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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 July 31, 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 Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of Registrant's Common Stock ($.01 par value per
share) issued and outstanding, as of July 31, 2003: 9,009,567.
1
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.............................................................. 3
Condensed Consolidated Balance Sheets at July 31, 2003 and January 31, 2003.............................. 3
Condensed Consolidated Statements of Operations for the three and six months ended July 31,
2003 and 2002............................................................................................ 5
Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 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.................... 12
Item 4. Controls and Procedures.................................................................................. 21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................ 21
Item 3. Defaults on Senior Securities............................................................................ 22
Item 6. Exhibits and Reports on Form 8-K......................................................................... 22
Signatures............................................................................................... 23
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
July 31, January 31,
2003 2003
------------ ------------
Assets
Current assets:
Cash and cash equivalents (restricted by long-term debt agreement) $ 5,734,314 $ 7,242,230
Accounts receivable, net of allowance for doubtful
accounts of $400,000, respectively 1,806,102 1,499,767
Contract receivables 2,875,807 3,074,596
Prepaid expenses related to unrecognized revenue 22,005 79,214
Other 374,528 246,966
------------ ------------
Total current assets 10,812,756 12,142,773
Property and equipment:
Computer equipment 2,418,051 2,351,203
Computer software 787,593 743,204
Office furniture, fixtures and equipment 1,161,551 1,153,934
Leasehold improvements 157,492 153,549
------------ ------------
4,524,687 4,401,890
Accumulated depreciation and amortization (3,426,660) (3,137,943)
------------ ------------
1,098,027 1,263,947
Capitalized software development costs, net of accumulated
amortization of $2,350,228 and $2,100,228, respectively 1,539,701 1,389,701
Installment receivables 433,339 433,339
Other 46,691 107,316
------------ ------------
$ 13,930,514 $ 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)
July 31, January 31,
2003 2003
------------ -------------
Current liabilities:
Accounts payable $ 560,709 $ 721,402
Accrued compensation 210,355 308,658
Accrued other expenses 1,136,134 1,392,157
Deferred revenues 2,137,460 2,220,383
Current portion of capitalized leases 213,004 206,051
Current portion of long-term debt 2,000,000 2,000,000
Accrued interest on long-term debt 3,824,020 -
------------- -------------
Total current liabilities 10,081,682 6,848,651
Capitalized leases 280,050 388,320
Long-term debt - 1,000,000
Long-term accrued interest on long-term debt - 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, 9,009,567 and 8,959,004 shares issued, respectively 90,096 89,590
Capital in excess of par value 34,899,375 34,835,639
Accumulated (deficit) (31,420,689) (30,958,493)
------------- -------------
Total stockholders' equity 3,568,782 3,966,736
------------- -------------
$ 13,930,514 $ 15,337,076
============= =============
See Notes to Condensed Consolidated Financial Statements.
4
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended July 31,
(Unaudited)
Three Months Six Months
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Systems sales $ 889,963 $ 1,235,151 $ 1,512,459 $ 2,672,505
Services, maintenance and support 1,630,309 1,844,903 3,199,553 3,245,772
Application-hosting services 446,318 192,134 874,560 387,130
----------- --------- ----------- -----------
Total revenues 2,966,590 3,272,188 5,586,572 6,305,407
Operating expenses:
Cost of systems sales 443,307 277,703 905,770 643,904
Cost of services, maintenance and support 667,540 819,511 1,330,417 1,537,921
Cost of application-hosting services 214,128 75,680 429,496 142,329
Selling, general and administrative 534,043 906,547 1,478,241 1,750,074
Product research and development 461,013 542,753 1,044,106 1,049,833
----------- ----------- ----------- -----------
Total operating expenses 2,320,031 2,622,194 5,188,030 5,124,061
----------- ----------- ----------- -----------
Operating income 646,559 649,994 398,542 1,181,346
Other income (expense):
Interest income 17,316 27,829 36,350 57,752
Interest expense (450,279) (476,191) (897,088) (952,197)
----------- ----------- ----------- -----------
Earnings ( loss ) before income taxes 213,596 201,632 (462,196) 286,901
Income tax benefit - - - 13,000
----------- ----------- ----------- -----------
Net earnings ( loss ) $ 213,596 $ 201,632 $ (462,196) $ 299,901
=========== =========== =========== ===========
Basic net earnings ( loss ) per common share $ .02 $ .02 $ (.05) $ .03
=========== =========== =========== ===========
Diluted net earnings ( loss ) per common share $ .02 $ .02 $ (.05) $ .03
=========== =========== =========== ===========
Number of shares used in per common share computations:
Basic 8,991,517 8,927,966 8,978,207 8,921,073
=========== =========== =========== ===========
Diluted 9,179,751 9,184,346 8,978,207 9,208,693
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended July,
(Unaudited)
2003 2002
------------ ------------
Operating activities:
Net (loss) earnings $ (462,196) $ 299,901
Adjustments to reconcile net (loss) earnings to net cash
(used for) provided by operating activities:
Depreciation and amortization 538,717 344,737
Increase in long-term accrued interest 690,651 143,723
Cash (used for) provided by assets and liabilities:
Accounts and contract receivables (107,546) (1,072,222)
Other current assets (70,353) (28,792)
Accounts payable and accrued expenses (515,019) 247,779
Deferred revenues (82,923) 165,295
------------ ------------
Net cash (used for) provided by operating activities (8,669) 100,421
------------ ------------
Investing activities:
Purchases of property and equipment (122,797) (322,001)
Capitalization of software development costs (400,000) (300,000)
Other 60,625 37,931
------------ ------------
Net cash (used for) investing activities (462,172) (584,070)
------------ ------------
Financing activities:
Repayment of long-term debt (1,000,000) (1,000,000)
Payment of capitalized leases (101,317) -
Exercise of stock options and employees stock purchase plan 64,242 38,412
------------ ------------
Net cash (used for) financing activities (1,037,075) (961,588)
============ ============
(Decrease) in cash and cash equivalents (1,507,916) (1,445,237)
Cash and cash equivalents at beginning of period 7,242,230 7,865,053
------------ ------------
Cash and cash equivalents at end of period $ 5,734,314 $ 6,419,816
============ ============
Supplemental cash flow disclosures:
Interest paid $ 184,631 $ 786,667
============ ============
Capital lease obligations incurred $ - $ 654,130
============ ============
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 or six months
ended July 31, 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 on 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 $1,507,916 decrease in cash and cash equivalents results primarily from the
operating activities and the payment of $1,101,317 in long-term debt and
capitalized leases during the first six months of the fiscal year.
The increase in accounts receivable is due to invoicing of contracts with
deferred payment provisions.
The decrease in contract receivables is due to invoicing of contracts with
deferred payment provisions.
Other current assets consist of software and hardware awaiting installation
(related to unrecognized revenue) and prepaid expenses, including commissions.
7
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.
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 quarterly bonuses payable under the employee bonus plans.
The decrease in accrued other expenses relates to the settlement of certain
accrued obligations during the period.
The decrease in deferred revenues results from the recognition of revenue
related to billings to customers recorded prior to revenue recognition.
The increase in accrued interest on long-term debt results from the normal
increase in the deferred interest payable under the loan. The long-term accrued
interest has been classified as a current liability during the current quarter
as the amount is due and payable in July 2004. See also long-term debt Note 6.
Note 4 - STOCK OPTIONS
During the first six months of the current fiscal year, the Company granted
47,500 options under all Stock Option Plans. During the same period, 3,834
options were forfeited under all plans and 32,502 options were exercised under
all plans during the first six months.
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 July 31, 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 earnings, 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 Six Months
----------------------- -----------------------
2003 2002 2003 2002
--------- ----------- ---------- ----------
Net earnings (loss), as reported $ 213,596 $ 201,632 $ (462,196) $ 299,901
Deduct: Total stock based compensation expense
determined under the fair value based methods for
all awards, net of tax related effects (1,004) (10,527) (1,004) (24,273)
--------- ----------- ---------- ----------
Pro forma net earnings( loss) $ 212,592 $ 191,105 $ (463,200) $ 275,628
========= =========== ========== ==========
Earnings per share
Basic - as reported $ 0.02 $ 0.02 $ (0.05) $ 0.03
========= =========== ========== ==========
Basic - pro forma $ 0.02 $ 0.02 $ (0.05) $ 0.03
========= =========== ========== ==========
Earnings per share
Diluted - as reported $ 0.02 $ 0.02 $ (0.05) $ 0.03
========= =========== ========== ==========
Diluted - pro forma $ 0.02 $ 0.02 $ (0.05) $ 0.03
========= =========== ========== ==========
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 earnings (loss) per common share is calculated using the weighted
average number of common shares outstanding during the period.
The 2003 diluted net earnings per common share calculation, for the second
quarter, is based on the weighted average number of common shares outstanding
adjusted for the dilutive effect of the common stock equivalents (stock options
and the employee stock purchase plan) of 390,673 shares. The 2003 diluted net
(loss) per common share calculation, for the six months, excludes the effect of
the common stock equivalents, as the inclusion thereof would be antidilutive.
The Company had approximately 177,775 option shares outstanding at July 31, 2003
that were not included in the second quarter diluted net earnings per share
calculation as the inclusion thereof would be antidilutive.
The 2002 diluted net earnings per common share calculation is based on the
weighted average number of common shares outstanding adjusted for the dilutive
effect of the common stock equivalents (stock options and the employee stock
purchase plan) of 256,380 shares in the second quarter and 287,620 shares in the
first six months of 2002. The Company had approximately 100,775 option shares
outstanding at July 31, 2002 that were not included in the diluted net earnings
per share calculations as the inclusion thereof would be antidilutive.
Note 6 - CONTRACTUAL OBLIGATIONS
9
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.
2003 2004 2005 2006 2007
----------- ----------- --------- ------- -------
Capitalized leases $ 119,948 $ 239,895 $ 173,234 $ - $ -
Long-term debt 1,000,000 1,000,000 - - -
Accrued interest, assuming no Warrant
value (see below) - 5,238,618 - - -
Operating leases 276,589 89,102 9,007 5,690 -
----------- ----------- --------- ------- ------
Total $ 1,395,537 $ 6,567,615 $ 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 $2,000,000 and the accrued interest on the long-term debt
of $3,824,020, 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 $3,800,000, through the maturity of the loan in July
2004. LanVision complied with all of the provisions of the loan agreement during
the quarter. LanVision believes that it will be able to comply with all of its
covenants for the remainder of fiscal year 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 the 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.
10
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.
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.
In accordance with U. S. Generally Accepted Accounting Principles (GAAP), the
accrued and unpaid interest payable on the debt, which is due and payable in
July 2004, is classified as a current liability notwithstanding the fact that
LanVision intends to refinance some or all of this liability with a new loan.
However, because LanVision has not negotiated such refinancing and not entered
into a refinancing agreement as of the balance sheet date, the liability for the
accrued interest on the long-term debt, as required by GAAP, is classified as a
current liability.
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(SM) 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 July 31, 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.
11
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 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.
Current Regulatory Matters
The U. S. Department of Health and Human Services (HSS) has asked the Institute
of Medicine to design a standardized model of an electronic health record, in a
move that may help spur nationwide acceptance of Electronic Medical Records. The
tentative date for the completed design is 2004. The impact of such change, if
implemented by HSS, on current LanVision products and services is unknown at
this time. However, LanVision believes that its software and systems are
sufficiently flexible to accommodate changing regulatory requirements.
RESULTS OF OPERATIONS
12
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) a
technologically advanced medical record workflow solution and health information
repository 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 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, and Cerner Corporation and IDX Information Systems
Corporation 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-
13
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 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
14
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 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.
15
REVENUES
Revenues for the second fiscal quarter ended July 31, 2003, were $2,966,590,
compared with $3,272,188 reported in the comparable quarter of 2002. The
decrease was primarily a result of a decline in system sales "software licensing
revenues" when compared to the comparable prior quarter, which had an
uncharacteristically high volume of software revenues.
Revenues for the first six months ended July 31, 2003, were $5,586,572, compared
with $6,305,407 reported in the comparable period of 2002. The decrease was
primarily a result of a decline in system sales "software licensing 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 the later
two quarters. The decrease in software licensing revenues in the second quarter
and first six months were partially offset by increases in application-hosting
services revenues. The increase in the ASPeN application-hosting revenues during
the first and second quarters resulted from adding two new clients in the third
quarter of fiscal year 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 second quarter of fiscal years 2003 and
2002 were 50% and 22%, respectively and for the first six months of fiscal years
2003 and 2002 were 60% and 24%, respectively. The higher percentage of cost of
sales reflects a greater volume of hardware sold during the current periods
compared to the comparable prior periods, which had lower hardware and
significantly higher software licensing revenues.
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 41% and 44% for
the second quarter and 41% and 47% for the first six months, respectively, of
fiscal year 2003 and 2002. The Company's support margins are highest on
LanVision's proprietary software. Accordingly, margins improve as more customers
are added.
16
Cost of Application-hosting services
The cost of application-hosting services operations increased during both the
second quarter and the first six months 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 used an outsourced data center and
incurred expenses only for the outsourcing data center resources 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
second quarter of fiscal year 2003, Selling, General and Administrative expenses
decreased when compared with the comparable prior quarter primarily because of a
reduction in legal expenses and the reimbursement of prior legal expenses in
conjunction with the settlement of certain litigation initiated by LanVision to
defend its intellectual property. 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, the
Company has increased its direct sales force to take advantage of current market
opportunities. During the first six months of fiscal year 2003, Selling, General
and Administrative expenses were $1,478,421 compared with $1,750,074 in the
comparable prior period. The net decrease is the result of the litigation
expense reduction and settlement, discussed above, in the second quarter.
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 second quarter, research and development expenses were
$461,013 compared with $542,753 in the comparable prior quarter. During the six
months, research and development expenses were $ 1,044,106 compared with
1,049,833 in the comparable prior period. The decrease during the quarter is due
to increased capitalized software and use of fewer outside contractors when
compared to the prior comparable quarter. 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, $400,000 and $300,000 of product research and development
costs in the first six months of fiscal years 2003 and 2002, respectively.
Operating income
17
The operating income for the second quarter of fiscal year 2003 was $646,559
compared with operating income of $649,994 in the second quarter of fiscal year
2002. The net decrease is the result of a decline in revenues, offset by
decreases in expenses as noted above.
The operating income for the first six months of fiscal year 2003 was $398,542
compared with operating income of $ 1,181,346 in the first six months of 2002.
The decrease results primarily from a decrease in system sales software
licensing revenues as discussed above.
Interest income consists primarily of interest on invested cash. The decreases
in interest income results from lower cash balances and lower rates.
Interest expense relates primarily to the long-term debt and includes the
interest expense on the capitalized leases in 2003.
Net earnings (loss)
The net earnings for the second quarter of fiscal year 2003 was $213,596 or $.02
per share compared with net earnings of $201,632 or $.02 per share in the second
quarter of fiscal year 2002.
The net (loss) for the first six months of fiscal year 2003 was ($462,196) or
($.05) per share compared with net earnings of $299,901 or $.03 per share in the
first six months of fiscal year 2002. This decrease is the result of primarily
lower revenues as noted above.
Notwithstanding the less than anticipated number of new customer agreements
signed by the Company and its resellers in the first and second quarters,
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
18
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 including 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 periods for the industry. However, some healthcare organizations
have experienced significant operating losses because 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 and second quarters of
the current fiscal year. However, over the last three fiscal 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 fiscal 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 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 July 31, 2003, LanVision had cash and cash equivalents of $5,734,314. Cash
equivalents consist primarily of short-term commercial. Under the terms of its
loan agreement, as amended, LanVision has agreed to maintain a minimum cash and
cash equivalent balance of $3,800,000, which will be maintained through the
maturity of the loan in July 2004. During the remainder of fiscal year 2003,
$1,000,000 of long-term debt is required to be repaid to the lender. See also
Note 6 to the financial statements regarding the accrued and unpaid interest,
which will approximate $5,200,000 and is required to be paid to the lender in
July 2004. LanVision intends to refinance all, or a portion, of the unpaid
interest payable in July 2004.
LanVision has carefully monitored operating expenses during the last four fiscal
years, and believes it will continue to improve operating results in fiscal year
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
19
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 July 31, 2003.
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 July 31, 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 $3,100,000. 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 $3,713,000 over the remaining terms 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 July 31, 2003, LanVision had Maintenance
20
Agreements, purchase orders or royalty reports from customers or remarketing
partners for maintenance, which if fully performed, will generate future
revenues of approximately $1,781,000, through their respective renewal dates in
fiscal year 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.
Item 4. Controls and Procedures
LanVision maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in LanVision's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to LanVision's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-15(e). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of LanVision's senior
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of LanVision's disclosure
controls and procedures. Based on that evaluation, LanVision's management,
including the Chief Executive and Chief Financial Officer, concluded that
LanVision's disclosure controls and procedures were effective as of the end of
the period covered by this report. There have been no significant changes in
LanVision's internal control or in the other controls that could significantly
affect internal controls subsequent to the date LanVision completed its
evaluation. Therefore, no corrective actions were taken.
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. LanVision is not aware of any
legal matters that will have a material
21
adverse effect on LanVision's consolidated results of operations or consolidated
financial position.
As disclosed in the Form 10-Q for the period ending April 30, 2003, LanVision
was 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. LanVision has settled all of these claims on terms acceptable to
LanVision.
Item 3. DEFAULTS ON SENIOR SECURITIES
The Company is not in default under its existing Loan Agreement.
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
31.1 Certification Chief Executive Officer Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
31.2 Certification Chief Financial Officer Pursuant to Section 302 of the
Sarbanes - Oxley Act of 2002
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(*) Incorporated by reference.
(b) Reports on Form 8-K
On May 27, 2003, the Company furnished a Form 8-K, reporting pursuant to Item
12, the first fiscal quarter end April 30, 2003 Results of Operations.
22
On September 8, 2003, the Company furnished a Form 8-K, reporting pursuant to
Item 12, the second fiscal quarter end July 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: September 10, 2003 By: /s/ J. BRIAN PATSY
---------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: September 10, 2003 By: /s/ PAUL W. BRIDGE, JR.
---------------------------
Paul W. Bridge, Jr.
Chief Executive Officer and
Treasurer
23
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 ***
31.1 Certification Chief Executive Officer Pursuant to Section 302 ***
of the Sarbanes - Oxley Act of 2002
31.2 Certification Chief Financial Officer Pursuant to Section 302 ***
of the Sarbanes - Oxley Act of 2002
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. ***
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. ***
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
*** Included herein
24