synergis) had expected to
complete the Acquisitions and an initial public offering of its
common stock on or before December 31, 1998. Due to adverse
conditions in the equity capital markets, Universal Document's
(subsequently Synergis') plans to conduct an initial public
offering were postponed for a second time in August 1998.
The Company and Synergis now plan to merge Synergis and three of
the Founding Companies into a new entity. The merger would occur
concurrently with the new entity obtaining private financing.
Under the terms of the proposed transaction, the Company would
receive a minority interest in the new entity. The Company would
also receive reimbursement for up to $3,000,000 previously
advanced to fund costs of the public offering and the
Acquisitions. The Company would receive the reimbursement through
a long-term note receivable.
Universal Document had capitalized direct, incremental costs
during the year ended January 31, 1998 related to the Acquisitions
and initial public offering for accountants', attorneys', and
consultants' fees ("acquisition and offering costs") that were to
become a cost of the acquired companies or costs of the initial
public offering upon the completion of the transactions. As a
result of the first postponement of its initial public offering,
Universal Document expensed in January 1998 all such costs
capitalized during the fiscal year ended January 31, 1998.
During the nine months ended October 31, 1998, Universal Document
expensed $139,143 of acquisition and offering costs due to the
second postponement of its initial public offering. Universal
Document has incurred additional acquisition, merger and debt
financing costs on behalf of Synergis in the third quarter of the
current year. The Company has recorded a receivable of
approximately $400,000 related to the funding of such costs as
part of the reimbursement discussed in the preceding paragraph.
This receivable is included in other receivables in the Company's
consolidated balance sheet as of October 31, 1998. The Company
also incurred and expensed $1,080,131 of operating costs during
the nine months ended October 31, 1998 associated with the senior
management team hired to manage the Acquisitions, offering,
private financing and integration of the Founding Companies.
Liquidity and Capital Resources
The Company's business requires significant amounts of working
capital to finance new product research and development, the
expansion of its sales and marketing organization, anticipated
revenue growth, capital expenditures and strategic investments.
The Company has financed its operations, working capital needs,
and investments through the sale of common stock, bank borrowings,
capital lease financing agreements and, recently, the sale of the
assets of its IntelliCode division. The Company's principal uses
of cash since inception have been for funding operations, capital
expenditures, research and development activities, investments in
and advances to companies which are deemed to have strategic value
to the Company and funding costs associated with the Synergis
acquisitions, initial public offering, and private financing.
The Company's revolving line of credit agreement ("MedPlus line of
credit") with a bank permits the Company to borrow a maximum of
$10,000,000 subject to a defined net worth formula. The term of
the MedPlus line of credit extends through December 31, 1998, and
the MedPlus line of credit is secured by substantially all of the
Company's assets. At October 31, 1998, the maximum amount
available under the line of credit was approximately $5,500,000 of
which the Company had borrowed approximately $2,250,000. No
amounts were outstanding under the MedPlus line of credit at
January 31, 1998.
On September 9, 1997, the Company and Universal Document entered
into a line of credit agreement ("Universal line of credit") with
a bank to fund the costs associated with Universal Document's
acquisitions and initial public offering discussed in Note 5 of
the consolidated financial statements and for working capital.
The amount outstanding under the Universal line of credit at
January 31, 1998 was $1,496,353. The Universal line of credit was
paid in full and canceled on February 10, 1998.
The Company's Board of Directors authorized a common stock
repurchase program in November 1996. Under the program the
Company may repurchase up to 500,000 shares of the Company's
common stock. During the three months ended October 31, 1998, the
Company repurchased 164,600 shares at a cost of $645,600. As of
October 31, 1998 the Company's cumulative repurchases totaled
200,000 shares.
The Company has continued to incur operating losses from
continuing operations. During this period, the Company has made
significant cash expenditures in the areas of research and
development, sales and marketing, customer support and
implementation consulting in anticipation of higher revenues.
However, revenues have been lower than expected during the period
of the operating losses. Management has continued to review the
Company's current operations to identify areas to reduce or
maintain current levels of expenses until revenues increase
sufficiently to justify increased investments in certain areas.
Such areas include, but may not be limited to, the Company's
Universal Document and FutureCORE subsidiaries and certain
corporate marketing activities. In addition to expense
reductions, increased revenues will also be needed to improve
operating cash flow. Management believes that the Company's
current pipeline for its ChartMaxx product, its recent contract
for an imaging and workflow solution for Quest Diagnostics
Incorporated and the marketing of this solution to other reference
laboratories will result in significant opportunities to increase
revenues over the next twelve to eighteen months.
The Company believes that improvements in operating cash flow from
the expense reductions and increased revenues noted above combined
with its cash and cash equivalents and available line of credit
will be sufficient to finance its expected growth and cash
requirements. The Company also believes that it has the ability to
renegotiate or extend its existing line of credit, secure other
debt or equity financings, or sell assets to provide additional
cash if needed. The Company is currently negotiating an extension
of its existing line of credit. The Company has also entered into
an agreement with an investment bank to secure additional
financing through a private placement of debt securities. In
addition, in the event that the aforementioned merger of Synergis
occurs in fiscal 1999, the Company expects this would provide
additional cash to the Company through the reimbursement of a
portion of Synergis' management, acquisition, and offering costs
funded by the Company. The completion of the merger would also
eliminate MedPlus' funding of the ongoing Synergis management
expenses. There can be no assurance, however, as to the extent or
timing of the Company's success in increasing revenues, that
additional sources of financing will be available on a timely
basis or on terms satisfactory to the Company, or that the
Synergis merger will be successfully completed in fiscal 1999.
Year 2000 Compliance
Some existing computer programs use only the last two digits to
refer to a year. Because these programs may not properly
recognize a year that begins with "20" rather than "19" and thus
may fail or create errors in the year 2000, they are not
considered "year 2000 compliant." The Company has been reviewing,
and continues to review, all potential year 2000 compliance issues
which may have a material effect on the Company's business,
results of operations or financial condition.
Specifically, the most recent releases of the Company's ChartMaxx
and OptiMaxx products have both been developed using four digit
date fields and, as such, are year 2000 compliant. The Company's
standard license agreements for the most recent releases of each
of these products now include a year 2000 compliance warranty.
Although the Company has not similarly warranted earlier versions
of these products, the Company is not aware of any features in
earlier versions which would cause the products not to be year
2000 compliant. Customers who have earlier versions of these
products may upgrade to the versions warranted by the Company as
year 2000 compliant under the terms of their license agreements
with the Company or the Company's standard maintenance and support
agreements, as the case may be.
Although the most recent releases of the Company's ChartMaxx and
OptiMaxx products are year 2000 compliant, the Company is also
working to ensure that its customers do not experience problems
where data entered into a ChartMaxx or OptiMaxx system includes
two digit date fields. Currently, if a two digit date field is
passed from another system to ChartMaxx or OptiMaxx, the product's
four digit date field is automatically populated with the first
two digits of the current ChartMaxx or OptiMaxx system date. The
Company has completed final year 2000 testing for these systems
and verified that the most recent releases are year 2000
compliant.
In addition, both systems incorporate third party software and
hardware. While the Company's year 2000 compliance warranty
covers the components of third party products which are
incorporated into the ChartMaxx or OptiMaxx application, the
Company does not independently warrant any third party product.
The Company has received certifications from many of its third
party vendors that their products are year 2000 compliant and is
currently reviewing the remaining third party products, and
working with those vendors, to determine what steps, if any, are
required to ensure compliance. At this time, the Company knows of
no third party product which is not year 2000 compliant and which
affects the year 2000 compliance of the ChartMaxx or OptiMaxx
product.
Furthermore, the ChartMaxx and OptiMaxx products operate in
conjunction with each customer's operating system which has not
been provided or modified by the Company. The Company plans to
advise its customers to contact their operating systems vendors in
order to upgrade these systems to the year 2000 compliant
versions. Where possible, the Company will provide its customers
with specific information regarding how they may obtain upgrades
to their operating system software via the internet or other
means.
The Company's Universal Document subsidiary has completed its
testing of the Step2000 software product and verified that it is
year 2000 compliant. Step2000, however, may be used by a customer
to develop other software applications. The customer is
responsible for ensuring that these developed applications are
also year 2000 compliant. Universal Document has provided a year
2000 compliance warranty to its customers, but the warranty
excludes developed applications from coverage.
The Company's internal software systems are either already
compliant or will be upgraded to available year 2000 compliant
versions.
The Company has to date, and will in the foreseeable future use,
internal resources to continue to monitor its products for year
2000 compliance. If modifications to any of the Company's
products are required to ensure year 2000 compliance, the Company
plans to use internal resources for those modifications. The
total cost of the year 2000 compliance effort has not yet been
determined, however, the Company does not anticipate it to be
material based on the results of its review and testing to date.
The cost of the year 2000 effort will be funded by cash on hand
and cash from operations. The Company does not anticipate, based
on its current understanding of the year 2000 issue and the
results of its review and testing to date, that the year 2000
issue will have a material effect on the Company's results of
operations or result in significant operational problems for the
Company.
Forward Looking Statements
MedPlus notes that many of the statements made herein are forward-
looking statements. As such, factors may occur which could cause
actual events to differ materially from those anticipated in these
statements. For example, although the Company plans to merge
Synergis with certain value-added resellers in the design
automation software field, there can be no assurance that such
mergers will occur. Definitive merger agreements have not yet
been executed with such resellers and factors such as market
conditions or changes in the resellers' business strategies could
delay or even prevent the mergers from occurring. In addition,
there can be no assurance at this time that the Company will
receive reimbursement for the $3,000,000 previously advanced
to fund costs of the public offering and the Acquisitions.
Although management believes that the Company's current pipeline
for its ChartMaxx product, its recent contract for an imaging and
workflow solution for Quest Diagnostics Incorporated and the
marketing of this solution to other reference laboratories will
result in significant opportunities to increase revenues over the
next twelve to eighteen months, any number of factors, including
those beyond the control of MedPlus such as each potential
customer's financial condition and/or the time frame in which it
may receive contract approval, could prevent the execution of such
agreements during this period. Furthermore, whether improvements
in operating cash flow from the expense reductions and increased
revenues combined with cash and cash equivalents and available
line of credit will be sufficient to finance expected growth and
cash requirements is also uncertain. The Company may not be able
to renegotiate or extend its existing line of credit, secure other
debt or equity financings, or sell assets to provide additional
cash if needed.
PART II. OTHER INFORMATION
Items 1-4. None.
Item 5. Other Information
The Securities and Exchange Commission has recently
amended Rule 14a-4 to provide that with respect to a shareholder
proposal to be presented at an annual shareholders' meeting other
than pursuant to Rule 14a-8 (i.e., which is not to be included in
the registrant's proxy statement), the registrant's management may
exercise discretionary voting authority under proxies solicited by
it for the meeting if it receives notice of the proposed non-Rule
14a-8 shareholder action less than 45 days prior to the calendar
date its proxy materials were mailed for the prior year's annual
meeting.
As this new provision applies to the Company, in the
event
notice of a non-Rule 14a-8 shareholder proposal to be presented at
the Company's 1999 Annual Meeting of Shareholders is received by
the Company after April 16, 1999, the Company will be permitted to
exercise discretionary voting authority under proxies solicited by
it with respect to the 1999 Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are hereby filed as part of this Form
10-QSB:
Exhibit Sequentially
Number Description of Exhibits Numbered Page
27.1 Financial Data Schedule for nine
months ended October 31, 1998
(b) The following report on Form 8-K was filed during the three
month period ended October 31, 1998:
Current Report on Form 8-K filed September 3, 1998 disclosing the
registrant's issuance of a press release announcing (a) its plans
to further refine and promote its strategy of integrating the
capabilities of each of its individual business units to provide
process automation for its customers, (b) the proposed private
combination of 11 value-added design automation companies, and (c)
operating results for the second quarter ended July 31, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MedPlus, Inc.
Date: 12/11/98 By: /s/ Daniel A. Silber
Daniel A. Silber
Vice President and Chief
Financial Officer
* Pursuant to the last sentence of General Instruction G to Form
10-QSB, Mr. Daniel A. Silber has executed this Quarterly report
on Form 10-QSB both on behalf of the registrant and in his
capacity as its principal financial and accounting officer.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF MEPDLUS, INC. AND SUBSIDIARIES AS OF AND FOR
THE NINE MONTH PERIOD ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REEFRENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 1,205,438
<SECURITIES> 0
<RECEIVABLES> 6,385,588
<ALLOWANCES> 240,000
<INVENTORY> 740,192
<CURRENT-ASSETS> 10,448,410
<PP&E> 2,908,981
<DEPRECIATION> 1,057,361
<TOTAL-ASSETS> 15,716,038
<CURRENT-LIABILITIES> 7,117,387
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0
0
<COMMON> 0
<OTHER-SE> 8,256,900
<TOTAL-LIABILITY-AND-EQUITY> 15,716,038
<SALES> 3,976,939
<TOTAL-REVENUES> 7,725,907
<CGS> 2,289,325
<TOTAL-COSTS> 5,740,777
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,697,705)
<INCOME-TAX> (1,666,370)
<INCOME-CONTINUING> (6,031,335)
<DISCONTINUED> 177,299
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<NET-INCOME> (5,854,036)
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