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 July 31, 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 Identification
incorporation or organization) 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 September 13, 1999, there were 6,119,570 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 Three Six Six
Months Months Months Months
Ended Ended Ended Ended
July 31, July 31, July 31, July 31,
1999 1998 1999 1998
___________ ___________ ___________ ____________
<S> <C> <C> <C> <C>
Revenues:
Systems sales $ 798,924 678,463 3,681,114 1,392,921
Support and consulting revenues 1,385,361 1,164,966 2,763,785 2,383,859
___________ ___________ ___________ ____________
Total revenues 2,184,285 1,843,429 6,444,899 3,776,780
___________ ___________ ___________ ____________
Cost of revenues
Systems sales 645,877 602,578 2,063,037 1,028,331
Support and consulting revenues 1,082,161 1,042,964 2,250,178 2,000,123
___________ ___________ ___________ ____________
Total cost of revenues 1,728,038 1,645,542 4,313,215 3,028,454
___________ ___________ ___________ ____________
Gross profit 456,247 197,887 2,131,684 748,326
Operating expenses:
Sales and marketing 688,597 1,484,266 1,682,578 3,116,572
Research and development 622,420 401,587 1,089,721 883,620
General and administrative 1,081,431 1,175,859 2,124,833 2,069,090
___________ ___________ ___________ ____________
Total operating expenses 2,392,448 3,061,712 4,897,132 6,069,282
___________ ___________ ___________ ____________
Operating loss (1,936,201) (2,863,825) (2,765,448) (5,320,956)
Other income (expense), net:
Other, net (123,213) (100,064) (194,130) 25,750
Synergis management expenses,
acquisition and offering costs -- (317,335) (179,663) (696,294)
___________ ___________ ___________ ____________
Total other income (expense), net (123,213) (417,399) (373,793) (670,544)
___________ ___________ ___________ ____________
Loss from continuing operations
before income tax benefit (2,059,414) (3,281,224) (3,139,241) (5,991,500)
Income tax benefit -- (504,364) -- (1,460,223)
___________ ___________ ___________ ____________
Loss from continuing operations (2,059,414) (2,776,860) (3,139,241) (4,531,277)
Income from discontinued operations -- 168,856 -- 177,299
___________ ___________ ___________ ____________
Net loss (2,059,414) (2,608,004) (3,139,241) (4,353,978)
Conversion discount on preferred stock 346,285 -- 346,285 --
Preferred stock dividend requirements 82,000 -- 82,000 --
___________ ___________ ___________ ____________
Loss attributable to
common shareholders $(2,487,699) (2,608,004) (3,567,526) (4,353,978)
=========== =========== =========== ============
Net loss per common share
- basic and diluted:
Continuing operations $ (0.41) (0.45) (0.59) (0.74)
Discontinued operations -- 0.03 -- 0.03
___________ ___________ ___________ ____________
Net loss per common share $ (0.41) (0.42) (0.59) (0.71)
=========== =========== =========== ============
Weighted average number of shares of
common stock outstanding 6,041,269 6,170,726 6,038,776 6,165,529
=========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE><CAPTION>
July 31, January 31,
1999 1999
_______________ _____________
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,516,791 1,148,099
Accounts receivable, less allowance for doubtful accounts of
$195,000 at July 31, 1999 and $155,000 at January 31, 1999 3,896,302 5,595,273
Other receivables 65,244 70,769
Income taxes refundable 25,000 550,000
Inventories 407,666 442,312
Prepaid expenses 682,137 656,588
_______________ _____________
Total current assets 9,593,140 8,463,041
_______________ _____________
Capitalized software development costs, net 2,667,733 2,559,823
Fixed assets, net 1,458,036 1,648,093
Excess of cost over fair value of net assets acquired, net 768,522 714,448
Other assets 210,541 291,402
_______________ _____________
$ 14,697,972 13,676,807
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of obligations under capital leases $ 146,446 222,558
Borrowings on line of credit 2,508,036 507,017
Accounts payable 1,003,379 1,712,392
Accrued expenses 1,549,854 2,099,124
Deferred revenue 1,260,872 1,158,128
_______________ _____________
Total current liabilities 6,468,587 5,699,219
_______________ _____________
Obligations under capital leases, excluding current installments 99,489 148,746
Long-term debt, net of deferred debt costs and discounts 1,870,428 2,250,000
_______________ _____________
Total liabilities 8,438,504 8,097,965
_______________ _____________
Shareholders' equity:
Preferred shares, $.01 par value, authorized 5,000,000 shares;
issued 2,371,815 shares at July 31, 1999 23,718 -
Common stock, no par value, authorized 15,000,000 shares; issued
6,255,269 shares at July 31, 1999 and 6,225,371 shares
at January 31, 1999 - -
Additional paid-in capital 21,454,798 17,639,105
Treasury stock, at cost, 200,000 shares (863,497) (863,497)
Accumulated deficit (14,306,743) (11,167,502)
Unearned stock compensation (48,808) (29,264)
_______________ _____________
Total shareholders' equity 6,259,468 5,578,842
_______________ _____________
$ 14,697,972 13,676,807
=============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE><CAPTION>
MEDPLUS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited) Six Months Six Months
Ended Ended
July 31, July 31,
1999 1998
___________ ___________
<S> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (3,139,241) (4,531,277)
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 345,751 229,441
Depreciation of fixed assets 304,846 235,046
Amortization of unearned stock compensation costs 29,316 108,273
Amortization of excess of cost over fair value of net assets acquired 41,926 33,385
Amortization of deferred costs related to long-term debt 38,969 --
Deferred income taxes -- (113,355)
Realized (gain) loss on sales of fixed assets 480 12,633
Provision for loss on doubtful accounts 40,000 83,962
Changes in assets and liabilities:
Accounts receivable 1,679,832 1,011,799
Other receivables 5,525 36,278
Inventories 34,646 169,080
Prepaid expenses and other assets (25,548) (296,278)
Accounts payable and accrued expenses (1,117,802) (1,355,501)
Income taxes 525,000 (1,946,869)
Deferred revenue 102,744 (21,933)
___________ ___________
Net cash used in operating activities (1,133,556) (6,206,173)
___________ ___________
Cash flows from investing activities:
Capitalization of software development costs (453,660) (537,798)
Purchases of fixed assets (115,270) (441,223)
Synergis acquisition and offering costs (173,020) (1,446,512)
Payments made for acquisitions of businesses (25,000) (19,858)
Other advances and investments -- (28,000)
___________ ___________
Net cash used in investing activities (766,950) (2,473,391)
___________ ___________
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs -- 58,084
Proceeds from issuance of preferred shares, net of issuance costs 3,740,242 --
Purchases of treasury stock -- (164,348)
Proceeds from borrowings on line of credit 5,838,862 3,647
Repayments on line of credit (6,045,843) (1,500,000)
Proceeds from issuance of long-term debt 2,000,000 --
Principal payments on capital lease obligations (125,370) (82,409)
Payment of debt issue costs (138,693) --
___________ ___________
Net cash provided by (used in) financing activities 5,269,198 (1,685,026)
___________ ___________
Discontinued operations -- (94,505)
___________ ___________
Net increase (decrease) in cash and cash equivalents 3,368,692 (10,459,095)
Cash and cash equivalents, beginning of period 1,148,099 13,794,473
___________ ___________
Cash and cash equivalents, end of period $ 4,516,791 3,335,378
=========== ===========
Interest paid $ 163,726 84,150
=========== ===========
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.
Recently, the ChartMaxx product line has been modified to allow
for purchase and implementation by module, thus enabling tailored
solutions that will be less costly and can be implemented in a
shorter time frame. OptiMaxx is an optical disk-based archival
system designed to meet the departmental and enterprise-wide 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. In the second
quarter of fiscal 2000, the Company's majority interest in
DiaLogos increased from 58.5% to 78% as a result of the purchase
by DiaLogos of its outstanding stock held by a minority
shareholder.
(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 and quarter one, fiscal 2000 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. Amounts in excess of the
$2,250,000 due in February 2000 become payable to the bank at
specified dates throughout fiscal 2000. The maximum amount
available as of July 31, 1999 was $2,750,000 and $2,508,036 was
outstanding and classified as current in the Consolidated Balance
Sheet as of July 31, 1999. 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. The
interest rate on the new financing agreement is payable at the
bank's prime rate plus 1.5%. The new agreement contained a closing
fee of $60,000 and requires 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.
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 holders of the Notes also received warrants to purchase 281,137
Preferred Shares at an exercise price of $1.66. 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 also
elect a non-cash conversion of the warrants to Preferred Shares,
but would receive a reduced number of Preferred Shares.
On June 25, 1999, the Company issued to the investors 2,371,815
Preferred Shares, with a $ .01 stated par value, at a purchase
price of $1.729 per share for gross proceeds of $4,100,000 (net
proceeds of $3,740,242). 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 three years, increasing to 10% thereafter. The
market rate related to the dividends is estimated at an annual rate
of 8%. 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, ten-year warrants for the
purchase of 721,702 Preferred Shares were issued to the Investors
at a purchase price of $1.66. 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 net of debt issuance costs and discounts in the
Consolidated Balance Sheet as long-term debt for the current
quarter. Debt issuance costs and discounts on the Notes will be
amortized to interest expense over the remaining term of the Notes.
The effective interest yield on the Notes is estimated at an
annual rate of 14.5%. The estimated fair value of the Note
warrants have been recorded as additional paid-in-capital in the
Consolidated Balance Sheet. The Preferred Shares and related
warrants have also been recorded in shareholders' equity in the
Consolidated Balance Sheet based upon their estimated fair value.
The estimated fair value of all financial instruments were based
upon an external appraisal by an investment banking firm unrelated
to the Company.
The Company recognized in the second quarter a beneficial
conversion feature on the Preferred Shares of $346,285 that was
included in the consolidated statement of operations as an
adjustment to net loss. 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 feature has no impact on the financial
condition or cash flows of the Company, it has a negative impact on
the Company's earnings (loss) per share-basic and diluted in the
second quarter of fiscal 2000. The Company also recorded dividends
on the preferred shares as of the declaration date of July 31,
1999. Although the Company is only required to pay dividends at an
annual rate of 4% for the first three years, the preferred stock
dividend requirement disclosed in the consolidated statement of
operations has been based upon the Company's estimated market rate
of 8%. The incremental 4% had no impact on the financial condition
or cash flows of the Company, but negatively impacts 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
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
$696,294 for the six months ended July 31, 1999 and 1998,
respectively. In the first quarter of fiscal 2000, the Company had
terminated all efforts to merge Synergis with other entities. As
all negotiations have been terminated, the Company did not incur
any expenses in the second quarter of fiscal 2000 and 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
increased its sales and marketing efforts internationally.
Revenues from customers located internationally were not material.
The following table presents the revenues and segment operating
results of the Company by operating segment
<TABLE><CAPTION>
Three Months Ended Six Months Ended
July 31, July 31, July 31, July 31,
1999 1998 1999 1998
_____________ _____________ ____________ ______________
<S> <C> <C> <C> <C>
Revenues:
Healthcare solutions $ 1,438,167 1,316,797 5,086,621 2,555,065
Workflow and document management 249,014 271,524 449,235 743,838
Distributed computing products and services 514,373 365,080 956,279 703,320
Less intercompany (17,269 (109,972) (47,236) (225,443)
_____________ _____________ ____________ ______________
Total revenues $ 2,184,285 1,843,429 6,444,899 3,776,780
============= ============= ============ ==============
Segment operating results:
Healthcare solutions $ (943,511) (1,365,610) (761,742) (2,698,719)
Workflow and document management 35,901 (192,976) 32,941 (216,140)
Distributed computing products and services (307,230) (487,223) (602,504)
(639,591)
Total segment operating loss (1,214,840) (2,045,809) (1,331,305) (3,554,450)
Corporate expenses (721,361) (818,016) (1,434,143) (1,766,506)
Total operating loss (1,936,201) (2,863,825) (2,765,448) (5,320,956)
_____________ _____________ ____________ ______________
Other income (expense):
Other, net (123,213) (100,064) (194,130) 25,750
Synergis management expenses, acquisition
and offering costs -- (317,335) (179,663) (696,294)
_____________ _____________ ____________ ______________
Loss from continuing operations before
income tax benefit $ (2,059,414) (3,281,224) (3,139,241) (5,991,500)
============= ============= ============ ==============
</TABLE>
(7) Liquidity
Since 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, offerings of its common
stock to the public and, most recently, a subordinated debt and
preferred share equity financing. 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. In addition, as the Company's revolving line of
credit expires in February 2000, the Company is currently
negotiating with various groups in order to extend or replace this
debt with a longer-term facility, as well as to potentially obtain
funding from other sources. For fiscal 2000, the Company has made
certain operational changes that will hopefully position the
Company to substantially improve its operating results, as
evidenced by the decrease in cash used in operations from $6.2
million for the six months ended July 31, 1998 to $1.1 million for
the six months ended July 31, 1999. Management believes that the
additional financing agreements entered into during fiscal 2000,
the expected near-term refinancing of its senior debt, the
potential sale of a portion of the Company's assets and 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[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. 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[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
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.
Recently, the ChartMaxx product line has been modified to allow
for purchase and implementation by module, thus enabling tailored
solutions that will be less costly and can be implemented in a
shorter time frame. OptiMaxx is an optical disk-based archival
system designed to meet the departmental and enterprise-wide 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[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.
In January 1998, the Company acquired a majority interest in
DiaLogos[tm] 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 priced 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 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.
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
During 1997, the Company's Universal Document subsidiary began a
process to identify and recruit certain design automation software
resellers and integrators (the "Founding Companies") that
Universal Document could acquire or with which it could combine
(the "Acquisitions"), and to review the possibility of an initial
public offering of its common stock. 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. 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, however, 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.
During the first quarter of fiscal 2000, the Company terminated
all efforts to merge Synergis with other entities. As all
negotiations have been terminated, the Company does not anticipate
incurring any additional expenses related to the Synergis
transaction on a prospective basis.
Results of Operations
Three Months Ended July 31, 1999 and July 31, 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 July 31, 1999
("second quarter of fiscal 2000") were $2,184,285, an increase of
$340,856, or 18%, from $1,843,429 for the three months ended July
31, 1998 ("second quarter of fiscal 1999"). Systems sales
increased $120,461 or 18% from the second quarter of fiscal 1999,
primarily due to various upgrades and installations occurring in
fiscal 2000, as well as revenue recognized on certain projects
under the percentage of completion method of accounting. Support
and consulting revenues of $1,385,361 for the second quarter of
fiscal 2000 increased $220,395, or 19%, from the three months ended
July 31, 1998 due to increased consulting revenues in the Company's
DiaLogos subsidiary, as well as 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: Gross profit for the three months ended July 31, 1999
was $456,247, or 21% of revenues, compared to $197,887, or 11% of
revenues, for the three months ended July 31, 1998. The gross
profit percentage on systems sales increased from 11% in the second
quarter of fiscal 1999 to 19% in the second 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 increased from 11% in the second
quarter of fiscal 1999 to 22% in the second quarter of fiscal 2000.
The increase in this percentage was primarily a result of increased
support revenues on the Company's ChartMaxx and OptiMaxx contracts
and increased revenues in DiaLogos. Future gross profit margins
for support and consulting services can be affected by 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 second quarter
of fiscal 2000 were $2,392,448, a decrease of $669,264, or 22%,
compared to $3,061,712 for the second quarter of fiscal 1999.
Sales and marketing expenses decreased $795,669, or 54%, 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 increased $220,833,
or 55%, compared to the second quarter of fiscal 1999. This
increase relates to personnel increases in the area of product
development as well as a decrease in the amount of research and
development capitalized for the quarter over the comparable period.
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 decreased slightly by $94,428,
or 8%, due to the Company's ongoing monitoring of these types of
expenses.
Other Income (Expense): Other income (expense), net, consists
primarily of interest income, interest expense, and expenses
incurred with the Synergis transaction. "Other expense" increased
from $100,064 of expense for the quarter ended July 31, 1998 to
$123,213 of expense for the quarter ended July 31, 1999. This
increase is a result of higher interest expense due to borrowings
on the Company's line of credit during the current quarter. Also,
the second quarter of fiscal 1999 had higher 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 $0 and
$317,335 for the quarters ended July 31, 1999 and 1998,
respectively. During the first quarter of fiscal 2000, the Company
had 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 $504,364 on
its operating loss for the quarter ended July 31, 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 second
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 21% improvement in the Company's net loss was a
direct result of improvements in the Company's revenues and gross
profit combined with decreased operating and other 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.
Conversion Discount on Preferred Stock: During the second quarter
of fiscal 2000, the Company issued 2,371,815 shares of its
preferred stock to certain investors at a purchase price of $1.729
per share for gross proceeds of $4,100,000 and net proceeds of
$3,740,242 (see Financing in Liquidity and Capital Resources). As
a result of this issuance, the Company recorded a conversion
discount on the preferred stock of $346,285. This amount
represents the effect of the differential between the conversion
price of $1.729 and the closing market price of $1.88 on the date
of commitment of the Preferred Shares. Although the beneficial
conversion feature has no impact on the financial condition or cash
flows of the Company, it does negatively impact the Company's loss
per common share-basic and diluted.
Preferred Stock Dividend Requirements: The Company recorded
quarterly dividends on the preferred stock as of the declaration
date of July 31, 1999. Although the Company is only required to
pay dividends at an annual rate of 4% for the first three years,
the preferred stock dividend requirement disclosed in the
consolidated statement of operations has been calculated using the
Company's estimated market rate of 8%. A market rate of 8% was
utilized as the dividends are considered increasing rate dividends
for accounting purposes. The incremental 4% has no impact on the
financial condition or cash flows of the Company, but negatively
impacts the Company's earnings (loss) per common share-basic and
diluted.
Loss Attributable to Common Shareholders and Loss Per Common Share:
Net Loss has been adjusted for items related to the preferred
shares issued in the second quarter of fiscal 2000 to derive the
"Loss Attributable to Common Shareholders." This amount has been
utilized in the calculation of net loss per common share.
Six Months Ended July 31, 1999 and July 31, 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 six months ended July 31, 1999 ("first
half of fiscal 2000") were $6,444,899, an increase of $2,668,119,
or 71%, from $3,776,780 for the six months ended July 31, 1998
("first half of fiscal 1999"). Systems sales increased $2,288,193
or 164% from the first half of fiscal 1999, primarily due to an
increase in the number of ChartMaxx and OptiMaxx sales recognized
in the first half of fiscal 2000, as well as revenue recognized on
certain projects under the percentage of completion method of
accounting. Additionally, support and consulting revenues of
$2,763,785 for the first half of fiscal 2000 increased $379,926,
or 16%, from the first half of fiscal 1999 due to increased
consulting revenues in the Company's DiaLogos subsidiary as well as
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: Gross profit for the six months ended July 31, 1999
was $2,131,684, or 33% of revenues, compared to $748,326, or 20% of
revenues, for the six months ended July 31, 1998. The gross profit
percentage on systems sales increased from 26% in the first half of
fiscal 1999 to 44% in the first half 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 increased from 16% in the first half of fiscal 1999 to 19%
in the first half of fiscal 2000. The increase in this percentage
is primarily attributable to increased support revenues on the
Company's ChartMaxx and OptiMaxx contracts and increased revenues
in DiaLogos. Offsetting the full benefit of increased revenues was
an increase in customer support, installation, and consulting
personnel in advance of related revenues. Future gross profit
margins for support and consulting services can be affected by 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 half of
fiscal 2000 were $4,897,132, a decrease of $1,172,150, or 19%,
compared to $6,069,282 for the first half of fiscal 1999. Sales and
marketing expenses decreased $1,433,994 or 46% 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 increased $206,101, or 23%,
compared to the second half of fiscal 1999. This increase relates
to personnel increases in the area of product development as well
as a decrease in the amount of research and development
capitalized. 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 decreased
slightly by $55,743, or 3%, as the Company continues its ongoing
monitoring of these types of expenses.
Other Income (Expense): Other income (expense), net, consists
primarily of interest income, interest expense, and expenses
incurred with the Synergis transaction. "Other expense" increased
from income of $25,750 for the first half of fiscal 1999 to expense
of $194,130 for the first half of fiscal 2000. This increase in
expense is a result of higher interest expense due to borrowings on
the Company's line of credit. Also, fiscal 1999 had higher
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 $696,294 for the six months ended
July 31, 1999 and 1998, respectively. As of the first quarter of
fiscal 2000, the Company has terminated all efforts to merge
Synergis with other entities. As all negotiations have been
terminated, the Company does not anticipate incurring any
additional expenses related to the Synergis transaction.
Income Tax Benefit: The Company did not recognize an income tax
benefit on its loss from continuing operations for fiscal 2000 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 $1,460,223 on its operating
loss for fiscal 1999 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 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 28% improvement in the Company's net loss was a
direct result of improvements in the Company's revenues and gross
profit combined with decreased operating and other 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.
Conversion Discount on Preferred Stock: During the second quarter
of fiscal 2000, the Company issued 2,371,815 shares of its
preferred stock to certain investors at a purchase price of $1.729
per share for gross proceeds of $4,100,000 and net proceeds of
$3,740,242 (see Financing in Liquidity and Capital Resources). As
a result of this issuance, the Company recorded a conversion
discount on the preferred stock of $346,285. This amount
represents the effect of the differential between the conversion
price of $1.729 and the closing market price of $1.88 on the date
of commitment of the Preferred Shares. Although the beneficial
conversion feature has no impact on the financial condition or cash
flows of the Company, it does negatively impact the Company's loss
per common share-basic and diluted.
Preferred Stock Dividend Requirements: The Company recorded
quarterly dividends on the preferred stock as of the declaration
date of July 31, 1999. Although the Company is only required to
pay dividends at an annual rate of 4% for the first three years,
the preferred stock dividend requirement disclosed in the
consolidated statement of operations has been calculated using the
Company's estimated market rate of 8%. A market rate of 8% was
utilized as the dividends are considered increasing rate dividends
for accounting purposes. The incremental 4% has no impact on the
financial condition or cash flows of the Company, but negatively
impacts the Company's earnings (loss) per common share-basic and
diluted.
Loss Attributable to Common Shareholders and Loss Per Common Share:
Net Loss has been adjusted for items related to the preferred
shares issued in the second quarter of fiscal 2000 to derive the
"Loss Attributable to Common Shareholders." This amount has been
utilized in the calculation of net loss per common share.
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,
the issuance of preferred shares and subordinated debt, 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.
Under Nasdaq National Market regulations, the Company is required
to maintain a minimum public float of $5,000,000. During portions
of July and August of 1999, the Company's public float was under
this required minimum which was the result of the Company's stock
trading at depressed values over the past few months. Meeting the
public float requirement is essential for the Company to continue
to be listed on the Nasdaq National Market and is contingent upon a
sufficient increase in the Company's stock price in the near term.
As a result, unless the Company's public float meets acceptable
levels in the near term, it is possible a formal letter of
deficiency may be issued by the Nasdaq National Market indicating a
potential delisting of the Company's stock on this market. If this
occurs, the Company will pursue listing its stock on alternative
markets, including but not limited to the Nasdaq SmallCap Market.
(The Company notes for clarification purposes that 392,950 of the
shares of the Company's common stock as to which its president,
Richard Mahoney, had sole voting power as proxy as indicated in
the Company's Proxy Statement dated May 15, 1999 are no longer
subject to Mr. Mahoney's proxy.)
Financing
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. Amounts in excess of the
$2,250,000 due in February 2000 become payable to the bank at
specified dates throughout fiscal 2000. The maximum amount
available as of July 31, 1999 was $2,750,000 and $2,508,036 was
outstanding and classified as current in the Consolidated Balance
Sheet. As the revolving line of credit expires in February 2000,
the Company is currently negotiating with various groups in order
to extend or replace this debt with a longer-term facility. The
ability of the Company to refinance this debt is critical to the
ongoing operations 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.
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 holders of the Notes also received warrants to purchase 281,137
Preferred Shares at an exercise price of $1.66. 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 also
elect a non-cash conversion of the warrants to Preferred Shares,
but would receive a reduced number of Preferred Shares.
On June 25, 1999, the Company issued to the investors 2,371,815
Preferred Shares, with a $ .01 stated par value, at a purchase
price of $1.729 per share for gross proceeds of $4,100,000 (net
proceeds of $3,740,242). 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 three years, increasing to 10% thereafter. The
market rate related to the dividends is estimated at an annual rate
of 8%. 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, ten-year warrants for the
purchase of 721,702 Preferred Shares were issued to the Investors
at a purchase price of $1.66. 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 six months ended July 31, 1999
and 1998, respectively. On a cumulative basis, the Company has
repurchased 200,000 shares.
Cash Flows from Operations and Liquidity
Cash flows used by operating activities was $1,133,556 and
$6,206,173 for the six months ended July 31, 1999 and 1998,
respectively. The reduction in cash used in operations for the
first six months 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 had income expense of
$1,946,869 in the first half of fiscal 1999, compared to the
receipt of a $525,000 tax refund in the first half of fiscal 2000.
Management has continued to incur operating losses from continuing
operations and has been reviewing 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. Over the past two years, the Company
has made significant strides in curtailing expenses, primarily in
the area of sales of marketing, and continues to review its current
structure to properly manage expenses. In addition to expense
reductions, increased revenues will also be needed to improve
operating cash flow. 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 anticipates sales of ChartMaxx and OptiMaxx will increase,
although there is no assurance that this trend will occur in the
near term. 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
its solution to other reference laboratories and other hospitals
are key opportunities to increase cash flows from operations over
the next twelve to eighteen months.
The Company anticipates that improvements in operating cash flow
from the expense reductions and increased revenues noted above
combined with its cash and cash equivalents and near-term
refinancing of its senior debt structure will be sufficient to
finance its expected growth and cash requirements in the near term.
If warranted, the Company would also pursue other financing
strategies or the raising of additional capital or selling of
assets in order to achieve its longer-term goals. The Company's
ability to maintain its current operational status is dependent
upon its ability to generate revenue, the proper management of the
Company's expenses and the completion of senior debt refinancing
referred to above. There can be no assurance as to the extent or
timing of the Company's success in achieving these goals.
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 critical internal software systems have been tested
and are currently year 2000 compliant.
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.
Management believes that the Company's current pipeline for its
ChartMaxx product, the ability to expand its existing imaging and
workflow contract with Quest Diagnostics Incorporated and its
current backlog and opportunities for other OptiMaxx, UDMS, and
DiaLogos sales will result in significant opportunities to increase
revenues over the next twelve to eighteen months. However, 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 its
ability to obtain senior debt refinancing (iii) cash received from
the debt and equity financing which occurred during fiscal 2000 and
(iv) other potential financing sources such as equity/debt
financing and sales of assets will be sufficient to finance
expected growth and cash requirements is also uncertain.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: N/A
Item 2. Changes in Securities:
(b) Changes in Securities. On June 18, 1999, the shareholders
of the Company approved and the Ohio Secretary of State certified
an amendment to the Company's Articles of Incorporation which
created a new class of Series A Convertible Preferred Stock
("Preferred Stock"). The designation, rights, preferences and other
terms and conditions relating to the Preferred Stock are described
below, however they are set forth in greater detail in (i) Exhibit
A to the Company's Definitive Proxy Statement filed with the
Securities and Exchange Commission ("SEC") on July 30, 1999 and
(ii) the Securities Purchase Agreement filed with the SEC as an
exhibit to the Company's Annual Report on Form 10-KSB relating to
fiscal 1999. The following description is merely a brief summary
of the terms and conditions of the Preferred Stock which may
materially limit or qualify the rights of the holders of common
stock of the Company, including but not limited to the effects of
dilution, and is qualified in its entirety by reference to the SEC
filings described above.
(i) Conversion Features. Subject to certain terms and condi-
tions, the holder of any shares of Preferred Stock shall have the
right, at its option at any time, to convert any such shares into
the number of fully paid and nonassessable shares of Common Stock
that is obtained by (i) multiplying the number of Shares of
Preferred Stock to be converted by the original purchase price for
such shares and (ii) dividing the result by the original purchase
price per share for such shares or, in case an adjustment of such
price has taken place, then by the conversion price as last
adjusted and in effect at the date the shares of Preferred Stock
are surrendered for conversion.
(ii) Mandatory Conversion. If at any time the Company conducts
a firm commitment underwritten public offering of shares of Common
Stock in which (i) the aggregate price paid for such shares by the
public is at least $25,000,000 and (ii) the price paid by the
public for such shares is at least $5.00 per share (as adjusted),
then effective upon the closing of such public offering, all
outstanding shares of Preferred Stock will automatically convert to
shares of Common Stock. In addition, if at any time after the
third anniversary of the date on which the shares of Preferred
Stock are initially issued to the Investors the Fair Market Value
of one share of Common Stock exceeds 200% of the original purchase
price of the shares of Preferred Stock, (as adjusted), then all
outstanding shares of Preferred Stock will automatically convert to
shares of Common Stock.
(iii) Dividends. The holders of shares of Preferred Stock shall
be entitled to receive quarterly cash dividends at the rate per
annum equal to 4% of the original purchase price per share until
the third anniversary of the date on which such shares were
initially issued to the Investors, and thereafter at the rate equal
to 10% of the original purchase price per share. Such dividends
will be cumulative and will be declared by the Board of Directors
and paid by the Company quarterly on January 31, April 30, July 31
and October 31 of each year. At the sole option of the holder of
shares of Preferred Stock, such dividends may be paid in the form
of additional shares of Common Stock.
(iv) Voting Rights. Except as otherwise provided in the terms
of the Preferred Stock or by law, the Preferred Stock will vote
together with all other classes and series of stock of the Company
as a single class on all actions to be taken by the shareholders of
the Company, including, but not limited to actions amending the
Company's Articles of Incorporation to increase the number of
authorized shares of Common Stock. Each share of Preferred Stock
will entitle its holder to the number of votes per share on each
action equal to the number of shares of Common Stock into which
each share of Preferred Stock is then convertible; provided,
however, that if the number of such number of votes is greater than
such number of shares of Preferred Stock and is consequently a
violation of the rules of the Nasdaq Stock Market applicable to the
Company, then the number of votes shall equal the number of shares
of Preferred Stock.
<TABLE><CAPTION>
(b) Recent Sales of Unregistered Securities. On June 25, 1999, the Company issued to the investors listed
below (the "Investors") 2,371,815 shares of Preferred Stock, with a $ .01 stated par value, at a purchase
price of $1.729 per share for gross proceeds of $4,100,000, and net proceeds of $3,740,242
Name and Address of Purchaser Number of Shares Purchased Purchase Price for Shares
<S> <C> <C>
Cahill Warnock Strategic Partners Fund, L.P. 2,192,494 $3,790,019.63
c/o Cahill, Warnock & Company, LLC
One South Street, Suite 2150
Baltimore, MD 21202
Attn: Edward L. Cahill
Strategic Associates, L.P. 121,484 $ 210,001.37
c/o Cahill, Warnock & Company, LLC
One South Street, Suite 2150
Baltimore, MD 21202
Attn: Edward L. Cahill
Double Black Diamond II, LLC 57,837 $ 99,979.00
50 California Street, Suite 3200
San Francisco, CA 94111
Attn: Thomas G. McKinley
The securities were offered privately to the investors and were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933. The shares of Preferred Stock are convertible into equity securities
pursuant to the conversion terms described in Item 2(b) above.
</TABLE>
Item 3. Defaults Upon Senior Securities: N/A
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company held a special meeting in lieu of its annual
meeting of shareholders on June 18, 1999.
b. The following matters were voted upon at the annual
shareholders' meeting:
(i) The following six individuals were each reelected as members
of the board of directors:
The nominees, Richard A. Mahoney, Robert E. Kenny III, Paul J.
Stein, Jay Hilnbrand, Philip S. Present II and Martin A. Neads are
currently serving as members of the Board of Directors. While
management has no reason to believe that any of the nominees will,
prior to the date of the meeting, refuse or be unable to accept the
nominations, should any nominee so refuse or become unable to
accept, the proxies will be voted for the election of such
substitute nominee, if any, as may be recommended by the Board of
Directors. Nominees receiving the six highest totals of votes cast
in the election will be elected as directors. Proxies in the form
solicited hereby that are returned to the Company will be voted in
favor of the six nominees specified above unless otherwise
instructed by the shareholders. Abstentions and shares not voted
by brokers and other entities holding shares on behalf of
beneficial owners will not be counted and will have no effect on
the outcome of the election.
<TABLE><CAPTION>
Nominee Votes For Votes Against Abstentions
<S> <C> <C> <C>
Richard A. Mahoney 5,493,886 0 11,953
Robert E. Kenny III 5,494,366 0 11,473
Paul J. Stein 5,494,366 0 11,473
Jay Hilnbrand 5,494,366 0 11,473
Philip S. Present II 5,392,766 0 113,073
Martin A. Neads 5,494,366 0 11,473
</TABLE>
<TABLE><CAPTION>
The following matters were also voted upon at the special in lieu of annual meeting:
Matter Votes For Votes Against Abstentions
<S> <C> <C> <C>
Approval of an amendment to the
Company's Articles of Incorporation
creating a class of 5,000,000 shares of
Series A Convertible Preferred Stock
("Preferred Stock"). 3,413,938 36,480 11,753
Approval of the issuance of 2,371,815
shares of Preferred Stock, warrants to
purchase up to an additional 1,040,699
shares of Preferred Stock and the
potential issuance of an indeterminate
number of shares of the Company's
Common Stock issuable upon the
conversion of shares of Preferred Stock
for purposes of complying with the
shareholder approval requirements
of The Nasdaq Stock Market. 3,396,538 47,130 12,853
Approval of the issuance of 2,371,815
shares of Preferred Stock, warrants to
purchase up to an additional 1,040,699
shares of Preferred Stock and the
potential issuance of an indeterminate
number of shares of the Company's
Common Stock issuable upon the
conversion of shares of Preferred Stock
for purposes of complying with the
shareholder approval requirements of
the Ohio Control Share Acquisition Act. 3,396,638 47,130 12,753
</TABLE>
Item 5. Other Information: N/A
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are hereby filed as part of this Form
10-QSB:
Exhibit Number Description of Exhibit
27.1 Financial Data Schedule for six months
ended July 31, 1999
(b) The following Reports were filed on Form 8-K for the three month
period ended July 31, 1999
(1) A current report on Form 8-K, Item 5, dated June 9, 1999 was
filed regarding the Company's debt and equity financing entered
into on April 30 1999 and amended on June 8, 1999.
(2) A current report on Form 8-K, Item 5, dated July 9, 1999 was
filed which included Pro Forma Consolidated Financial Statements
reflecting on a pro forma basis, the debt and equity financing
referred to in (1).
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: September 14, 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 JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JUL-31-1999
<CASH> 4,516,791
<SECURITIES> 0
<RECEIVABLES> 3,896,302
<ALLOWANCES> 195,000
<INVENTORY> 407,666
<CURRENT-ASSETS> 9,593,140
<PP&E> 2,974,849
<DEPRECIATION> 1,516,813
<TOTAL-ASSETS> 14,697,972
<CURRENT-LIABILITIES> 6,468,587
<BONDS> 0
0
23,718
<COMMON> 0
<OTHER-SE> 6,235,750
<TOTAL-LIABILITY-AND-EQUITY> 14,697,972
<SALES> 3,681,114
<TOTAL-REVENUES> 6,444,899
<CGS> 2,063,037
<TOTAL-COSTS> 4,313,215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,139,241)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,139,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,139,241)
<EPS-BASIC> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
