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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2003
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: 0-28132
LANVISION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1455414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5481 Creek Road
Cincinnati, Ohio 45242-4001
(Address of principal executive offices) (Zip Code)
(513) 794-7100
(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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
Number of shares of Registrant's Common Stock ($.01 par value per
share) issued and outstanding, as of April 30, 2003: 8,977,670.
1
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements....................................................... 3
Condensed Consolidated Balance Sheets at April 30, 2003 and January 31, 2003...................... 3
Condensed Consolidated Statements of Operations for the three months ended
April 30, 2003 and 2002 .......................................................................... 5
Condensed Consolidated Statements of Cash Flows for the three months ended
April 30, 2003 and 2002 .......................................................................... 6
Notes to Condensed Consolidated Financial Statements.............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 20
Item 3. Defaults on Senior Securities..................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............................................... 20
Item 6. Exhibits and Reports on Form 8-K.................................................................. 20
Signatures........................................................................................ 21
Certifications.................................................................................... 21
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited) (Audited)
April 30, January 31,
2003 2003
------------- -------------
Current assets:
Cash and cash equivalents (restricted by long-term debt agreement) $ 5,121,274 $ 7,242,230
Accounts receivable, net of allowance for doubtful
accounts of $400,000, respectively 1,562,504 1,499,767
Contract receivables 3,408,451 3,074,596
Prepaid expenses related to unrecognized revenue 25,899 79,214
Other 304,790 246,966
------------ ------------
Total current assets 10,422,918 12,142,773
Property and equipment:
Computer equipment 2,371,688 2,351,203
Computer software 760,827 743,204
Office furniture, fixtures and equipment 1,154,795 1,153,934
Leasehold improvements 157,227 153,549
------------ ------------
4,444,537 4,401,890
Accumulated depreciation and amortization (3,280,316) (3,137,943)
------------ ------------
1,164,221 1,263,947
Capitalized software development costs, net of accumulated
amortization of $2,225,228 and $2,100,228, respectively 1,464,701 1,389,701
Installment receivables 433,339 433,339
Other 48,598 107,316
------------ ------------
$ 13,533,777 $ 15,337,076
============ ============
See Notes to Condensed Consolidated Financial Statements.
3
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Liabilities, Convertible Redeemable Preferred Stock and Stockholders' Equity
(Unaudited) (Audited)
April 30, January 31,
2003 2003
------------- -------------
Current liabilities:
Accounts payable $ 550,475 $ 721,402
Accrued compensation 239,936 308,658
Accrued other expenses 1,274,691 1,392,157
Deferred revenues 1,646,928 2,220,383
Current portion of capitalized leases 209,498 206,051
Current portion of long-term debt 2,000,000 2,000,000
------------ ------------
Total current liabilities 5,921,528 6,848,651
Capitalized leases 334,634 388,320
Long-term debt 500,000 1,000,000
Long-term accrued interest 3,470,290 3,133,369
Convertible redeemable preferred stock, $.01 par value per share
5,000,000 shares authorized - -
Stockholders' equity:
Common stock, $.01 par value per share, 25,000,000 shares
authorized, 8,977,670 and 8,959,004 shares issued, respectively 89,777 89,590
Capital in excess of par value 34,851,833 34,835,639
Accumulated (deficit) (31,634,285) (30,958,493)
------------ ------------
Total stockholders' equity 3,307,325 3,966,736
------------ ------------
$ 13,533,777 $ 15,337,076
============ ============
See Notes to Condensed Consolidated Financial Statements.
4
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended April 30,
(Unaudited)
Three Months Ended
-----------------------------
2003 2002
------------ ------------
Revenues:
Systems sales $ 622,496 $ 1,437,354
Services, maintenance and support 1,569,244 1,400,869
Application-hosting services 428,242 194,996
----------- -----------
Total revenues 2,619,982 3,033,219
Operating expenses:
Cost of systems sales 462,463 366,201
Cost of services, maintenance and support 662,877 718,410
Cost of application-hosting services 215,368 66,649
Selling, general and administrative 944,198 843,527
Product research and development 583,093 507,080
----------- -----------
Total operating expenses 2,867,999 2,501,867
----------- -----------
Operating income (loss) (248,017) 531,352
Other income (expense):
Interest income 19,034 29,923
Interest expense (446,809) (476,006)
----------- -----------
Income (loss) before income taxes (675,792) 85,269
Income tax provision (benefit) - (13,000)
----------- -----------
Net income (loss) $ (675,792) $ 98,269
=========== ===========
Basic net income (loss) per common share $ (.07) $ .01
=========== ===========
Diluted net income (loss) per common share $ (.07) $ .01
=========== ===========
Number of shares used in per common share
computations:
Basic 8,964,449 8,913,947
=========== ===========
Diluted 8,964,449 9,232,807
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 30,
(Unaudited)
2003 2002
----------- -----------
Operating activities:
Net income (loss) $ (675,792) $ 98,269
Adjustments to reconcile net income (loss) to net cash
(used for) operating activities:
Depreciation and amortization 267,373 174,088
Increase (decrease) in long-term accrued interest 336,921 (183,481)
Cash (used for) provided by assets and liabilities:
Accounts and unbilled receivables (396,592) (382,320)
Other current assets (4,509) (41,120)
Accounts payable and accrued expenses (357,115) 150,584
Deferred revenues (573,455) (14,522)
----------- -----------
Net cash (used for) operating activities (1,403,169) (198,502)
----------- -----------
Investing activities:
Purchases of property and equipment (42,647) (130,147)
Capitalization of software development costs (200,000) (150,000)
Other 58,718 13,474
----------- -----------
Net cash (used for) investing activities (183,929) (266,673)
----------- -----------
Financing activities:
Repayment of long-term debt (500,000) (500,000)
Payment of capitalized leases (50,239) -
Exercise of stock options 16,381 -
----------- -----------
Net cash (used for) financing activities (533,858) (500,000)
=========== ===========
(Decrease) in cash and cash equivalents (2,120,956) (965,175)
Cash and cash equivalents at beginning of period 7,242,230 7,865,053
----------- -----------
Cash and cash equivalents at end of period $ 5,121,274 $ 6,899,878
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 11,000 $ -
=========== ===========
Interest paid $ 99,902 $ 650,167
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
6
LANVISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been
prepared by the Company without audit, in accordance with accounting principles
generally accepted in the United States for interim financial information,
pursuant to the rules and regulations applicable to quarterly reports on Form
10-Q of the U. S. Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the Condensed Consolidated Financial
Statements have been included. These Condensed Consolidated Financial Statements
should be read in conjunction with the financial statements and notes thereto
included in the most recent LanVision Systems, Inc. Annual Report on Form 10-K,
Commission File Number 0-28132. Operating results for the three months ended
April 30, 2003, are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 2004.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 34 of its 2002 Annual Report to Stockholders of Form 10-K.
Users of financial information for interim periods are encouraged to refer to
the footnotes contained in the Annual Report to Stockholders when reviewing
interim financial results. There has been no material change in the accounting
policies followed by the Company during fiscal year 2003.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The decrease in cash and cash equivalents results primarily from the operating
activities during the quarter and the payment of $550,239 in long-term debt and
capitalized leases during the quarter.
The increase in contract receivables is due to sales in the first quarter with
deferred payment provisions.
Other current assets consist of software and hardware awaiting installation
(related to unrecognized revenue) and prepaid expenses, including commissions.
The decrease in property and equipment, net, is primarily the result of the
acquisition of replacement equipment and software necessary to support current
customers, offset by normal depreciation and amortization.
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Other non-current assets consist primarily of prepaid long-term debt closing
costs, which are amortized to expense over the life of the loan.
The decrease in accounts payable results primarily from the payment of invoices
for hardware sales to new customers in late January.
The decrease in accrued compensation results primarily from the decrease in the
accrual for first quarter bonuses payable under the employee bonus plans.
The decrease in accrued other expenses relates to the settlement of certain
accrued obligations during the quarter.
The decrease in deferred revenues results from the recognition of revenue
related to billings to customers recorded prior to revenue recognition.
The increase in long-term accrued interest results from the normal increase in
the deferred interest payable under the loan.
Note 4 - STOCK OPTIONS
During the first three months of the current fiscal year, the Company granted no
stock options under any Stock Option Plan. During the same period, 3,834 options
were forfeited under all plans and 18,666 options were exercised during the
quarter.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, establishes a fair value method of financial accounting and
reporting for stock-based compensation plans. LanVision elected to continue to
account for stock options under the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and, accordingly, has adopted the disclosure only provisions of
Statement 123. At April 30, 2003, LanVision had three stock-based compensation
plans, which are more fully disclosed in Note 7 of the Notes to Consolidated
Financial Statements in the Form 10-K for the Fiscal year ended January 31,
2003. No stock-based compensation cost is reflected in the net income, as all
options granted under the plans had exercise prices equal to the fair market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net earnings and earnings per share as if LanVision
had applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, to stock-based employee compensation.
8
Three months ended April 30, 2003 2002
--------------- --------------
Net income (loss), as reported $ (675,792) $ 98,269
Deduct: Total stock based compensation
expense determined under the fair value based
method for all awards, net of related tax
effects (13,746) (45,971)
-------------- -------------
Pro forma net income (loss) $ (689,538) $ 52,298
============== =============
Earnings per share:
Basic - as reported $ (0.07) $ 0.01
============== =============
Basic - pro forma $ (0.08) $ 0.01
============== =============
Diluted - as reported $ (0.07) $ 0.01
============== =============
Diluted - pro forma $ (0.08) $ 0.01
============== =============
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect current market conditions and
prior experience.
Note 5 - EARNINGS PER SHARE
The basic net income (loss) per common share is calculated using the weighted
average number of common shares outstanding during the period.
The 2003 diluted net (loss) per common share calculation, excludes the effect of
the common stock equivalents (stock options), as the inclusion thereof would be
antidilutive. The Company had approximately 544,838 option shares outstanding at
April 30, 2003 that were not included in the diluted net income (loss) per share
calculation as the inclusion thereof would be antidilutive.
The 2002 diluted net income per common share calculation, is based on the
weighted average number of common shares outstanding adjusted for the dilutive
effect of stock options (318,860 option shares in 2002). The Company had
approximately 103,775 option shares outstanding at April 30, 2002 that were not
included in the diluted net income per share calculation as the inclusion
thereof would be antidilutive.
Note 6 - CONTRACTUAL OBLIGATIONS
The following table details the remaining obligations, by fiscal year, as of the
end of the quarter for, the capitalized leases, long-term debt, accrued interest
on the long-term debt and the operating leases.
9
2003 2004 2005 2006 2007
---------- ---------- ---------- --------- --------
Capitalized leases $ 179,921 $ 239,895 $ 173,234 $ - $ -
Long-term debt 1,500,000 1,000,000 - - -
Accrued interest, assuming
no Warrant value (see below) - 5,238,618 - - -
Operating leases 369,776 36,421 9,007 5,690 -
---------- ---------- ---------- --------- --------
Total $2,049,697 $6,514,934 $ 182,241 $ 5,690 $ -
========== ========== ========== ========= ========
Capitalized Leases
During fiscal year 2002, LanVision acquired computer equipment and related
software for a new application-hosting services data center, which are accounted
for as capitalized leases. The amount of the leased assets by category is
computer equipment $372,705; computer software $196,799; and prepaid maintenance
and expenses $84,626, for a total of $654,130 in new assets. The leases are
payable monthly in installments of $19,991, through August 2005 and an
additional amount of $8,323, through December 2005. The present value of the
future lease payments upon lease inception was $654,130 using the interest rates
implicit in the lease agreements at the inception of the leases.
Long-term Debt
The long-term debt of $2,500,000 is secured by all of the assets of LanVision
and the loan agreement, as amended, restricts LanVision from incurring
additional indebtedness for borrowed money, including capitalized leases, limits
certain investments, restricts substantial asset sales, capital expenditures,
cash dividends, stock repurchases, and mergers and consolidations with
unaffiliated entities without lender consent. In addition, LanVision is required
to meet certain financial covenants, including minimum levels of revenues,
earnings, and net worth. In addition, the loan agreement requires LanVision to
maintain a minimum cash balance of $4,300,000 through July 29, 2003, at which
time the amount is reduced to $3,800,000, which will be maintained through the
maturity of the loan in July 2004. LanVision complied with all of the provisions
of the loan agreement during the quarter except for the Earnings Before Interest
and Taxes, which the Company fell short of the requirement by $28,983. The
lender has granted the Company a waiver of this provision through July 31, 2003.
LanVision believes that it will be able to comply with all of its covenants for
the remainder of fiscal 2003, and the likelihood of defaulting on the debt
covenants is not likely absent any material adverse events that may affect the
Company, the healthcare industry or our market. In the past, LanVision has
requested, and the lender has granted, waivers of certain debt covenants.
However, our expectations of future operating results and continued compliance
with the debt covenants cannot be assured and the lenders' actions are not
controllable by us. If our projections of future operating results are not
achieved and the debt is placed in default, LanVision would experience a
material adverse impact on the reported financial position and results of
operations.
In connection with the issuance of the long-term debt, LanVision issued Warrants
to purchase 750,000 shares of Common Stock of LanVision at $3.87 per share at
any time through July 16, 2008. The Warrants are subject to customary
antidilution and registration rights provisions.
10
Under the terms of the long-term debt agreement, LanVision has guaranteed the
lender that the increase in the market value of the stock underlying the
Warrants, at the time of loan maturity, over the exercise price plus the 12%
interest paid on the loan will yield the lender a 25% compound annual return. If
the yield from the Warrants plus interest paid does not provide the lender with
the 25% guaranteed compound annual return, LanVision is required to pay the
additional amount in cash at the time of maturity. Accordingly, LanVision is
accruing interest on the loan at a 25% compound interest rate, regardless of the
market value of the stock and the inherent value of the Warrants. Assuming that
the Warrants have no value, the maximum amount of the accrued and unpaid
interest at maturity in July 2004 will be $5,238,618.
Warranties and Indemnities
LanVision provides for the estimated cost of the product warranties at the time
revenue is recognized. Should products fail to meet certain performance
standards for an initial warranty period, LanVision's estimated warranty
liability might need to be increased. LanVision bases its warranty estimates on
the nature of any performance complaint, the effort necessary to resolve the
issue, customer requirements and any potential concessions, which may be
required to be granted to a customer, which result from performance issues.
LanVision's ASPeN application-hosting services guarantees specific "up-time" and
"response time" performance standards, which, if not met may result in reduced
revenues, as a penalty, for the month in which the standards are not met.
LanVision's standard agreements with its customers also usually include
provisions to indemnify them from and against third party claims, liabilities,
damages, and expenses arising out of LanVision's operation of its business or
any negligent act or omission of LanVision. To date, LanVision has always
maintained the ASPeN performance standards and has not been required to make any
material penalty payments to customers or indemnify any customers for any
material third party claims. At April 30, 2003 and January 31, 2003 LanVision
had a warranty reserve in the amount of $250,000. Each contract is reviewed
quarterly with the appropriate LanVision Client Manager to determine the need
for a warranty reserve based upon the most currently available information as to
the status of the contract, the customer comments, if any, and the status of any
open or unresolved issues with the customer.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information contained herein, this Discussion and
Analysis, as well as other Items in this Form 10-Q, contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements, included
herein. These risks and uncertainties include, but are not limited to, the
impact of competitive products and pricing, product demand and market
acceptance, new product development, key strategic alliances with vendors that
resell LanVision products, the ability of the Company to control costs,
availability of products obtained from third party vendors, the healthcare
regulatory environment, healthcare information systems budgets, availability of
healthcare information systems trained personnel for implementation of new
systems, as well as maintenance of legacy systems, fluctuations in operating
results and other risks detailed from time to time in the LanVision Systems,
Inc. filings with the Securities and Exchange Commission. Readers are
11
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly release the results of any revision to these
forward-looking statements, which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
LanVision's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires LanVision
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent
liabilities. On an on-going basis, LanVision evaluates its estimates, including
those related to product revenues, bad debts, capitalized software development
costs, income taxes, warranty obligations, support contracts, contingencies, and
litigation. LanVision bases its estimates on historical experience and on
various other assumptions that LanVision believes are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and revenue recognition. Actual
results may differ from these estimates under different assumptions or
conditions.
RESULTS OF OPERATIONS
GENERAL
LanVision Systems, Inc. (LanVision(TM) or the Company) is a Medical Record
Workflow solution provider and application-hosting services provider. LanVision
is a leading supplier of technologically advanced software and
application-hosting services specializing in Web based applications that
leverage the availability of the Internet and Intranets. LanVision's Medical
Record Workflows allow authenticated users, such as physicians, nurses,
administrative and financial personnel, and payers with access to patient
healthcare information that exists in disparate systems across the continuum of
care. LanVision's software application products and services are complementary
to existing clinical and financial systems, and use document imaging and
advanced workflow tools to ensure users can electronically access both
"structured" and "unstructured" patient data and all the various forms of
clinical and financial healthcare information from a single permanent and secure
repository, including clinician's handwritten notes, lab reports, photographs,
insurance cards, etc. LanVision's workflow solutions offer value to all of the
constituents in the healthcare delivery process by enabling them to
simultaneously access and utilize LanVision's accessANYware(TM) advanced
technological workflow application to process the information, on a real-time
basis, from virtually any location, including the physician's desktop, using
Web-based technology. Web access to the entire medical record repository
improves physician and administrative personnel productivity; allows for
multiple simultaneous access to the records necessary to review and complete,
using completionANYware(TM), the information necessary to process claims for
payment, using codingANYware(TM), and reduces administrative costs such as
filing, storage, retrieval, using accessANYware and releaseANYware(TM) and
reduces the cost of maintaining medical records and reduces clinical costs, such
as redundant diagnostic testing. LanVision's solutions integrate a document
imaging platform, application workflow suites, and image and Web-enabling tools
that
12
allow for the seamless merger of "back office" functionality with existing
Clinical Information Systems at the desktop. LanVision offers a document
imaging/management infrastructure (Foundation Suite) that is built for high
volume transaction processing and is specifically designed for the healthcare
industry. In addition to providing access to information not previously
available at the desktop, LanVision's applications fulfill the administrative
and legal needs of the Medical Records and Patient Financial Services
departments. Furthermore, these systems have been specifically designed to
integrate with any Clinical Information System. For example, LanVision has
integrated its products with selected systems from Siemens Medical Solutions
Health Services Corporation (Siemens), and Cerner Corporation and will soon
integrate its products with IDX Information Systems Corporation (IDX)
applications. By offering electronic access to all the patient information
components of the medical record, this integration completes one of the most
difficult tasks necessary to provide a true Electronic Health Record (EHR).
LanVision's systems deliver on-line enterprisewide access to fully updated
patient information, which historically was maintained on a variety of media,
including paper, magnetic disk, optical disk, and microfilm.
Historically, LanVision has derived most of its revenues from systems sales and
professional services involving the licensing, either directly or through
remarketing partners, of its Medical Record Workflow solutions to Integrated
Healthcare Delivery Networks (IDN). In a typical transaction, LanVision, or its
remarketing partners, enter into a perpetual or term license or fee-for-service
agreement for LanVision's software application suite and may license or sell
other third-party software and hardware components to the IDN. Additionally,
LanVision, or its remarketing partners provide professional services, including
implementation, training, and product support.
With respect to systems sales, LanVision earns its highest margins on
proprietary LanVision software or application-hosting services and the lowest
margins on third-party hardware. Systems sales to customers may include
different configurations of software hardware and professional services,
resulting in varying margins among contracts. The margins on professional
services revenues fluctuate based upon the negotiated terms of the agreement
with each customer and LanVision's ability to fully utilize its professional
services, maintenance, and support services staff.
Beginning in 1998, LanVision began offering customers the ability to obtain its
workflow solutions on an application-hosting basis as an Application Service
Provider (ASP). LanVision established a hosting data center and installed
LanVision's suite of workflow products, called ASPeN(SM) (Application Service
Provider eHealth Network) within the hosting data center. Under this
arrangement, customers electronically capture information and securely transmit
the data to the hosting data center. The ASPeN services store and manage the
data using LanVision's suite of applications, and customers can view, print,
fax, and process the information from anywhere using the LanVision Web-based
applications. LanVision charges and recognizes revenue for these ASPeN services
on a per transaction or subscription basis as information is captured, stored,
retrieved and processed.
In February 2000, LanVision sold its application-hosting data center.
Simultaneously therewith, LanVision entered into an annual service agreement
with the buyer. Under the terms of this service agreement, LanVision continued
to use this data center through January 2003. LanVision
13
has established a new application-hosting data center in order to provide the
capacity for all of its ASPeN services clients and into which it has
consolidated its existing ASPeN application-hosting services. Approximately
$865,000 in new hardware and third-party software was leased or purchased, in
fiscal year 2002, for the new application-hosting data center.
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. Since
inception, LanVision has experienced extended sales cycles, which has adversely
affected revenues. It is not uncommon for sales cycles to take six to eighteen
months from initial contact to the execution of an agreement. As a result, the
sales cycles can cause significant variations in quarter-to-quarter operating
results. These agreements cover the entire implementation and maintenance of the
system and specify the installation schedule, which typically takes place in one
or more phases. The licensing agreements generally provide for the licensing of
LanVision's proprietary software and third-party software with a perpetual or
term license fee that is adjusted depending on the number of concurrent users or
workstations using the software. Third-party hardware is 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 materials basis. Alternatively, with LanVision's
ASPeN services solution, the application-hosting services agreements generally
provide for utilizing LanVision's software and third-party software on a fee per
transaction or subscription basis.
ASPeN services was designed to overcome obstacles in the buying decision such as
large capital commitment, length of implementation, and the scarcity of time for
Healthcare Information Systems personnel to implement new systems. LanVision
believes that Integrated Delivery Networks will begin to look for this type of
ASP application because of the ease of implementation and lower entry-level
costs. LanVision believes its business model is especially well suited for the
ambulatory marketplace and is actively pursuing remarketing agreements, in
addition to those discussed below, with other Healthcare Information Systems
providers to distribute LanVision's workflow solutions.
LanVision's quarterly operating results have varied in the past and may continue
to do so in the future because of various reasons including: demand for
LanVision's products and services, long sales cycles, and extended installation
and implementation cycles based on customer's schedules. Sales are often delayed
because of customers' budgets and competing capital expenditure needs as well as
personnel resource constraints within an integrated delivery network.
Delays in anticipated sales or installations may have a significant impact on
LanVision's quarterly revenues and operating results, because substantial
portions of the operating expenses are relatively fixed.
UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS
The Company's revenues from systems sales have varied, and may continue to vary,
significantly from quarter-to-quarter because of the volume and timing of
systems sales and delivery. Professional services revenues also fluctuate from
quarter to quarter because of the timing of the
14
installation of software and hardware, project management and customized
programming. Revenues from maintenance services do not fluctuate significantly
from quarter to quarter, but have been increasing as the number of customers
increase. Revenues from ASP application-hosting services operations are expected
to increase over time, as more hospitals outsource services to LanVision's ASP
Division, or its remarketing partners begin to utilize the software, and
existing customers increase the volume of documents stored on the systems, and
the number of retrievals increase.
The Company's revenues and operating results may vary significantly from
quarter-to-quarter because of a number of other factors, many of which are
outside the Company's control. These factors include the relatively high
purchase price of a system, unpredictability in the number and timing of systems
sales, length of the sales cycle, delays in the installation process and changes
in the customer's financial condition or budget and the sales activities of the
remarketing partners. As a result, period-to-period comparisons may not be
meaningful with respect to the past operations of the Company nor are they
necessarily indicative of the future operations of the Company.
REVENUES
Revenues for the first fiscal quarter ended April 30, 2003, were $2,619,982,
compared with $3,033,219 reported in the comparable quarter of 2002. The
decrease was primarily a result of a decline in system sales "software revenues"
when compared to the comparable prior quarter, which had an uncharacteristically
high volume of software revenues. Traditionally, the first two quarters are the
most challenging because of the seasonality of software licensing revenues,
which the Company has experienced in the past, with a greater portion of the
annual revenues recorded in later two quarters. The decrease in software
revenues in the first quarter were partially offset by increases in
application-hosting, services, maintenance, and support revenues. The increase
in the ASPeN application-hosting revenues during the first quarter resulted from
adding two new clients in the third quarter of fiscal 2002.
OPERATING EXPENSES
Cost of Systems Sales
The cost of systems sales includes amortization of capitalized software
development costs on a straight-line basis, royalties and the cost of third
party software and hardware. Cost of systems sales as a percentage of systems
sales may vary from period to period depending on the mix of hardware and
software of the systems or add-on sales delivered. The cost of systems sales as
a percentage of systems sales for the first quarter of fiscal 2003 and 2002 were
74% and 25%, respectively. The higher percentage of cost of sales reflects a
greater volume of hardware sold during the current period compared to the
comparable prior period, which had lower hardware and higher software revenues.
15
Cost of Services, Maintenance and Support
The cost of services, maintenance and support includes compensation and benefits
for support and professional services personnel and the cost of third party
maintenance contracts. As a percentage of services, maintenance and support
revenues, the cost of such services, maintenance and support was 42% and 51% for
the first quarter of fiscal 2003 and 2002, respectively. The Company's support
margins are highest on LanVision's proprietary software. Accordingly, margins
improve as more customers are added.
Cost of Application-hosting services
The cost of application-hosting services operations increased because of the
addition of the new data center, which opened in August 2002 in order to provide
the capacity necessary for new clients. Prior thereto, the Company incurred
expenses only for the outsourcing data center it used, which were directly
related to the application-hosting services revenues generated by the ASPeN
Division.
Selling, General and Administrative
Selling, General and Administrative expenses consist primarily of compensation
and related benefits and reimbursable travel and living expenses related to the
Company's sales, marketing and administrative personnel; advertising and
marketing expenses, including trade shows and similar type sales and marketing
expenses; and general corporate expenses, including occupancy costs. During the
first quarter of fiscal 2003, Selling, General and Administrative expenses
increased when compared with the comparable prior quarter primarily because of a
nonrecurring expense for a healthcare market and industry consulting project
commissioned by the Company. Demand for Medical Record Workflow (MRW)
technologies and healthcare information access systems is growing and the
frequency of requests for proposals received is increasing. Accordingly, Company
has increased its direct sales force to take advantage of current market
opportunities.
Product Research and Development
Product research and development expenses consist primarily of compensation and
related benefits; the use of independent contractors for specific development
projects; and an allocated portion of general overhead costs, including
occupancy. During the first quarter, research and development expenses increased
compared with the comparable prior quarter. The increase results from the use of
additional outside contractors, which were used to augment the in-house staff to
complete the development and testing for the Company's newest products. The
Company monitors closely and augments its Research and Development staff, as
necessary, with outside contractors to assist with the development and testing
of new products. The Company capitalized, in accordance with Statement of
Financial Accounting Standards No. 86, $200,000 and $150,000 of product research
and development costs in the first quarter of fiscal 2003 and 2002,
respectively.
Operating profit
16
The operating loss for the first quarter of fiscal 2003 was ($248,017) compared
with an operating profit of $531,352 in the first quarter of fiscal 2002. The
decrease is the result of the decline in revenues and the increases in operating
expenses as noted above.
Interest income consists primarily of interest on invested cash. The decreases
in interest income results from lower cash balances.
Interest expense relates primarily to the long-term debt and includes the
interest expense on the capitalized leases in 2003.
Net income (loss)
The net (loss) for the first quarter of fiscal 2003 was ($675,792) ($.07 per
share) compared with net income of $98,269 ($.01 per share) in the first quarter
of fiscal 2002. This decrease is the result of lower revenues and increased
expenses as noted above.
Notwithstanding the less than anticipated number of new customer agreements
signed by the Company and its resellers in the first quarter, management
continues to believe that the healthcare document imaging and workflow market is
going to be a significant market. Management believes it has made, and continues
to make, the investments in the talent and technology necessary to establish the
Company as a leader in this marketplace, and continues to believe the Company is
well positioned to experience significant revenue growth primarily through third
party distributors and remarketing partners.
Since commencing operations in 1989, the Company has incurred operating losses.
Although the Company achieved profitability in fiscal years 1992, 1993, 2000,
2001, and 2002, the Company incurred a net loss in fiscal years 1994 through
1999. In view of the Company's prior operating history, there can be no
assurance that the Company will be able to achieve consistent profitability on a
quarterly or annual basis or that it will be able to sustain or increase its
revenue growth in future periods. Based upon the expenses associated with
current and planned staffing levels, profitability is dependent upon increasing
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
During the last five fiscal years, LanVision has funded its operations, working
capital needs, and capital expenditures primarily from a combination of cash
generated by operations, and a $6,000,000 loan. LanVision's liquidity is
dependent upon numerous factors to include the timing and amount of revenues and
collection of contractual amounts from customers, amounts invested in research
and development and capital expenditures, and the level of operating expenses.
LanVision's customers typically have been well-established hospitals or medical
facilities or major Healthcare Information Systems companies that resell
LanVision' products, which have good credit histories and payments are received
within normal time frames for the industry. However, some healthcare
organizations have experienced significant operating losses because
17
of limits on third-party reimbursements from insurance companies and
governmental entities. Agreements with customers often involve significant
amounts and contract terms typically require customers to make progress
payments.
LanVision has no significant obligations for capital resources, other than as
noted in note 6 to the financial statements included herein.
Although LanVision achieved its revenue goals in Fiscal Year 2002, LanVision's
revenues were less than its internal plans in the first quarter of the current
fiscal year. However, over the last three years, LanVision has expended
significant amounts for capital expenditures, product research and development,
sales, support and consulting expenses. This resulted in significant net cash
outlays over the last three years. Although LanVision has reduced staffing
levels and related expenses, increased revenues and improved operating
performance, LanVision's expenses will continue to increase. Accordingly, to
continue to achieve increasing profitability, and positive cash flow, it is
necessary for LanVision to increase revenues or continue to reduce expenses.
LanVision believes that the requirement for healthcare organizations to become
HIPAA compliant, and the recent signing of the IDX Information Systems
Corporation Remarketing Agreement and the 3M Marketing and Referral Agreement
should offer significant opportunities to increase revenues. LanVision believes
that market opportunities are such that LanVision should be able to increase its
revenues. However, there can be no assurance LanVision will be able to do so.
At April 30, 2003, LanVision had cash and cash equivalents of $5,121,274. Cash
equivalents consist primarily of short-term commercial paper. Under the terms of
its loan agreement, as amended, LanVision has agreed to maintain a minimum cash
and cash equivalent balance of $4,300,000 through July 29, 2003, at which time
the amount is reduced to $3,800,000, which will be maintained through the
maturity of the loan in July 2004. During fiscal 2003, $2,000,000 of long-term
debt is required to be repaid to the lender.
LanVision has carefully monitored operating expenses during the last three
fiscal years, and believes it will continue to improve operating results in
fiscal 2003. Notwithstanding the increases in fiscal year 2001 and 2002 revenues
and operating profit, for the near future, LanVision will need to assess
continually its revenue prospects compared to its then current expenditure
levels. If it does not appear likely that revenues will increase, it may be
necessary to reduce operating expenses or raise cash through additional
borrowings, the sale of assets, or other equity financing. Certain of these
actions will require lender approval. However, there can be no assurance
LanVision will be successful in any of these efforts. If it is necessary to
reduce significantly operating expenses, this could have an adverse effect on
future operating performance.
LanVision believes that its present cash position, combined with cash generation
anticipated from operations, will be sufficient to meet anticipated cash
requirements during fiscal year 2003.
To date, inflation has not had a material impact on LanVision's revenues or
expenses. In addition, LanVision does not have any significant market risk
exposure at April 30, 2003.
18
SIGNED AGREEMENTS - BACKLOG
LanVision, or its remarketing partners, enter into master agreements with their
customers to specify the scope of the system to be installed and services to be
provided, the agreed upon aggregate price and the timetable for implementation.
The master agreement typically provides that the Company, or its remarketing
partner, will deliver the system in phases pursuant to the customer's purchase
orders, thereby allowing the customer flexibility in the timing of its receipt
of systems and to make adjustments that may arise based upon changes in
technology or changes in customer needs. The master agreement also allows the
customer to request additional components as the installation progresses, which
additions are then separately negotiated as to price and terms. Historically,
customers have ultimately purchased systems and services in addition to those
originally contemplated by the master agreement. Although there can be no
assurance that customers will continue in the future to expand their systems and
purchase additional licenses and services, LanVision believes, based on its past
experience, that its customers will expand their existing systems.
At April 30, 2003, LanVision has master agreements, purchase orders or royalty
reports from remarketing partners for systems and related services (excluding
support and maintenance, and transaction-based revenues for the
application-hosting services) which have not been delivered, installed and
accepted which, if fully performed, will generate future revenues of
approximately $4,100,000. The related products and services are expected to be
delivered over the next two to three years. Furthermore, LanVision has entered
into application-hosting agreements, which are expected to generate revenues in
excess of $4,300,000 over the remaining lives of the agreements.
LanVision's master agreements also generally provide for an initial maintenance
period and give the customer the right to subscribe for maintenance and support
services on a monthly, quarterly, or annual basis. Maintenance and support
revenues for fiscal years 2002, 2001 and 2000 were approximately $4,176,000,
$4,032,000 and $3,678,000, respectively. Maintenance and support revenues are
expected to increase in 2003. At April 30, 2003, LanVision had Maintenance
Agreements, purchase orders or royalty reports from remarketing partners for
maintenance, which if fully performed, will generate future revenues of
approximately $2,046,000, through their respective renewal dates in fiscal 2003.
The commencement of revenue recognition varies depending on the size and
complexity of the system; the implementation schedule requested by the customer
and usage by customers of the application-hosting services. Therefore, LanVision
is unable to predict accurately the revenue it expects to achieve in any
particular period. LanVision's master agreements generally provide that the
customer may terminate its agreement upon a material breach by LanVision, or may
delay certain aspects of the installation. There can be no assurance that a
customer will not cancel all or any portion of master agreement or delay
installations. A termination or installation delay of one or more phases of an
agreement, or the failure of LanVision to procure additional agreements, could
have a material adverse effect on LanVision's business, financial condition, and
results of operations.
19
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
LanVision is a party to various legal proceedings and claims that arise in the
ordinary course of business from time to time. Currently, LanVision is a party
to several pending lawsuits that were initiated by LanVision to protect its
intellectual property rights, to enforce non-competition covenants and/or to
prevent third parties from improperly interfering in LanVision's business. The
defendants in one or more of these actions have asserted, and may assert in the
future, counterclaims against LanVision. The company has negotiated, in
principle, the settlement of all of the outstanding litigation that it has
initiated, and is in the process of executing settlement agreements. LanVision
is not aware of any legal matters that will have a material adverse effect on
LanVision's consolidated results of operations or consolidated financial
position.
Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan Agreement.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held on May 28, 2003, the
following members were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
George E. Castrucci 8,734,900 164,918
Richard C. Levy, M.D. 8,879,393 20,425
Eric S. Lombardo 8,849,668 50,150
J. Brian Patsy 8,849,668 50,150
Z. David Patterson 8,734,900 164,918
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of LanVision Systems, Inc.(*)
3.2 Bylaws of LanVision Systems, Inc.(*)
11 Computation of Earnings (Loss) Per Common Share
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(*) Incorporated by reference.
(b) Reports on Form 8-K
20
On April 1, 2003, the Company filed a Form 8-K, reporting under Item 12, the
Fiscal Year End January 31, 2003 Results of Operations.
SIGNATURES
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.
LANVISION SYSTEMS, INC.
DATE: June 6, 2003 By: /s/ J. BRIAN PATSY
-------------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: June 6, 2003 By: /s/ PAUL W. BRIDGE, JR.
-------------------------------------
Paul W. Bridge, Jr.
Chief Financial Officer and Treasurer
CERTIFICATIONS
I, J. Brian Patsy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LanVision
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is
21
made known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
June 6, 2003 /s/ J. Brian Patsy
------------------
Chief Executive Officer and
President
22
I, Paul W. Bridge, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of LanVision
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
23
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
June 6, 2003 /s/ Paul W. Bridge, Jr.
-----------------------
Chief Financial Officer and
Treasurer
24
INDEX TO EXHIBITS
Exhibit No. Exhibit
3.1 Certificate of Incorporation of LanVision Systems,
Inc.
Previously filed with the Commission and incorporated
herein by reference from, the Registrant's
Registration Statement on Form S-1, File Number
333-01494, as filed with the Commission on April 15,
1996.
3.2 Bylaws of LanVision Systems, Inc.
Previously filed with the Commission and incorporated
herein by reference from, the Registrant's
Registration Statement on Form S-1, File Number
333-01494, as filed with the Commission on April 15,
1996.
11 Computation of Earnings (Loss) Per Common Share
99.1 Certification by Chief Executive Officer pursuant to
U.S.C. Section *** 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer pursuant to
U.S.C. Section *** 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.