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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, 2004
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 June 1, 2004: 9,060,233.
1
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements............................................................ 3
Condensed Consolidated Balance Sheets at April 30, 2004 and January 31, 2004........................... 3
Condensed Consolidated Statements of Operations for the three months ended April 30, 2004 and 2003..... 5
Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2004 and 2003..... 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................................................................................ 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... 22
Item 3. Defaults on Senior Securities.......................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 22
Item 6. Exhibits and Reports on Form 8-K....................................................................... 23
Signatures............................................................................................. 24
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
April 30, January 31,
2004 2004
------------ ------------
Assets
Current assets:
Cash and cash equivalents (restricted by long-term debt agreement) $ 4,511,161 $ 6,227,236
Accounts receivable, net of allowance for doubtful
accounts of $400,000, respectively 1,864,025 2,386,723
Contract receivables 1,821,384 2,972,356
Prepaid expenses related to unrecognized revenue 22,770 32,224
Other 329,143 325,697
------------ ------------
Total current assets 8,548,483 11,944,236
Property and equipment:
Computer equipment 2,623,435 2,588,749
Computer software 866,430 812,591
Office furniture, fixtures and equipment 1,167,497 1,166,377
Leasehold improvements 157,492 157,492
------------ ------------
4,814,854 4,725,209
Accumulated depreciation and amortization (3,803,357) (3,672,442)
------------ ------------
1,011,497 1,052,767
Capitalized software development costs, net of accumulated
amortization of $2,758,478 and $2,600,228, respectively 1,781,451 1,689,701
Other, including deferred taxes 624,300 603,750
------------ ------------
$ 11,965,731 $ 15,290,454
============ ============
See Notes to Condensed Consolidated Financial Statements.
3
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
April 30, January 31,
2004 2004
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 241,522 $ 637,222
Accrued compensation 230,752 265,095
Accrued other expenses 782,404 928,097
Deferred revenues 1,690,746 2,357,531
Current portion of capitalized leases 223,890 220,199
Current portion of long-term debt 500,000 1,000,000
Accrued interest on long-term debt 3,491,176 4,635,169
------------ ------------
Total current liabilities 7,160,490 10,043,313
Capitalized leases 110,745 168,121
Stockholders' equity:
Convertible redeemable preferred stock, $.01 par value per share
5,000,000 shares authorized - -
Common stock, $.01 par value per share, 25,000,000 shares
authorized, 9,060,233 and 9,030,032 shares issued, respectively 90,602 90,300
Capital in excess of par value 34,964,286 34,928,047
Accumulated (deficit) (30,360,392) (29,939,327)
------------ ------------
Total stockholders' equity 4,694,496 5,079,020
------------ ------------
$ 11,965,731 $ 15,290,454
============ ============
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
-------------------------------
2004 2003
----------- -----------
Revenues:
Systems sales $ 286,883 $ 622,496
Services, maintenance and support 1,721,658 1,569,244
Application-hosting services 633,014 428,242
----------- -----------
Total revenues 2,641,555 2,619,982
Operating expenses:
Cost of systems sales 358,912 462,463
Cost of services, maintenance and support 680,245 662,877
Cost of application-hosting services 216,648 215,368
Selling, general and administrative 913,468 944,198
Product research and development 513,999 583,093
----------- -----------
Total operating expenses 2,683,272 2,867,999
----------- -----------
Operating (loss) (41,717) (248,017)
Other income (expense):
Interest income 24,102 19,034
Interest expense (403,449) (446,809)
----------- -----------
(Loss) before income taxes (421,064) (675,792)
Income tax provision (benefit) - -
----------- -----------
Net (loss) $ (421,064) $ (675,792)
=========== ===========
Basic net (loss) per common share $ (.05) $ (.07)
=========== ===========
Diluted net (loss) per common share $ (.05) $ (.07)
=========== ===========
Number of shares used in per common share computations:
Basic 9,035,897 8,964,449
=========== ===========
Diluted 9,035,897 8,964,449
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
5
LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 30,
(Unaudited)
2004 2003
----------- -----------
Operating activities:
Net (loss) $ (421,064) $ (675,792)
Adjustments to reconcile net (loss) to net cash
(used for) operating activities:
Depreciation and amortization 289,165 267,373
Increase (decrease) in long-term accrued interest (1,143,993) 336,921
Cash (used for) provided by assets and liabilities:
Accounts and contract receivables 1,673,670 (396,592)
Other current assets 6,007 (4,509)
Accounts payable and accrued expenses (575,736) (357,115)
Deferred revenues (666,785) (573,455)
----------- -----------
Net cash (used for) operating activities (838,736) (1,403,169)
----------- -----------
Investing activities:
Purchases of property and equipment (89,645) (42,647)
Capitalization of software development costs (249,999) (200,000)
Other (20,550) 58,718
----------- -----------
Net cash (used for) investing activities (360,194) (183,929)
----------- -----------
Financing activities:
Repayment of long-term debt (500,000) (500,000)
Payment of capitalized leases (53,686) (50,239)
Exercise of stock options 36,541 16,381
----------- -----------
Net cash (used for) financing activities (517,145) (533,858)
=========== ===========
(Decrease) in cash and cash equivalents (1,716,075) (2,120,956)
Cash and cash equivalents at beginning of period 6,227,236 7,242,230
----------- -----------
Cash and cash equivalents at end of period $ 4,511,161 $ 5,121,274
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid $ 105,570 $ 11,000
=========== ===========
Interest paid $ 1,536,788 $ 99,902
=========== ===========
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, 2004, are not necessarily indicative of the results that may be
expected for the fiscal year ending January 31, 2005.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is presented
beginning on page 37 of its fiscal year 2003 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 2004.
Note 3 - CHANGES IN BALANCE SHEET ACCOUNT BALANCES
The decrease in cash and cash equivalents during the quarter results primarily
from operating activities during the quarter, including the advance payment of
accrued interest on the long-term debt, and the payment of $553,686 in long-term
debt and capitalized leases during the quarter.
The decrease in contract receivables is due to the collection, during the first
quarter, of receivables with deferred payment provisions.
Other current assets consist of software and hardware awaiting installation
(related to unrecognized revenue) and other prepaid expenses, including
commissions.
The decrease in property and equipment, net, is primarily the result of the
acquisition of replacement equipment and software, offset by normal depreciation
and amortization.
7
Other non-current assets consist primarily of the deferred federal income tax
assets relating to the net operating loss carry forward.
The decrease in accounts payable results primarily from the payment during the
quarter 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 primarily to the payment of
certain estimated taxes and accrued liabilities subsequent to January 31, 2004.
The decrease in deferred revenues results primarily from the recognition of
revenue related to maintenance billings to customers recorded prior to revenue
recognition.
The decrease in long-term accrued interest results from a prepayment of
$1,500,000 in deferred interest on the long-term debt during the first quarter,
net of the normal increase in the deferred interest payable under the long-term
debt agreement for the quarter.
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, no options
were forfeited and 30,201 options were exercised under all plans 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, 2004, 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,
2004. 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, 2004 2003
---- ----
Net (loss), as reported $ (421,064) $ (675,792)
Deduct: Total stock based compensation expense
determined under the fair value based method for all
awards, net of related tax effects - (13,746)
------------ -----------
Pro forma net (loss) $ (421,064) $ (689,538)
============ ===========
Earnings per share:
Basic - as reported $ (0.05) $ (0.07)
============ ===========
Basic - pro forma $ (0.05) $ (0.08)
============ ===========
Diluted - as reported $ (0.05) $ (0.07)
============ ===========
Diluted - pro forma $ (0.05) $ (0.08)
============ ===========
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 (loss) per common share is calculated using the weighted average
number of common shares outstanding during the period.
The 2004 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 535,754 option shares outstanding at
April 30, 2004 that were not included in the diluted net (loss) per share
calculation as the inclusion thereof would be antidilutive.
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 (loss) 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, other commitments and the operating leases.
9
Total 2004 2005 2006 2007 2008
---------- ---------- ---------- ---------- --------- ----------
Capitalized leases $ 353,157 $ 179,921 $ 173,236 $ - $ - $ -
Long-term debt 500,000 500,000 - - - -
Accrued interest, assuming no
Warrant value (see below) 3,854,441 3,854,441 - - - -
Other commitments 50,000 25,000 25,000 - - -
Operating leases 286,378 252,565 28,423 5,390 - -
---------- ---------- ---------- ---------- --------- ----------
Total 5,043,976 $4,811,927 $ 226,659 $ 5,390 $ - $ -
========== ========== ========== ========== ========= ==========
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 $500,000, and the accrued and unpaid deferred interest, 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 was 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 $3,000,000
through July 31, 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 through the July 31, 2004, maturity date of the loan
and the likelihood of defaulting on the debt 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.
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 at the maturity of the loan, 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
$3,854,441.
In accordance with US Generally Accepted Accounting Principles (GAAP), the
accrued and unpaid interest payable on the long-term 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.
The Company has received nonbinding expressions of interest to refinance our
existing debt, in July 2004, at an attractive interest rate. The Company is
continuing to seek additional sources to refinance this debt with the ultimate
goal of retiring it completely, as quickly as practicable.
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, 2004 and January 31, 2004, 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
11
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 Quarterly Report on
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 LanVision to control costs,
availability of products obtained from third-party vendors, the healthcare
regulatory environment, healthcare information system 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 risk factors that might cause such differences including those
discussed herein. 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 Registrant undertakes no obligation to publicly revise these
forward-looking statements, to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents LanVision files from time to time with the Securities and
Exchange Commission, including Quarterly Reports on Form 10-Q and any Current
Reports on Form 8-K.
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 ongoing 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
12
and systems are sufficiently flexible to accommodate changing regulatory
requirements. Also, in April 2004, President Bush put forth the goal of
establishing electronic medical records for most Americans within 10 years. His
plan includes appointing a national health-technology coordinator who will
report to the Secretary of Health and Human Services, specifically to create a
plan to guide the highly fragmented industry toward an interoperable electronic
medical records system.
RESULTS OF OPERATIONS
GENERAL
LanVision Systems, Inc. (LanVision(TM) or the Company) is a healthcare
information technology company focused on solutions that improve
document-centric information flows and complement enhance existing
transaction-centric healthcare information systems. The Company's workflow and
document management solutions bridge the gap between current, predominantly
paper-based processes and transaction-based healthcare information systems by 1)
electronically capturing document-centric information from disparate sources, 2)
electronically directing that information through vital business processes, and
3) providing access to the information to authenticated users (such as
physicians, nurses, administrative and financial personnel and payers) across
the continuum of care.
The Company's workflow-based products and services offer solutions to specific
healthcare business processes within the revenue cycle, such as remote coding,
abstracting and chart completion, remote physician order processing,
pre-admission registration scanning, insurance verification, denial management,
secondary billing services, explanation of benefits processing and release of
information processing.
LanVision's products and services also create an integrated document-centric
repository of historical health information that is complementary and can be
seamlessly "bolted on" to existing transaction-centric clinical, financial and
management information systems, allowing healthcare providers to aggressively
move toward fully Electronic Medical Record processes while improving service
levels and convenience for all stakeholders. These integrated systems allow
providers and administrators to dramatically improve the availability of patient
information while decreasing direct costs associated with document retrieval,
work-in-process, chart completion, document retention and archiving.
LanVision's systems can be provided on a subscription basis via remote
application-hosting services or installed locally. LanVision provides its
ASPeN(SM), Application Service Provider-based remote hosting services to, among
others, The University Hospital, a member of The Health Alliance of Greater
Cincinnati, M.D. Anderson Cancer Center and Children's Medical Center of
Columbus, OH among others. In addition, LanVision has installed its workflow and
document management solutions at leading healthcare providers including Stanford
Hospital and Clinics, the Albert Einstein Healthcare Network, Beth Israel
Medical Centers, the University of Pittsburgh
13
Medical Center, Medical University Hospital Authority of South Carolina, and
Memorial Sloan-Kettering Cancer Center.
LanVision's applications 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 and improve operational efficiencies through business process
re-engineering and automating labor-intensive and demanding paper environments.
LanVision's applications 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, laboratory 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 advanced technological workflow applications to process the
document-centric information, on a real-time basis from virtually any location,
including the Physician's desktop, using Web-based technology. LanVision's
solutions integrate its own proprietary imaging platform, application workflow
modules and image and web-enabling tools that allow for the seamless merger of
"back office" functionality with existing Clinical and Financial Information
Systems at the desktop.
LanVision offers its own 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 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 Medical Record. 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.
LanVision operates in one segment as a provider of health information technology
solutions that streamline document-centric information flows.
Historically, LanVision has derived most of its revenues from systems sales,
recurring application-hosting subscriptions services, recurring maintenance fees
and professional services involving the licensing, either directly or through
remarketing partners, of its Medical Record Workflow and Revenue Cycle
Management solutions to Integrated Healthcare Delivery Networks (IDN). In a
typical transaction, LanVision, or its remarketing partners, enter into a
perpetual license or fee-for-service subscription agreement for LanVision's
software application suite and may license or sell other third-party software
and hardware components to the IDN.
14
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 LanVision 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 (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.
The decision by a healthcare provider to replace, substantially modify, or
upgrade its information systems is a strategic decision and often involve 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 recurring 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 IDN's and smaller healthcare providers are looking 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
medium to small acute care facility marketplace as well as the ambulatory
15
marketplace and is actively pursuing remarketing agreements, in addition to
those discussed below, with other Healthcare Information Systems (HIS) and staff
outsourcing providers to distribute LanVision's workflow solutions.
Generally, revenues from systems sales are recognized when an agreement is
signed and products are made available to end-users. Revenue recognition related
to routine installation, integration and project management are deferred until
the work is performed. If an agreement requires LanVision to perform services
and modifications that are deemed significant to system acceptance, revenues are
recorded either on the percentage-of-completion method or revenue related to the
delivered hardware and software components is deferred until such obligations
are deemed insignificant, depending on the contractual terms. Revenues from
consulting, training, and application-hosting services are recognized as the
services are performed. Revenues from short-term support and maintenance
agreements are recognized ratably over the term of the agreements. Billings to
customers recorded prior to the recognition of the revenue are classified as
deferred revenues. Revenues recognized prior to progress billings to customers
are recorded as contract receivables.
LanVision has entered into third party agreements to market, remarket or refer
business to LanVision, including: a five year Remarketing Agreement with IDX
Information Systems Corporation. Under the terms of the agreement, IDX was
granted a non-exclusive worldwide license to distribute all LanVision workflow
software including accessANYware(TM), codingANYware(TM), and ASPeN
application-hosting services to IDX customers and prospective customers, as
defined in the Remarketing Agreement; and a Marketing and Referral Agreement
with the 3M Health Information Systems, a division of Minnesota Mining &
Manufacturing Co., whereby 3M Health Information Systems and LanVision entered
into a referral marketing agreement for its new product codingANYware.
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-
16
hosting services operations are expected to increase over time, as more
hospitals outsource services to LanVision's ASPeN 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, 2004, were $2,641,555,
compared with $2,619,982 reported in the comparable quarter of 2003. The
increase was primarily a result increased revenues from the application-hosting
and service, maintenance and support revenues offset by the decline in system
sales "software revenues" when compared to the comparable prior quarter.
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 increase in the application-hosting revenues during the first
quarter resulted from increased revenues from existing clients when compared to
2003.
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 2004 and 2003 were
125% and 74%, respectively. The higher percentage of cost of sales reflects
lower software and hardware revenues during the current period compared to the
comparable prior period.
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
17
and support was 39% and 42% for the first quarter of fiscal 2004 and 2003,
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 remained approximately the
same for 2004 when compared to 2003, as the cost of providing these services is
relatively fixed. As a percentage of application-hosting revenues, the cost of
application-hosting was 34% and 50% for the first quarter of fiscal 2004 and
2003, respectively. The decline in the cost percentage reflects the higher
revenues from existing clients without a corresponding increase in operating
costs.
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
decreased when compared with the comparable prior quarter primarily because of a
nonrecurring expense in 2003 for a healthcare market and industry consulting
project commissioned by the Company. Demand for Medical Record Workflow
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 decreased
compared with the comparable prior quarter. The decrease results primarily from
the use of fewer contractors and increased capitalized software development
costs associated with new Patient Financial Services products under development
in 2004. 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, approximately $250,000 and $200,000 of
product research and development costs in the first quarter of fiscal 2004 and
2003, respectively.
Operating (loss)
The operating (loss) for the first quarter of fiscal 2004 was ($41,717) compared
with an operating (loss) of ($248,017) in the first quarter of fiscal 2003. The
decrease in the operating (loss) is the result of the decline in operating
expenses as noted above.
18
Interest income consists primarily of interest on invested cash. The increase in
interest income results from increased cash balances.
Interest expense relates primarily to the long-term debt and includes the
interest expense on the capitalized leases in 2004.
Net (loss)
The net (loss) for the first quarter of fiscal 2003 was ($421,064) ($.05 per
share) compared with a net (loss) of ($675,792) ($.07 per share) in the first
quarter of fiscal 2002. This decrease is the result of lower 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, and 2000
through 2003, 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
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 of limits on
third-party reimbursements from insurance companies and governmental entities.
19
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.
LanVision's revenues were less than its internal plans in the first quarter of
the current fiscal year. Over the last four 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 four 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 compliant
with the Health Insurance Portability and Accountability Act of 1996 (HIPAA),
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 April 30, 2004, LanVision had cash and cash equivalents of $4,511,161. 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 $3,000,000 through the maturity of the loan in
July 2004. During the remainder of fiscal 2004, $500,000 of long-term debt is
required to be repaid to the lender, along with $3,854,441 of the deferred
interest on the long-term debt. LanVision has received nonbinding proposals with
favorable terms to refinance the deferred interest on its existing debt.
However, there can be no assurance LanVision will be able to do so.
LanVision has carefully monitored operating expenses during the last four fiscal
years, and believes it will continue to improve operating results in fiscal
2004. Notwithstanding the level of revenues and operating profits in fiscal
years 2001 through 2003, 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, and the anticipated financing of the deferred
interest payable in July, will be sufficient to meet anticipated cash
requirements during fiscal year 2004.
20
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, 2004.
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, 2004, 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 $2,400,000. 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 $2,700,000, through their respective renewal dates in fiscal 2006
through 2007.
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 2003, 2002 and 2001 were approximately $4,712,000,
$4,176,000 and $4,032,000, respectively. Maintenance and support revenues are
expected to increase in 2004. At April 30, 2004, LanVision had Maintenance
Agreements, purchase orders or royalty reports from remarketing partners for
maintenance, which if fully performed, will generate future revenues of
approximately $2,550,000, through their respective renewal dates in fiscal 2004
and 2005.
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
21
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, which arise, in
the ordinary course of business from time to time. 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
22
At the Annual Meeting of Stockholders held on May 26, 2004, the following
members were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
George E. Castrucci 7,803,634 228,942
Richard C. Levy, M.D. 7,955,214 77,362
Eric S. Lombardo 7,879,020 153,556
J. Brian Patsy 7,879,020 153,556
Z. David Patterson 7,806,434 226,142
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 of Chief Executive Officer pursuant to Rule 13a -14(a)
and Rule 15d - 14(a) of the Securities Exchange Act, as Amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a -14(a)
and Rule 15d - 14(a) of the Securities Exchange Act, as Amended
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002
(*) Incorporated by reference.
(b) Reports on Form 8-K
On April 5, 2004, the Company filed a Form 8-K, reporting under Item 12, the
Fiscal Year End January 31, 2004 Results of Operations.
23
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 4, 2004 By: /s/ J. BRIAN PATSY
--------------------------------
J. Brian Patsy
Chief Executive Officer and
President
DATE: June 4, 2004 By: /s/ PAUL W. BRIDGE, JR.
--------------------------------
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
31.1 Certification of Chief Executive Officer pursuant to Rule 13a
-14(a) and Rule 15d - 14(a) of the Securities Exchange Act, as
Amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a
-14(a) and Rule 15d - 14(a) of the Securities Exchange Act, as
Amended
32.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002
25