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 April 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 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 June 8, 1999, there were 6,055,269 shares of the registrant's
common stock without par value issued and outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE><CAPTION> MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three Months Three Months
Ended Ended
April 30, April 30,
1999 1998
_____________ _____________
<S>
Revenues: <C> <C>
Systems sales $ 2,882,191 714,468
Support and consulting revenues 1,378,423 1,218,882
_____________ _____________
Total revenues 4,260,614 1,933,350
_____________ _____________
Cost of revenues:
Systems sales 1,417,160 425,754
Support and consulting revenues 1,234,253 957,159
_____________ _____________
Total cost of revenues 2,651,413 1,382,913
_____________ _____________
Gross profit 1,609,201 550,437
Operating expenses:
Sales and marketing 999,361 1,632,306
Research and development 395,686 482,033
General and administrative 1,043,402 893,230
_____________ _____________
Total operating expenses 2,438,449 3,007,569
_____________ _____________
Operating loss (829,248) (2,457,132
Other income (expense):
Other income (expense), net (70,916) 125,816
Synergis management expenses, acquisition
and offering costs (179,663) (378,961)
_____________ _____________
Total other income (expense) (250,579) (253,145)
_____________ _____________
Loss before income tax benefit (1,079,827) (2,710,277)
Income tax benefit -- (955,860)
_____________ _____________
Loss from continuing operations (1,079,827) (1,754,417)
Income from discontinued operations -- 8,443
_____________ _____________
Net loss $ (1,079,827) (1,745,974)
_____________ _____________
_____________ _____________
Loss per share - basic and diluted:
Continuing operations $ (0.18) (0.29)
Discontinued operations 0.00 0.00
_____________ _____________
Net loss per share $ (0.18) (0.29)
_____________ _____________
_____________ _____________
Weighted average number of shares of
common stock outstanding 6,050,198 6,160,157
_____________ _____________
_____________ _____________
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE><CAPTION> MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, January 31,
1999 1999
____________ ____________
(unaudited)
ASSETS <C> <C>
Current assets:
Cash and cash equivalents $ 2,720,021 1,148,099
Accounts receivable, less allowance for doubtful accounts of
$155,000 at April 30, 1999 and January 31, 1999 5,316,856 5,595,273
Other receivables 112,341 70,769
Income tax receivable 25,000 550,000
Inventories 332,227 442,312
Prepaid expenses 700,032 656,588
____________ ____________
Total current assets 9,206,477 8,463,041
____________ ____________
____________ ____________
Capitalized software development costs, net 2,619,807 2,559,823
Fixed assets, net 1,515,553 1,648,093
Excess of cost over fair value of net assets acquired, net 694,417 714,448
Other assets 389,498 291,402
____________ ____________
$14,425,752 13,676,807
____________ ____________
____________ ____________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases $ 189,903 222,558
Borrowings on line of credit 2,863,298 507,017
Accounts payable 1,611,674 1,712,392
Accrued expenses 1,702,872 2,099,124
Deferred revenue 1,363,863 1,158,128
____________ ____________
Total current liabilities 7,731,610 5,699,219
____________ ____________
Obligations under capital leases, excluding current installments 120,829 48,746
Long-term debt 2,000,000 2,250,000
____________ ____________
Total liabilities 9,852,439 8,097,965
____________ ____________
Shareholders' equity:
Common stock, no par value, authorized 15,000,000 shares;
issued 6,255,269 shares at April 30, 1999 and 6,225,371 shares
at January 31, 1999 - -
Additional paid-in capital 17,746,465 17,639,105
Treasury stock, at cost, 200,000 shares (863,497) (863,497)
Accumulated deficit (12,247,329) (11,167,502)
Unearned stock compensation (62,326) (29,264)
____________ ____________
Total shareholders' equity 4,573,313 5,578,842
____________ ____________
$14,425,752 13,676,807
____________ ____________
____________ ____________
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE><CAPTION> MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Three Months
Ended Ended
April 30, April 30,
1999 1999
____________ ____________
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (1,079,827) (1,745,974)
Adjustments to reconcile loss from continuing operations to
net cash provided by (used in) operating activities:
Amortization of capitalized software development costs 170,482 119,331
Depreciation of fixed assets 153,049 111,236
Amortization of unearned stock compensation costs 15,798 56,905
Amortization of excess of cost over fair value of net assets acquired 20,031 13,354
Deferred income taxes -- (120,097)
Realized gain on sales of fixed assets (565) --
Provision for loss on doubtful accounts 431 3,562
Changes in assets and liabilities:
Accounts receivable 278,962 879,512
Other receivables (41,572) 32,651
Inventories 110,085 (27,170)
Prepaid expenses and other assets (42,710) (95,671)
Accounts payable and accrued expenses (281,050) (1,376,855)
Income taxes 525,000 (1,430,365)
Deferred revenue 205,735 (84,629)
____________ ____________
Net cash provided by (used in) operating activities 33,849 (3,664,240)
____________ ____________
Cash flows from investing activities:
Capitalization of software development costs (230,466) (210,207)
Purchases of fixed assets (19,944) (111,636)
Synergis acquisition and offering costs (157,420) (1,158,497)
Payments made for acquisitions of businesses -- (19,858)
Other advances and investments -- (260,679)
____________ ____________
Net cash used in investing activities (407,830) (1,760,877)
____________ ____________
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs -- 58,083
Purchases of treasury stock -- (164,346)
Proceeds from borrowings on line of credit 2,622,716 3,647
Repayments on line of credit (2,516,435) (1,500,000)
Proceeds from long-term debt 2,000,000 --
Principal payments on capital lease obligations (60,573) (38,791)
Payment of debt issue costs (99,805) --
____________ ____________
Net cash provided by (used in) financing activities 1,945,903 (1,641,407)
Discontinued operations -- (315,366)
____________ ____________
Net increase (decrease) in cash and cash equivalents 1,571,922 (7,381,890)
Cash and cash equivalents, beginning of period 1,148,099 13,794,473
____________ ____________
Cash and cash equivalents, end of period $ 2,720,021 6,412,583
____________ ____________
____________ ____________
Interest paid $ 80,248 74,954
____________ ____________
Income taxes paid $ -- 600,000
____________ ____________
____________ ____________
</TABLE>
See accompanying notes to consolidated financial statements
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.
The Company's healthcare related products, included in its
Healthcare Solutions segment, 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
health 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"), included in its Workflow and
Document Management segment, 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"), included in the Company's
Distributed Computing Products and Services segment, is a
majority-owned subsidiary and 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.
(2) Summary of Significant Accounting Policies
(a) Interim Financial Information
The consolidated financial statements and the related
notes thereto are unaudited and have been prepared on the same
basis as the audited consolidated financial statements. In the
opinion of management, such unaudited financial statements include
all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the information set forth therein.
(b) Significant Accounting Policies
A description of the Company's significant accounting
policies can be found in the footnotes to the Company's annual
consolidated financial statements for the year ended January 31,
1999 included in its Annual Report filed on Form 10-KSB. The
accompanying consolidated financial statements should be read in
conjunction with those footnotes. The results for interim periods
are not necessarily indicative of results to be expected for the
year. Certain fiscal 1999 amounts have been reclassified to
conform to fiscal 2000 presentation.
(c) 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.
(d) Supplemental Cash Flow Information
The Company's discretionary contribution to its
Retirement Savings and Investment Plan for the fiscal 1999 plan
year was funded in March 1999 through the issuance of 12,197
shares of the Company's common stock. The Company also issued
17,701 shares of the Company's common stock in February 1999 to
fund its Employee Stock Purchase Plan for the fiscal 1999 plan
year. The Company granted, in February 1999, a warrant to
purchase 100,000 shares of the Company's common stock to a
consultant of the Company. This warrant has an estimated fair
value of $48,860 that is being amortized into expense over the
related service period of two years. As these are non-cash
transactions, they have not been presented in the Consolidated
Statements of Cash Flows.
(3) Bank Agreements
At January 31, 1999, the Company had a revolving line of credit
agreement with a bank with a maximum amount available of
$3,250,000. In the first quarter of fiscal 2000, the bank amended
the credit agreement to reduce the limit to $3,000,000 and to
extend the expiration of $2,250,000 of this limit to February 2000,
subject to a defined net worth formula and the completion of the
debt and equity financing described below. As of April 30, 1999,
borrowings of $2,863,298 on the line of credit were classified as
current in the Consolidated Balance Sheet. As of January 31, 1999,
the Company classified $507,017 of the outstanding balance as
current and $2,250,000 as non-current in the Consolidated Balance
Sheet. Any amounts outstanding greater than $2,250,000 will become
payable to the bank at specified dates throughout fiscal 2000. The
interest rate on the new financing agreement is payable at the
bank's prime rate plus 1 1/2%. The new agreement contains a
closing fee of $60,000 and a quarterly commitment fee of 1% on the
line of credit limit. The line of credit is secured by all assets
of the Company.
(4) Debt and Equity Financing
In the first quarter of fiscal 2000, the Company entered into an
Agreement (the "Agreement") with three investment firms to obtain
$6,100,000 in debt and equity financing. The terms of the
Agreement provide for financing of $2,000,000 in subordinated
debentures (the "Notes") and $4,100,000 in Series A Convertible
Preferred Shares (the "Preferred Shares"). Certain terms of the
Agreement were amended in June 1999. The proceeds of the financing
will be utilized to fund working capital requirements and continue
product development and market penetration of certain of the
Company's core products. Certain terms of the agreement, including
the authorization of the Preferred Shares, are subject to potential
adjustment and to shareholder approval at the Company's special and
annual shareholders' meeting scheduled in June 1999.
On April 30, 1999, the Company issued the Notes, due 2004, with an
annual coupon rate, payable quarterly, of 10% in the first year,
12% from May 1, 2000 through October 31, 2000 and 14% thereafter.
The Company also is required to pay a 2% fee on the amount of
principal outstanding on each annual anniversary of October 31,
1999. The principal portion of the Notes is payable as follows:
$666,666 in April 2002, $666,667 in April 2003 and $666,667 in
April 2004; however, the Company may redeem the Notes at any time
during their term without penalty. In circumstances specified in
the Agreement, if the Company receives cash from certain
transactions, as defined, the Company may be required to pay any
outstanding principal balance and accumulated interest thereon.
The Notes provide that if the Preferred Shares are authorized and
certain additional terms are approved, by the Company's
shareholders prior to July 30, 1999, the Company will issue to the
holders of the Notes five-year warrants to purchase 281,137
Preferred Shares at an exercise price not to exceed $1.90. This
warrant price is subject to adjustment if the Company does not meet
specified requirements relating to the appreciation of its stock
price at the end of a defined two-year period. Holders of the
warrants can elect to convert warrants to Preferred Shares, but
would receive a reduced number of Preferred Shares. The Notes also
provide that if shareholder approval does not occur prior to July
30, 1999, then any outstanding principal and accumulated interest
thereon will become due and payable as of November 28, 1999. Also,
the Company would be required to issue to the holders of the Notes
a specified percentage of the Company outstanding common stock plus
281,137 warrants to purchase additional shares of common stock at
an exercise price not to exceed $1.90.
In addition, subject to shareholder approval on or before July 30,
1999, the Company has agreed to issue to the investors 2,371,815
Preferred Shares, with no stated par value, at a purchase price of
$1.729 per share for gross proceeds of $4,100,000. The Preferred
Shares are convertible into the Company's common stock on a one-
for-one basis. However, the conversion ratio could be subject to
certain price and dilution adjustments which essentially place
restrictions on the Company's ability to issue warrants, options or
other rights (except to employees), issue convertible securities or
stock dividends, or make changes in option prices or conversion
rates. The Company is required to pay a cumulative dividend
quarterly at a rate of 4% per share for the first four years,
increasing to 10% thereafter. The dividends to the preferred
shareholders will be included as a reduction in the Company's
earnings (loss) per common share-basic and diluted calculation on a
prospective basis. The Preferred Shares include (a) voting rights,
(b) receive preferential treatment upon liquidation of the Company
and (c) convert into common shares upon certain events. In
addition, upon meeting certain requirements specified in the
Agreement, the Company can elect at its option to convert the
Preferred Shares into common shares of the Company. Also, subject
to shareholder approval on or before July 30, 1999, the Company has
agreed to issue to the Investors ten-year warrants for the purchase
of approximately 720,000 Preferred Shares at a purchase price not
to exceed $1.90. These warrants cannot be exercised unless the
value of the Company's stock price as traded on the NASDAQ over a
twenty-day period exceeds $7.17.
The $2,000,000 Notes issued by the Company on April 30, 1999 have
been recorded in the Consolidated Balance Sheet as long-term debt
for the current quarter. Upon consummation of the transactions in
the second quarter of fiscal 2000, the warrants related to the
Notes will be recorded as additional paid-in capital and will
reduce the recorded amount of the Notes in the Consolidated Balance
Sheet. This reduction will be amortized to interest expense over
the expected term of the Notes. Also upon consummation of the
transactions in the second quarter, the Preferred Shares and
related warrants will be recorded in shareholders' equity in the
Consolidated Balance Sheet. The fair value of all financial
instruments in this transaction are still subject to adjustment
based upon a fair value allocation, which will be conducted in the
second quarter of fiscal 2000. The Company will recognize in the
second quarter a beneficial conversion on the Preferred Shares of
$346,285. This amount represents the effect of the differential
between the conversion price and the closing market price on the
date of commitment of the Preferred Shares. Although the
beneficial conversion will have no impact on the financial
condition, results of operations or cash flows of the Company, it
will negatively impact the Company's earnings (loss) per share-
basic and diluted in the second quarter of fiscal 2000.
(5) Synergis Management Expenses, Acquisition and Offering Costs
Beginning in 1997, the Company began negotiations to combine
certain design automation software resellers and integrators for
the expected merger of these entities with a subsidiary of the
Company, which eventually would become the Company's Synergis
subsidiary. This newly merged entity was expected to spin-off from
the Company through an initial public offering or, most recently,
through private financing. The Company has incurred expenses
related to management expenses, acquisition and offering costs of
$179,663 and $378,961 for the three months ended April 30, 1999 and
1998, respectively. As of April 30, 1999, the Company has
terminated all efforts to merge Synergis with other entities. As
all negotiations have been terminated, the Company does not
anticipate any additional expenses related to the Synergis
transaction on a prospective basis.
(6) Operating Segments
Based upon management's organization of its products and services,
the company has three reportable segments: Healthcare Solutions
(ChartMaxx, OptiMaxx, and FutureCore), Workflow and Document
Management (Universal Document), and Distributed Computing Products
and Services (DiaLogos). The Company's management evaluates
performance of each segment based on profit or loss from operations
before allocation of corporate expenses, unusual, infrequent and
extraordinary items, interest and income taxes. The accounting
policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2 to the
Consolidated Financial Statements). All of the Company's
operations are located in the United States. Also, the Company
primarily sells to customers within the United States, but has
currently been focusing on international customers. Revenues from
customers located internationally were not material.
The following table presents the revenues and segment operating
results of the Company by operating segment:
Three Months Ended
April 30, April 30,
1999 1998
____________ ___________
Revenues:
Healthcare solutions $ 3,648,453 1,238,267
Workflow and document management 200,222 472,314
Distributed computing products
and services 441,906 338,240
Less intercompany (29,967) (115,471)
____________ ___________
Total revenues $ 4,260,614 1,933,350
____________ ___________
____________ ___________
Segment operating results:
Healthcare solutions $ 181,769 (1,342,432)
Workflow and document management (2,959) (13,841)
Distributed computing products
and services (298,563) (152,369)
____________ ___________
Total segment operating loss (119,753) (1,508,642)
Corporate expenses (709,495) (948,490)
____________ ___________
Total operating loss (829,248) (2,457,132)
____________ ___________
Other income (expense):
Other income (expense), net (70,916) 125,816
Synergis management expenses,
acquisition and offering costs (179,663) (378,961)
____________ ___________
Loss from continuing operations
before income tax benefit $ (1,079,827) (2,710,277)
____________ ___________
____________ ___________
(6) Liquidity
Since its inception in 1991, the Company has funded its
operations, working capital needs and capital expenditures
primarily through a combination of cash generated by operations,
the sale of its Intellicode division, debt financing and offerings
of its common stock to the public. Over the past few years, the
Company's net cash outlays have exceeded its ability to generate
cash through operations resulting in the need to obtain additional
working capital. For fiscal 2000, the Company has made certain
operational changes that will hopefully position the Company to
substantially improve its operating results. Management believes
that the additional financing agreements entered into during
fiscal 2000, along with the execution of its current business
plan, will be sufficient to finance current working capital
requirements. There can be no assurances, however, that these
goals will be accomplished or that the Company will return to
profitability during fiscal 2000.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
MedPlus*, Inc. (the "Company") provides information technology
solutions designed to enable customers to manage information
efficiently and cost effectively through innovative technology,
consulting, and education. 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 revenue growth since the commencement
of operations. The Company's solutions focus on various elements
of process analysis and redesign, document imaging and management,
workflow, systems integration and technology education.
The Company's healthcare related products presently consist of the
ChartMaxx* Enterprise-wide Patient Record System ("ChartMaxx")
and the OptiMaxx* Archival System ("OptiMaxx"). ChartMaxx is an
enterprise-wide electronic patient record system that enables
healthcare 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 healthcare providers that require
electronic storage and quick retrieval of information. The
Company's FutureCORE, 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 licenses Step2000*
, 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.
In January 1998, the Company acquired a majority interest in
DiaLogos* Incorporated ("DiaLogos"). DiaLogos 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.
Revenue Recognition Cycle
The Company's revenues are derived from systems sales, including
software licenses and hardware, support contracts and
installation, implementation, training and education and
consulting services. Systems sales consist of software licenses
for proprietary software, third party software and hardware, and
related installation services. The gross profit percentage on
systems 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 support contracts
include software and hardware maintenance and support. Consulting
service revenues are derived from implementation, training and
education, custom software development and process improvement
services. Revenues from support contracts and consulting services
are expected to increase as the number of installed systems
increases. The gross profit percentage on support contracts and
consulting services may fluctuate based upon the negotiated terms
of each contract and the Company's ability to fully utilize its
customer support, implementation and consulting personnel.
The decision by a healthcare provider to replace, substantially
modify or upgrade its information systems is a strategic decision
and often involves a large capital commitment requiring an
extended approval process. The sales cycle for the Company's
ChartMaxx 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 concurrent users 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.
Fluctuations in Results of Operations
The Company has historically experienced significant quarterly and
annual fluctuations in revenues and operating results that 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. As a result, period to
period comparisons of the Company's past operating results may not
be necessarily indicative of future operating results of the
Company.
Discontinued Operations
In January 1998, the Company sold all the assets of its
IntelliCode division to Becton Dickinson and Company ("Becton
Dickinson") for $17,334,558 plus royalty payments over five
years. In connection with the sale, Becton Dickinson also assumed
certain liabilities of the IntelliCode division, primarily
deferred revenues and obligations related to service contracts and
an office lease. The Company recognized a pre-tax gain of
$14,724,720 and an after-tax gain of $10,268,710 related to this
transaction for the year ended January 31, 1998. The royalty
payments are based on future defined revenues and are recorded as
income when earned. No royalty payments were earned for the
periods reported.
In January 1998, the Company had decided to sell the net assets of
the Step2000 segment of Universal Document. However, during
fiscal 1999, the Company decided to retain the segment and reduce
operations to primarily research and development and customer
support while a new generation of products was developed. The
Step2000 segment had been accounted for as a discontinued
operation until the second quarter of fiscal 1999. However, as a
result of the Company's decision to retain the Step2000 segment,
the results of operations and financial position of the segment
have been included in continuing operations in the Company's
consolidated financial statements for the periods presented.
Prior years' financial statements have been presented on a
comparable basis.
Synergis Commitments
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 late 1997, Universal Document entered into
definitive merger agreements, which were contingent upon a
successful initial public offering, to acquire nine such
companies. Also, in October 1997, Universal Document filed a
registration statement on Form S-1 with the Securities and
Exchange Commission, which was subsequently amended in December
1997 and January 1998, to offer its common stock to the public.
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 evaluated the business operations
of Universal Document and determined that it no longer
complemented the businesses of the Founding Companies. As a
result, the Company created its Synergis subsidiary to serve as
the acquirer in the Acquisitions. The Company expected the newly
created Synergis subsidiary to complete the Acquisitions and an
initial public offering of its common stock. Due to adverse
conditions in the equity capital markets, Synergis' plans to
conduct an initial public offering were postponed for a second
time in August 1998. As of January 31, 1999, the Company was
considering the financing of the Synergis transaction on a private
basis. Most recently, the Company has terminated all efforts to
merge Synergis with other entities. As all negotiations have been
terminated, the Company does not anticipate any additional expenses
related to the Synergis transaction on a prospective basis.
Results of Operations
Three Months Ended April 30, 1999 and April 30, 1998
Comparisons in this section are consistent with the presentation
located in the Company's Consolidated Statement of Operations
located at Item 1. Financial Statements of this 10-QSB. Please
refer to Item 1 for the income statement depicting the amounts in
this narrative.
Revenues: Revenues for the three months ended April 30, 1999
("first quarter of fiscal 2000") were $4,260,614, an increase of
$2,327,264, or 120%, from $1,933,350 for the three months ended
April 30, 1998 ("first quarter of fiscal 1999"). The primary reason
for this increase relates to systems sales, which increased
$2,167,723, or 303%, from the first quarter of fiscal 1999,
primarily due to an increase in the number of ChartMaxx and
OptiMaxx sales recognized in the first quarter of fiscal 2000. The
Company believes that it has historically experienced lower-than-
anticipated revenues because many of its potential customers have
been focusing on resolving internal Year 2000 issues rather than
purchasing enterprise-wide solutions, such as ChartMaxx or
OptiMaxx. As resolution of this matter occurs, the Company
believes sales of ChartMaxx and OptiMaxx will increase, although
there is no assurance that this trend will continue to occur in the
near term. Additionally, support and consulting revenues of
$1,378,423 for the first quarter of fiscal 2000 increased $159,541,
or 13%, from the three months ended April 30, 1998 due to 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. These increases were offset, in
part, by lower revenues at the Company's UDMS subsidiary compared
to the year-ago period.
Gross Profit: Gross profit for the three months ended April 30,
1999 was $1,609,201, or 38% of revenues, compared to $550,437, or
28% of revenues, for the three months ended April 30, 1998. The
gross profit percentage on systems sales increased from 40% in the
first quarter of fiscal 1999 to 51% in the first quarter of fiscal
2000 due to a higher proportion of proprietary software relative to
lower margin third party hardware and software included in sales
during the comparable period. The gross profit percentage on
support and consulting revenues decreased from 21% in the first
quarter of fiscal 1999 to 10% in the first quarter of fiscal 2000.
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: Total operating expenses for the first quarter
of fiscal 2000 were $2,438,449, a decrease of $569,120, or 19%,
compared to $3,007,569 for the first quarter of fiscal 1999. Sales
and marketing expenses decreased $632,945 or 39% from the
comparable period of 1999 due to personnel reductions directly
related to a change in sales and marketing focus for the ChartMaxx
product line and DiaLogos in the areas of direct sales, channel
partner programs, national accounts and general marketing
activities. Research and development expenses decreased $86,347, or
18%, compared to the first quarter of fiscal 1999. This decrease
relates to a personnel reduction in the area of product development
for DiaLogos and a shifting from independent contractors to full-
time employees in the ChartMaxx and OptiMaxx businesses. The
Company believes that product development related activities are
the cornerstone to maintaining a competitive position in the market
and will continue to invest in these types of activities. General
and administrative expenses increased by $150,172, or 17%, over the
comparable period of the prior year primarily due to the absence of
an administrative service reimbursement associated with the sale of
Intellicode which was included in the first quarter of fiscal 1999
and an increase in administrative personnel in the current period.
Other Income (Expense): Other income (expense), net, consists
primarily of interest income and interest expense. Other income
(expense), net, decreased from income of $125,816 for the quarter
ended April 30, 1998 to expense of $70,916 for the quarter ended
April 30, 1999. This decrease is a result of higher interest
expense due to borrowings on the Company's line of credit during
the current quarter. The first quarter of fiscal 1999 had interest
income related to higher cash and cash equivalents balances due to
cash received from the sale of the Company's IntelliCode division
to Becton Dickinson and Company in January 1998. Expenses related
to the employment of Synergis management, acquisition, and offering
costs discussed above under "Synergis Commitments" were $179,663
and $378,961 for the quarters ended April 30, 1999 and 1998,
respectively. As of April 30, 1999, the Company has terminated all
efforts to merge Synergis with other entities. As all negotiations
have been terminated, the Company does not anticipate any
additional expenses related to the Synergis transaction on a
prospective basis.
Income Tax Benefit: The Company did not recognize an income tax
benefit on its loss from continuing operations for the current
quarter as the recognition of these benefits did not meet the
recognition criteria for accounting purposes due to the Company's
history of operating losses. The Company's ability to recognize
the full benefit of its net operating loss in future periods will
be dependent upon the generation of future taxable income,
limitations imposed by the Internal Revenue Service, and other
matters potentially affecting the realizability of these
carryforwards. The Company recognized a tax benefit of $955,680 on
its operating loss for the quarter ended April 30, 1998 due to the
Company's ability for income tax purposes to carry back this loss
against taxable income in fiscal 1998 generated by the sale of the
IntelliCode division.
Discontinued Operations: Discontinued operations for the first
quarter of fiscal 1999 represents the reversal of a portion of the
accrued loss related to the Step2000 segment which the Company
decided to retain in August 1998.
Net Loss: The 38% improvement in the Company's net loss and loss
per share was a direct result of improvements in the Company's
revenues and gross profit combined with decreased operating
expenses. This was partially offset by the Company's inability to
recognize an income tax benefit for accounting purposes on its loss
from continuing operations.
Liquidity and Capital Resources
The Company's business requires significant amounts of working
capital to finance new product research and development,
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 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, and
investments in and advances to companies which are deemed to have
strategic value to the Company.
In May 1999, the Company received a letter from Nasdaq National
Market ("Nasdaq"), the Company's market listing agency, inquiring
about the Company's ability to maintain compliance with the minimum
net tangible asset requirement of at least $4,000,000 under
Maintenance Standard 1 of the Nasdaq regulations. This requirement
is essential for the Company to continue to be listed on the
Nasdaq. The Company believes that it will be able to comply with
the requirement due to (1) the equity financing described below
which will increase the Company's net tangible assets by over
$4,000,000 on or about June 18, 1999 and (2) the Company's ability
to successfully execute its current business plan over the next
year. The Company has replied to Nasdaq and is currently awaiting
response. At this time, Nasdaq has neither accepted nor rejected
the Company's position.
Financing
In January 1999, the Company entered into a month-to-month
agreement with a bank with a limit of $3,250,000. This line
replaced a previous line of credit with the same bank with a limit
of $10,000,000, subject to a defined net worth formula. In the
first quarter of fiscal 2000, the bank amended the credit agreement
to reduce the limit to $3,000,000 and to extend the expiration of
$2,250,000 of this limit to February 2000, subject to a defined net
worth formula and the completion of the debt and equity financing
described below. As of April 30, 1999, borrowings of $2,863,298 on
the line of credit were classified as current in the Consolidated
Balance Sheet. As of January 31, 1999, the Company classified
$507,017 of the outstanding balance as current and $2,250,000 as
non-current in the Consolidated Balance Sheet. Any amounts
outstanding greater than $2,250,000 will become payable to the bank
at specified dates throughout fiscal 2000. The interest rate on
the new financing agreement is payable at the bank's prime rate
plus 1 1/2%. The new agreement contains a closing fee of $60,000 and
a quarterly commitment fee of 1% on the line of credit limit. The
line of credit is secured by all assets of the Company.
In the first quarter of fiscal 2000, the Company entered into an
Agreement (the "Agreement") with three investment firms to obtain
$6,100,000 in debt and equity financing. The terms of the
Agreement provide for financing of $2,000,000 in subordinated
debentures (the "Notes") and $4,100,000 in Series A Convertible
Preferred Shares (the "Preferred Shares"). Certain terms of the
Agreement were amended in June 1999. The proceeds of the financing
will be utilized to fund working capital requirements and continue
product development and market penetration of certain of the
Company's core products. Certain terms of the agreement, including
the authorization of the Preferred Shares, are subject to potential
adjustment and to shareholder approval at the Company's special and
annual shareholders' meeting scheduled in June 1999.
On April 30, 1999, the Company issued the Notes, due 2004, with an
annual coupon rate, payable quarterly, of 10% in the first year,
12% from May 1, 2000 through October 31, 2000 and 14% thereafter.
The Company also is required to pay a 2% fee on the amount of
principal outstanding on each anniversary of October 31, 1999. The
principal portion of the Notes is payable as follows: $666,666 in
April 2002, $666,667 in April 2003 and $666,667 in April 2004;
however, the Company may redeem the Notes at any time during their
term without penalty. In circumstances specified in the Agreement,
if the Company receives cash from certain transactions, as defined,
the Company may be required to pay any outstanding principal
balance and accumulated interest thereon. The Notes provide that
if the Preferred Shares are authorized and certain additional terms
are approved, by the Company's shareholders prior to July 30, 1999,
the Company will issue to the holders of the Notes five-year
warrants to purchase 281,137 Preferred Shares at an exercise price
not to exceed $1.90. This warrant price is subject to adjustment
if the Company does not meet specified requirements relating to the
appreciation of its stock price at the end of a defined two-year
period. Holders of the warrants can elect to convert warrants to
Preferred Shares, but would receive a reduced number of Preferred
Shares. The Notes also provide that if shareholder approval does
not occur prior to July 30, 1999, then any outstanding principal
and accumulated interest thereon will become due and payable as of
November 28, 1999. Also, the Company would be required to issue to
the holders of the Notes a specified percentage of the Company
outstanding common stock plus 281,137 warrants to purchase
additional shares of common stock at an exercise price not to
exceed $1.90.
In addition, subject to shareholder approval on or before July 30,
1999, the Company has agreed to issue to the investors 2,371,815
Preferred Shares, with no stated par value, at a purchase price of
$1.729 per share for gross proceeds of $4,100,000. The Preferred
Shares are convertible into the Company's common stock on a one-
for-one basis. However, the conversion ratio could be subject to
certain price and dilution adjustments which essentially place
restrictions on the Company's ability to issue warrants, options or
other rights (except to employees), issue convertible securities or
stock dividends, or make changes in option prices or conversion
rates. The Company is required to pay a cumulative dividend
quarterly at a rate of 4% per share for the first four years,
increasing to 10% thereafter. The dividends to the preferred
shareholders will be included as a reduction in the Company's
earnings (loss) per common share-basic and diluted calculation on a
prospective basis. The Preferred Shares include (a) voting rights,
(b) receive preferential treatment upon liquidation of the Company
and (c) convert into common shares upon certain events. In
addition, upon meeting certain requirements specified in the
Agreement, the Company can elect at its option to convert the
Preferred Shares into common shares of the Company. Also, subject
to shareholder approval on or before July 30, 1999, the Company has
agreed to issue to the Investors ten-year warrants for the purchase
of approximately 720,000 Preferred Shares at a purchase price not
to exceed $1.90. These warrants cannot be exercised unless the
value of the Company's stock price as traded on the NASDAQ over a
twenty-day period exceeds $7.17.
Common Stock Repurchase Program
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.
No shares were repurchased for the quarters ended April 30, 1999
and 1998, respectively. On a cumulative basis, the Company has
repurchased 200,000 shares.
Cash Flows from Operations
Cash flows provided by operating activities was $33,849 for the
quarter ended April 30, 1999. Cash flows used in operating
activities was $3,664,240 for the quarter ended April 30, 1998.
The positive cash flow for the first quarter of fiscal 1999 in
comparison to fiscal 1998 was largely the result of the
significantly better operating performance of the Company and the
improvement of working capital for the Company. In addition, the
Company paid income taxes of $1.4 million in the first quarter of
fiscal 1999, compared to the receipt of a refund in the first
quarter of fiscal 2000 of $525,000. 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. 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
contract for an imaging and workflow solution for Quest Diagnostics
Incorporated and the marketing of this solution to other reference
laboratories are key opportunities to increase cash flows from
operations 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 in the near term. The Company also believes that its
debt and equity financings will provide adequate funding necessary
to continue its current level of operations in the near term. 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, if needed, will be available on a timely basis or on
terms satisfactory to the Company.
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.
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.
Furthermore, the ChartMaxx and OptiMaxx products operate in
conjunction with third party hardware and operating systems
provided by the Company, but excluded from the Company's year 2000
compliance warranty. The Company has advised, and continues to
advise, its customers to contact the manufacturers of the hardware
and operating systems in order to upgrade these systems to the year
2000 compliant versions, if necessary. 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 Company does
not anticipate the total cost of its year 2000 compliance measures
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
The Company 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.
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 (i)
improvements in operating cash flow from the expense reductions and
increased revenues combined with cash and cash equivalents, (ii)
the Company's available line of credit and (iii) cash received from
the debt and equity financing occurring during fiscal 2000 will be
sufficient to finance expected growth and cash requirements is also
uncertain. Finally, although the Company believes the Preferred
Stock described Under "Liquidity and Capital Resources" above will
be approved by the Company's shareholders and subsequently issued,
there can be no assurance that such approval and issuance will take
place as anticipated. If the Preferred Stock is not issued on or
before July 31, 1999, then the Notes will become immediately
payable and Company will be required to grant to the investment
firm and its affiliates a percentage of its then-outstanding common
stock.
PART II. OTHER INFORMATION
Items 1-5. None.
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 the three
months ended April 30, 1999 --
(b) There were no reports on Form 8-K filed during the three month
period ended April 30, 1999
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: June 11, 1999 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> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF MEDPLUS, INC. AND SUBSIDIARIES AS OF AND FOR THE THREE
MONTH PERIOD ENDED APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> 2,720,021
<SECURITIES> 0
<RECEIVABLES> 5,609,197
<ALLOWANCES> 155,000
<INVENTORY> 332,227
<CURRENT-ASSETS> 9,206,477
<PP&E> 2,877,968
<DEPRECIATION> 1,362,415
<TOTAL-ASSETS> 14,425,752
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<OTHER-SE> 4,573,313
<TOTAL-LIABILITY-AND-EQUITY> 14,425,752
<SALES> 2,882,191
<TOTAL-REVENUES> 4,260,614
<CGS> 2,651,413
<TOTAL-COSTS> 5,340,441
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<INCOME-PRETAX> (1,079,827)
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