-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AaMzyk0QeS5RjAeHLJCA/U1bNbGxzvp6ofOG2wNtebgY/cH5r49hLxecC6XVRSR+ 5WXvR+5ymGYKB/mTIWhKFg== 0000906318-97-000022.txt : 19970329 0000906318-97-000022.hdr.sgml : 19970329 ACCESSION NUMBER: 0000906318-97-000022 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDPLUS INC /OH/ CENTRAL INDEX KEY: 0000922723 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 481094982 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-24196 FILM NUMBER: 97566796 BUSINESS ADDRESS: STREET 1: 8805 GOVERNORS HILL DR STREET 2: STE 100 CITY: CINCINNATI STATE: OH ZIP: 45249 BUSINESS PHONE: 5135830500 MAIL ADDRESS: STREET 1: 8805 GOVERNORS HILL DR STREET 2: SUITE 100 CITY: CINCINNATI STATE: OH ZIP: 45249 10-K405 1 MEDPLUS, INC. 1996 Annual Report and Form 10-KSB March 27, 1997 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended: December 31, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ______________ to Commission file number: Z-24196 MEDPLUS, INC. (Name of small business issuer in its charter) OHIO 48-1094982 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8805 Governor's Hill Drive, Suite 100, Cincinnati OH 45249 (Address of principal executive offices) (Zip Code) Issuer's telephone number 513-583-0500 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, No Par Value (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for its fiscal year ended December 31, 1996 were $10,940,456. The aggregate market value of the voting stock held by non-affiliates of the issuer as of December 31, 1996 was $18,143,097 based on the closing price of such stock on that date as reported on the Nasdaq National Market. There were 5,919,206 shares of the issuer's no par value common stock outstanding as of December 31, 1996. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's Proxy Statement for the Annual Meeting of Shareholders to be held on May 15, 1997, are incorporated by reference into Part III of this Form 10-KSB. Transitional Small Business Disclosure Format (check one): Yes No X INTEGRATED REPORTS TO SECURITY HOLDERS Pursuant to General Instruction F of Form 10-KSB and Regulation 240.14a(d) of the Securities Exchange Act of 1934, the Issuer's Annual Report to Security Holders for its fiscal year ended December 31, 1996 has been combined with the required information of Form 10-KSB and is being filed with the U.S. Securities and Exchange Commission and submitted to the registrant's shareholders on an integrated basis. A list of the exhibits to this Form 10-KSB is included in Part III hereof under the caption "Exhibits and Reports on Form 8-K." MedPlus, Inc. will provide a copy of any such exhibit to any of its shareholders upon written request and payment of a copying charge of $.10 per page. Requests for copies should be directed to: Investor Relations, MedPlus, Inc., 8805 Governor's Hill Drive, Suite, 100, Cincinnati, Ohio 45249. PART I ITEM 1. DESCRIPTION OF BUSINESS. General MedPlus, Inc. (the "Company") was incorporated in 1991. The Company's principal executive offices are located at 8805 Governor's Hill Drive, Suite 100, Cincinnati, Ohio, 45249. The Company's telephone number is (513) 583-0500. MedPlus provides state-of-the-art information management technology products and consulting services to customers predominantly in the health care industry. The Company sells and supports hardware and software solutions to meet the needs of health care organizations. The Company's products include electronic record patient systems, optical archival systems, intelligent bar coding systems, object-oriented workflow and document management systems and laboratory, business office and physician office integration services. The Company's products and services are designed to allow health care providers to easily and quickly achieve quality and productivity enhancements and cost containment goals which are increasingly imposed upon them by legal and regulatory requirements as well as economic and consumer pressures. Industry Background The health care industry has entered a period of profound change involving economic, regulatory and operational factors. The Company's strategy is intended to capitalize on the trend toward more spending by the health care industry on information systems and services such as those offered by the Company. Economic. The dramatic increase in health care costs in the United States has caused significant change in the health care industry. Managed care organizations (such as health maintenance organizations, preferred providers and independent physician associations) and other payers have developed alternative payment models to control costs, including procedure-based cost limitations, contractually approved providers and capitation (a fixed monthly fee for members as payment for all required services). The result has been a continuing shift of financial risk from the payers to both the physician/provider and the institutional/provider (hospitals, clinics, long-term care, acute providers and rehabilitative care centers). In response, health care organizations are aligning themselves with one another in order to form integrated delivery systems in an effort to lower costs and compete more effectively in the changing health care environment. The economic viability of many providers will be dependent upon their ability to continue to provide quality health care services while dramatically cutting costs and increasing productivity. The delivery of health care services is both labor and information intensive because the functions of tracking, organizing, retrieving, evaluating and generally managing the high volume of data that providers generate are essential to any provider. Compared to other industries, the health care industry has been slow to automate its information management needs. Hospitals, because of the lack of efficiency incentives, historically have underinvested in information technology, spending only 1-2% of their operating budgets on information technology compared to the 6-8% allocated by other industries for information technology. However, in a report issued by Smith Barney, spending on health care information technology is growing at an accelerating rate. According to Sheldon Dorenfest and Associates, hospital expenditures for computer related products and services have increased more than 70% since 1990. U.S. hospitals plan to invest more than $14 billion in information systems in the next three years according to the Input Study, Revolutionary Changes in Hospital IT Applications. Regulatory. Various regulatory bodies have begun to focus on the information management function. For example, the Joint Commission for Accreditation of Health Care Organizations ("JCAHO"), which is responsible for accrediting all hospitals, has determined that records management can have an important clinical impact. JCAHO has begun to impose specific information management requirements for accreditation. Most of the new requirements mandate performance levels which will be difficult to achieve without computerization. The Company's products and services are specifically designed to help providers comply with these requirements. Operational. Hospitals and other health care organizations are comprised of numerous departments, such as the accounting, laboratory, radiology, pharmacy, medical records, business office and clinical areas. The information management requirements of these departments tend to be quite distinct. To the extent they have purchased computerized systems, most hospitals have historically acquired a collection of separate, stand-alone information systems for their various departments. Moreover, even within a particular systems category, such as the laboratory, there are no system standards. Numerous vendors sell proprietary systems which often are not directly compatible with either competitive systems or the systems of other departments. MedPlus products and services enhance the capabilities of these systems by adding functionality not otherwise resident on these systems. Strategy Recognizing all of these factors, the Company's business strategy since its inception has been to focus on specific health care information problems that the Company believes have not been adequately addressed by other vendors. It is the Company's goal to develop appropriate information management systems which address the market needs, are affordable, and can be easily integrated with the major systems currently in place at most health care organizations in the United States. MedPlus products and services are designed to permit customers to leverage their existing investments in computerized information systems rather than forcing them to replace entire systems at a much greater cost. MedPlus concentrates on five specific segments of information technology for the health care industry: automated data collection, data storage and retrieval, electronic patient records, document management and workflow solutions and process engineering and consulting services. These technologies and services offer immediate benefits to health care organizations on a cost-efficient basis. The Company considers these five areas to be key subsets which directly affect the health care provider's efficiency at utilizing its existing information systems. The Company believes this niche has enabled it to provide high technology solutions at an affordable user cost. Over time, it is the Company's intention to adapt its current products to changing needs, to develop or acquire new products and services, and to address selected information management needs throughout the typical health care organization. Products and Services The Company pursues the automated data collection segment of the health care industry through its IntelliCode Intelligent Bar Code System product line, the automated data storage and retrieval segment through its OptiMaxx Archival System product line, the computerized electronic patient record system segment through its ChartMaxx Electronic Patient Record System and the document management and workflow solutions through its Step2000 Process Manager. Its product strategy is to design systems with open architecture and modular functionality which are compatible with most existing systems to which they will interface, without requiring any support or cooperation from the systems vendors. By designing products to be entirely independent of other system vendors, potential customer acceptance of MedPlus products is not limited in any way by their existing information system configurations, and the Company's ability to market its products is generally not subject to the cooperation of third party systems vendors. In July 1996, the Company acquired FutureCORE Ltd., which specializes in health care automation, systems integration, and business process engineering and consulting. FutureCORE will also assist the Company in its strategic role as an integrator of electronic patient record systems between hospital and physician offices. IntelliCode Intelligent Bar Code Systems MedPlus offers an array of data collection devices including hand-held scanners and direct thermal and thermal transfer bar code label printers that are "intelligent." Each printer's intelligence is derived from resident software, which runs on the Company's proprietary microprocessor or "board" within the printer. By providing custom programming with its proprietary software, MedPlus fulfills the particular requirements of each user. The software allows immediate interface with virtually any computer information system and allows the printer to print in all prevalent bar code symbologies. As a result of this "plug and play" capacity, the Company's printers generally do not require any system modifications or system manufacturer special support. In 1996, the Company introduced a line of bar code label printers that feature an on-board modem which enables the Company to remotely capture and perform programming procedures on its bar code printers. The product launch also included a new hand-held data collection unit and two products offered as options with the printers - a network module which enables the bar code printers to print from multiple information systems on a Token Ring or Ethernet network and software which allows users to develop and modify their own bar code label formats. The Company believes this independence from other vendors, which its printer intelligence permits, in addition to its new products and enhancements, provide a significant competitive advantage over other printer companies whose products can be used only with the assistance and cooperation of information system sellers. OptiMaxx Archival System The Company offers an optical disk storage and retrieval system under the name OptiMaxx which is specially configured for hospitals, medical practices and other health care providers. It consists of hardware (optical drives, disk "jukeboxes", personal computers) and software purchased from outside vendors, combined with the Company's software in a manner that provides specific benefits to health care industry users. At its most basic level, OptiMaxx permits a user to automatically store on an optical disk any data that it previously would have printed out of its system and then stored as paper or on microfilm/microfiche. OptiMaxx can also scan in and manage existing paper documents. A key feature of OptiMaxx is its ability to capture data directly from existing computer information systems without special software or other interfaces and without any data manipulation. Most optical storage systems must have the "host" information system computer configure files in a specific manner or convert the electronic format of the outgoing data into a particular format, often proprietary, which the optical system can then recognize and use when the data is received. OptiMaxx, which was designed to act as a system peripheral (such as a printer), can work with most host systems without the need for data configuration by the host system. Every host system must have the capacity to output data to a printer, and OptiMaxx can accept any such output "as is" without any special treatment by the host system. Moreover, OptiMaxx itself does not convert or change the incoming data. OptiMaxx stores the data and can retrieve it in its native format, without conversion. In 1996, the Company introduced a beta version of OptiMaxx which operates on the Windows NT operating system. The Company believes the addition of Windows NT, which is considered to be one of the most robust and open operating systems in the software industry, will provide a significant competitive advantage in the future. ChartMaxx Electronic Patient Record System The ChartMaxx system, which has been installed and is operational in four hospital locations, is a turnkey medical records information system which combines multiple technical and functional approaches to computer-based patient records development. The result is an integrated software and hardware platform which: - - Creates complete, digital medical records which meet all administrative and legal requirements. - - Manages multimedia digital data (structured and unstructured) in both report-oriented and discreet data element formats. - - Manages scanned documents (imaging). - - Manages workflow and the work processes associated with health information management. - - Builds a data repository based on an SQL (an industry standard)database and mass storage. - - Forms a system which has both enterprise-wide and remote connections. - - Provides application software to further automate the medical records and patient accounts departments. - - Is useful to providers of care and other health care staff members. - - Facilitates communication of clinical information within the health care organization and to external sources. Beyond the immediate benefits of automating an organization's medical records department and creating an electronic patient record, MedPlus is creating a data repository which can encompass the entire integrated delivery system. MedPlus has also created the interface to integrate the physician office into the network and create a patient record that is seamless throughout a total delivery system. The integrated hospital/physician office medical records system will be beta tested at a Florida hospital beginning in April 1997. Workflow, Document Management, and Application Systems In December 1995, the Company acquired Universal Document Management Systems, Inc. ("Universal Document"). The principal product of this entity is the Step2000 Process Manager, which transparently integrates existing hardware and software into a complete, fully functional workflow, document management and application development system for a variety of vertical markets. Functions such as data base connectivity, security, screen creation and related sign-off procedures can be implemented in the graphical environment of this product. Step2000 has a high level point-and-click approach whereby custom applications can be built without programming. The open architecture is a universal system allowing customers to mix and match a wide variety of platforms, networks, operating systems and databases. Step2000 is a complete client/server solution in one system that spans marketing, sales, general office, engineering and manufacturing applications. Step2000 improves product and service quality and meets market standards and government regulations. The Company believes Step2000's ability to provide workflow, document management and application development capabilities in one integrated product provides a significant advantage over competitors that only provide one or two of these capabilities. The product's open architecture is also seen as a competitive advantage. Consulting Services The acquisition of FutureCORE, in July 1996, significantly enhanced the Company's product lines by providing consultative system analysis and process improvement methodologies in laboratories, physician offices, hospitals, major health care instrumentation firms and integrated delivery networks. Now, rather than just providing new technology for health care providers, the Company has the unique advantages of being able to assist the health care providers in re-engineering their existing processes while implementing the Company's product lines so as to maximize the return on the investment in technology. The services provided by FutureCORE include program management involving project planning, analysis and planning involving workflow analysis, process flow charting, productivity improvements, modeling and process simulation. Sales and Marketing The Company utilizes selected strategic resellers and reference selling arrangements and also employs a direct sales force to market its products. Its sales philosophy is to provide consultative selling services to end users, conducted by both direct and indirect sales sources who are knowledgeable about the health care industry and information management technologies. Because of the "plug and play" nature of its products, the Company is able to market its products directly to end users, and is not required to enter into costly technical support, joint selling or other collaborative selling arrangements with vendors of health information systems merely to obtain access to the market. However, the Company has found it to be advantageous to enter into reseller and reference seller agreements for strategic reasons, including increased acceptance by customers due to the association with familiar vendors and exposure to the existing customer bases of the resellers and reference sellers. Presently, the Company has entered into strategic reseller, reference selling and preferred vendor arrangements with health care industry suppliers including Abbott Laboratories Diagnostic Division (instrumentation to clinical laboratories), Transcend Services, Inc. (medical records systems), Columbia/HCA (laboratory information systems), Beckman Instruments (chemistry instrumentation to clinical laboratories), Sunquest Information Systems (laboratory information systems), Shared Medical Systems (hospital information systems), Continental Health care Systems (pharmacy systems) and Medicus Systems Corporation (medical records systems). Product Manufacturing and Sources The Company does not possess substantial internal manufacturing capacity and instead relies upon third party manufacturers to fulfill its hardware requirements. This reliance on outside suppliers involves several risks, including limited control over pricing, availability, quality and delivery schedules. Bar code printers are contractually manufactured by third parties with appropriate nondisclosure and other protections the Company deems appropriate. The other hardware incorporated into the Company's products, such as bar code scanners, optical disk drives and computers, are non-proprietary items which are potentially available from multiple sources, although the Company currently has limited its purchases to certain vendors based on delivery, service and cost factors. To the extent the Company relies on single sources of components, it is vulnerable to potential disruptions in supply should such a manufacturer become insolvent or otherwise experience production problems. The Company believes, however, that any such disruption would be temporary since there are numerous alternative sources of supply available. The Company relies to a large extent on licensed third party software which is integrated through the use of proprietary software. The Company's internal software development capacity is limited, and the Company therefore concentrates its efforts on developing and enhancing proprietary software that enables various third party software products to work together. MedPlus must rely on the third party suppliers for enhancements and ongoing support for the acquired products. The failure of one or more of such vendors to provide services for any reason could, at least temporarily, adversely affect the Company's business. Product Development The Company believes that continued investment in research and development is critical to its long-term growth and success. The Company's product development strategy is to continue to focus on specific health care related information management requirements and to expand its existing product lines by adapting them to additional but related health care applications. The Company is presently concentrating its developmental efforts on the ChartMaxx Electronic Patient Record System, as well as enhancing the capabilities of the IntelliCode Intelligent Bar Code Systems, the OptiMaxx Archival System, and the Step2000 Process Manager. The Company's total product development expenditures were $2,030,271, $1,497,751 and $631,012 for the years ended December 31, 1996, 1995 and 1994, respectively. Competition The market for information technology in the health care industry is intensely competitive. The Company believes that the principal competitive factors in this market include the breadth and quality of system and product offerings, product pricing, the reputation and stability of the information systems provider, the features and capabilities of the information systems, ongoing support for such systems, the potential for enhancements thereto and, technical and financial resources. Certain MedPlus competitors have significantly greater resources than the Company. In addition, the Company's products compete with other technologies as well as similar products developed by other companies, and other major information management companies may enter the markets in which the Company competes. Competitive pressures and other factors, such as new product introductions by the Company or its competitors, or the entry into new geographic markets, may result in significant pricing pressures that could have a material adverse effect on the Company's business. There can be no assurance that the Company will be able to continue to compete successfully with its existing or any future competitors. However, the Company believes that it possesses certain competitive advantages, in particular its concentration on the health care market which enables it to tailor all of its products for that particular market, rather than attempting to design and sell products of a more generic nature. The "plug and play" compatibility of its products with most of the information systems with which they must interact also constitutes an advantage over its present competitors, most of whom must secure the support and cooperation of third party vendors in order for their products to operate. Also, any future enterprise-wide systems will likely be quite expensive and may not be attractive to hospitals which already have substantial investments in numerous departmental systems and may have limited budgets for future purchases. Licenses and Proprietary Rights To a significant degree, the Company's products consist of third party hardware and software integrated with some proprietary hardware and software of the Company. The Company does not hold any patents or copyrights with respect to any of its products, nor does it expect to apply for any patents or copyrights in the foreseeable future. To the extent possible, the Company attempts to protect its use of third party hardware and software with contractual exclusivity and nondisclosure provisions, but because the Company does not own the rights to these third party products, there can be no assurance that competitors or others will not attempt to integrate the same or similar products into systems competitive with those sold by the Company. To protect its proprietary product components, the Company relies upon the law of trade secrets, nondisclosure agreements with employees and others, and restrictions incorporated into agreements with customers. Notwithstanding these safeguards, it could be possible for competitors to obtain and/or imitate the Company's software and/or hardware. Further, there can be no assurance that others will not independently develop products similar or superior to those of the Company. The Company also explores technology developed by other entities that may be licensed or acquired in an effort to reduce the product development cycle or to complement existing product lines. Federal trademark protection has been obtained for the MedPlus name and the name that the Company uses for its printer labels, Flexilabel. Federal trademark protection is also pending for the name "IntelliCode." The Company has entered into an agreement to use the name ChartMaxx with the owner of the trademark, and has applied for trademark protection for the name OptiMaxx. Employees As of December 31, 1996 the Company had 112 full-time employees. The Company's future success will depend, in part, on its ability to continue to attract, retain and motivate highly qualified technical, marketing and management personnel who are in great demand. ITEM 2. DESCRIPTION OF PROPERTY. The Company currently leases approximately 33,000 square feet of high quality office space in Cincinnati, Ohio where it maintains its principal offices. The lease term runs through June 2002 with annual base rents ranging from $231,500 to $317,000. ITEM 3. LEGAL PROCEEDINGS. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is traded in the over-the-counter market under the symbol "MEDP." On May 24, 1994, the common stock commenced trading on the Nasdaq Small Cap Market ("NSM"). Beginning November 21, 1995, the Company's common stock commenced trading on the Nasdaq National Market ("NNM") tier of the Nasdaq Stock Market. There were approximately 102 record holders and approximately 1100 beneficial owners of the Company's common stock as of March 26, 1997. The following table sets forth, for the periods indicated, as reported by Nasdaq, the range of high and low closing bids of the Company's common stock on the NNM. All prices are rounded to the nearest one-eighth, and bid prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. Calendar Year/Quarter High Low 1995 First Quarter $ 8.250 $ 6.125 Second Quarter 8.625 6.125 Third Quarter 10.750 7.375 Fourth Quarter 11.125 8.375 1996 First Quarter $12.250 $ 8.125 Second Quarter 15.625 10.625 Third Quarter 14.375 10.000 Fourth Quarter 11.250 5.000 The Company has not paid any cash dividends since its inception and presently anticipates that earnings, if any, will be retained for future development of the Company's business. No dividends on its common stock will be declared in the foreseeable future. On December 29, 1995, the Company issued 99,274 shares of the Company's common stock valued at $868,648 to the former shareholders of Universal Document as part of the consideration for the acquisition of Universal Document. On April 16, 1996, the Company issued an additional 14,249 shares of the Company's common stock valued at $160,728 to the former shareholders of Universal Document as part of the contingent consideration earned in 1995 for the acquisition of Universal Document. A complete description of the terms of the Universal Document acquisition is hereby incorporated by reference to the Company's Report on Form 8-K filed on January 2, 1996. The transaction in connection with which these shares were issued did not involve any public offering and as such the issuance of these shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. The securities were purchased with no view to distribution thereof by the sole shareholders of a closely-held company acquired by the Company. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. General Since its inception in 1991, the Company has provided state-of-the-art information management technology products and services to customers predominantly in the health care industry. The Company has continued to develop systems that enable health care providers to more efficiently collect, store and retrieve medical information. It has been the Company's practice to continue to develop new products, enhance existing applications, make selected strategic acquisitions, and introduce consulting services, which has led to significant revenue growth since the commencement of operations. The Company's products presently consist of the IntelliCode [tm] Intelligent Bar Code System ("IntelliCode"), the OptiMaxx[tm] Archival System ("OptiMaxx"), the ChartMaxx [tm]Electronic Patient Record System ("ChartMaxx"), and Step 2000 Workflow, Document Management, and Application Development System (Step 2000). IntelliCode is an intelligent bar coding system for hospitals and other health care organizations. OptiMaxx is an optical disk-based archival system. ChartMaxx is an enterprise-wide electronic patient record system. Step 2000 is workflow, document management, and application development software that enhances the utilization of information on an enterprise-wide basis, regardless of hardware platform or operating environment. With its acquisition of FutureCORE, Ltd. ("FutureCORE"), the Company has also begun to provide process improvement and automation consulting services, primarily in the areas of patient care and laboratory services. The Company's revenues are derived from systems sales, bar code label sales, service contracts and consulting services. System sales consist of software licenses for proprietary software, third party software and hardware, and related installation. The gross profit on system sales may vary among customers based upon the relative proportion of proprietary software and third party software and hardware included in a sale. Revenues from service contracts include software and hardware maintenance and support. Consulting services include implementation, training, custom software development and process improvement. Sales of bar code labels are made to customers who have installed the Company's IntelliCode Intelligent Bar Code Systems. Revenues from service contracts, consulting services and bar code labels are expected to increase as the number of installed systems increases. Gross profit on service contracts, consulting services and bar code labels may fluctuate based upon the negotiated terms of each contract and the Company's ability to fully utilize its customer service, implementation and consulting personnel. The decision by a health care provider to replace, substantially modify or upgrade its information systems is a strategic decision and often involves a large capital commitment requiring an extended approval process. The sales cycle for the Company's systems is typically six to eighteen months from initial contact to the execution of a sales agreement. As a result, the sales cycle causes variations in quarter to quarter results. These agreements cover the entire implementation of the system and specify the implementation schedule, which typically takes place in one or more phases. The agreements generally provide for the licensing of the Company's software and third party software with a one-time perpetual license fee that is adjusted depending on the number of workstations using the software. Third party hardware is usually sold outright, with a one-time fee charged for installation and training. Site specific customization, interfaces with existing customer systems and other consulting services are sold on a fixed fee or a time and material basis. Revenue is recognized in accordance with the provisions of Statement of Position 91-1, Software Revenue Recognition. For intelligent bar coding systems and workflow and document management software licenses, revenue is recognized at the time of shipment. For optical disk-based archival systems, revenue is recognized upon delivery and customer acceptance of the system. Revenue is recognized on electronic patient record systems using a percentage-of-completion method based on meeting specified performance milestones over the term of the contract. Revenues from labels are recognized at the time of shipment and service contract revenues are recognized ratably over the term of the contracts. Revenues from consulting services are recognized in the period in which the services are performed. Results of Operations The following table presents, for the periods indicated, information derived from the Company's Consolidated Statements of Operations, expressed as a percentage of total revenues, with the exception of the cost of system sales and the cost of service, consulting and other revenues which are expressed as a percentage of the respective revenue components: Years ended December 31, 1996 1995 1994 Revenues: System sales 65.9% 76.3% 73.6% Service, consulting and other revenues 34.1 23.7 26.4 _____ _____ _____ Total revenues 100.0 100.0 100.0 Cost of revenues 50.1 46.1 44.2 _____ _____ _____ Gross profit 49.9 53.9 55.8 _____ ____ ____ Operating expenses (1) 74.8 83.0 51.6 _____ ____ ____ Operating income (loss) (24.9) (29.1) 4.2 Other income (expense), net 2.3 (1.1) 1.5 _____ ____ ____ Income (loss) before income taxes (22.6) (30.2) 5.7 Income taxes - 0.2 2.1 _____ ____ ____ Net income (loss) (22.6)% (30.4)% 3.6% _____ ____ ____ _____ ____ ____ Cost of system sales 45.7% 42.8% 38.6% Cost of service, consulting and other revenue 58.5 56.7 59.7 (1) Because a significant percentage of the Company's operating costs are expensed as incurred, a variation in the timing of system sales and installations and the resulting revenue recognition can cause significant variations in operating results. 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. Instead, the data in the table is presented solely for the purpose of reflecting the relationship of operating expenses to total revenues for the periods indicated. Years Ended December 31, 1996 and 1995 Revenues. Revenues for the year ended December 31, 1996 were $10,940,456, an increase of $2,335,885, or 27% over the $8,604,571 reported for the comparable period in 1995. System sales increased $640,533 or 10% from 1995. Service, consulting and other revenues increased $1,695,352 or 83% from 1995. The increase from service, consulting and other revenues resulted primarily from higher service revenues as the Company's installed systems base continues to grow and higher consulting revenues related to the Universal Document and FutureCORE subsidiaries. Gross Profit. Gross profit for the year ended December 31, 1996 was $5,462,524 and $4,636,755 for the year ended December 31, 1995, an increase of 18%. The overall gross profit margin decreased from 54% in 1995 to 50% in 1996. Competitive pricing pressures and higher capitalized software amortization led to a decrease in gross profit margin on systems sales from 57% in 1995 to 54% in 1996. Gross profit margins on service, consulting, and other revenues decreased from 43% to 41% due to lower than expected utilization of consulting and implementation personnel as margins on service contracts and label sales remained even with prior year. Operating Expenses. Operating expenses increased from $7,139,620 in 1995 to $8,185,200 in 1996, an increase of $1,045,580 or 15%. Excluding a non-recurring charge of $1,465,697 in 1995 related to the in-process technology acquired in the acquisition of Universal Document, operating expenses increased $2,511,277 or 44% from 1995. The increase is a result of an increase in personnel related to employees in the areas of sales, marketing, product development, administration and the Company's new subsidiaries, Universal Document and FutureCORE. Substantial expenditures were also made in the current year to increase market awareness of the Company's products. Net Loss. The Company's net loss for 1996 was $2,472,192 compared to a net loss of $2,616,277 in 1995. The net loss in 1996 is a result of the increased operating expenses discussed in the preceding paragraph and lower than expected revenues. No income tax benefit has been recorded related to the 1996 net loss. The Company is in a loss carryforward position with approximately $5,129,000 of net operating loss carryforwards as of December 31, 1996 available to offset future Federal taxable income. The weighted average number of shares outstanding for 1996 was 5,876,482 shares compared to 4,906,530 shares for 1995. The increase in the weighted average number of shares outstanding is primarily due to the issuance of 900,000 shares of stock in the Company's the secondary offering in November 1995. Years Ended December 31, 1995 and 1994 Revenues. Revenues for the year ended December 31, 1995 were $8,604,571, an increase of $1,961,879, or 30% over the $6,642,692 reported for the comparable period in 1994. System sales increased $1,675,339 or 34% from 1994 primarily due to enhanced market awareness of the OptiMaxx system, additional OptiMaxx sales personnel, the initial installations of ChartMaxx systems, and Step2000 sales subsequent to the date of acquisition for Universal Document. Service, consulting and other revenues increased $286,540 or 16% from 1994 due to higher service revenues resulting from an increase in the installed base of all systems. Gross Profit. Gross profit for the year ended December 31, 1995 was $4,636,755 and $3,705,849 for the year ended December 31, 1994, an increase of 25%. The overall gross profit margin decreased from 56% in 1994 to 54% in 1995. The gross profit margin on systems sales decreased from 61% in 1994 to 57% in 1995. Gross profit margins on service, consulting, and other revenues increased from 40% in 1994 to 43% in 1995 due to an increase in revenues from service contracts. Operating Expenses. Operating expenses increased from $3,427,088 in 1994 to $7,139,620 in 1995, an increase of 108%. Included in operating expenses in 1995 is a non-recurring charge of $1,465,697 related to the in-process technology acquired in the acquisition of Universal Document which was expensed at the date of acquisition. Technological feasibility had not been reached for the acquired in-process technology, as further development activities such as validation, quality assurance and beta testing were required to be completed. The acquired technology represented proprietary software and had no alternative future use. The Company added a significant number of employees in the areas of development, sales, marketing and administration. Substantial expenditures were made in 1995 to increase market awareness of the Company's products, especially the commercial release of the ChartMaxx product. The Company also incurred significant expenses to expand the direct and indirect channels of distribution and to recruit senior management personnel to direct and support the Company's anticipated growth. Net Loss. While net revenues increased 30% over the comparable year, the significant increases in operating expenses and the charge for the acquired in-process technology resulted in a loss of $2,616,277 in 1995. Net income in 1994 was $238,889. In addition, as a result of the operating loss and the tax ramifications of the Universal Document acquisition, the Company did not record a tax benefit related to the 1995 net loss. The weighted average number of shares outstanding for 1995 was 4,906,530 shares compared to 4,178,757 shares for 1994. The increase in the weighted average number of shares outstanding is attributable to the Company's secondary offering in November 1995. Inflation To date, inflation has not had a material impact on the Company's operations. Liquidity and Capital Resources The Company's business requires significant amounts of working capital to finance new product development, the expansion of its sales and marketing organization and anticipated revenue growth. The Company has financed its operations and working capital needs through the sale of common stock, bank borrowings, and capital lease financing agreements. The Company's principal uses of cash since inception have been for funding operations, capital expenditures, research and development activities, and investments in and advances to companies which are deemed to have strategic value to the Company. The Company currently maintains a $10,000,000 line of credit which is secured by substantially all of its assets. In December 1996, the Company amended the credit agreement to extend the term to December 31, 1998. At December 31, 1996, the maximum amount available under the line of credit was approximately $6,950,000. No amounts were outstanding under this line of credit at December 31, 1996 and 1995. The Company's Board of Directors authorized a common stock repurchase program in November 1996. Under the program, the Company may purchase up to 500,000 shares of the Company's common stock. As of December 31, 1996, no shares have been purchased under this program. The Company signed a letter of agreement with DiaLogos, Inc. ("DiaLogos"), dated July 12, 1996, which was subsequently amended on January 31, 1997, in which the Company, on or before March 31, 1998, agreed to either (a) pay $1.65 million to DiaLogos in return for 75% of the common shares of DiaLogos, (b) secure a funding commitment for DiaLogos' operations in the amount of $1.65 million from investors and/or lenders, or (c) pay a portion of the $1.65 million as consideration for less than 75% of the common shares of DiaLogos, and secure a funding commitment for the remainder of the $1.65 million from investors or lenders. In the event the Company secures a funding commitment from investors and/or lenders, then DiaLogos will grant the Company the option to purchase 75% of the common shares of DiaLogos less any shares already purchased by the Company and/or investors identified by the Company. The Company's option would be immediately exercisable and remain in effect until December 31, 1999. Under the agreement, the Company will continue to fund the operations of DiaLogos until funding has been obtained as discussed in the preceding paragraph. If the Company or investors identified by the Company decide to directly fund any portion of the $1.65 million, then, at the Company's or investors' option, any amount paid to DiaLogos shall be considered payment for a percentage of common shares of DiaLogos. If the Company secures funding for DiaLogos from investors and/or lenders for $1.65 million, then upon DiaLogos' receipt of such funding, DiaLogos will immediately reimburse the Company for any funds previously paid to it plus interest. Interest will be equal to the prime rate announced by the Company's primary bank lender plus 1% per annum. As of December 31, 1996, the Company had advanced $369,000 to DiaLogos. The Company has also converted an additional $110,000 of advances into an equity interest in DiaLogos' common shares. This investment has been accounted for on the equity method, and it has been included in other assets at the net amount of $85,000 at December 31, 1996. Subsequent to December 31, 1996, the Company arranged for approximately $400,000 of funding for DiaLogos from investors, which consisted of officers and directors of the Company. The proceeds of this funding will be used to repay advances made by the Company prior to December 31, 1996. It is the Company's current intention to find other investors to fulfill part or all of the remaining funding commitment to DiaLogos. The Company has also provided a guarantee to a leasing company under which the Company has guaranteed the payments due by DiaLogos under certain lease agreements for equipment and furniture. The future amounts due under the leases, which terminate in 1999 and 2001, are approximately $135,000. DiaLogos provides software, education and services to corporations that are implementing object-oriented systems in the design and redesign of their business processes. Universal Document has entered into agreements with two consulting firms to assist it in the identification and recruitment of certain software resellers and integrators that Universal Document may acquire or combine with, and to assist Universal Document in an initial public offering of the combined companies. The acquisition of or combination with these resellers and integrators would be concurrent with and contingent upon a successful public offering. The consulting agreements grant the consulting firms warrants to acquire up to 20% of the common shares of Universal Document outstanding prior to a public or private offering of Universal Document stock. One warrant is exercisable for a period of three years from the date that Universal Document completes a public or private offering while the other warrant expires February 19, 2000. The warrants will cease to be effective, however, if a public offering of stock of Universal Document is not completed or if the consulting agreements are terminated prior to a public or private offering. The Company believes that its cash and cash equivalents, investment securities, available line of credit, and cash generated from operations will be sufficient to finance its expected growth and cash requirements for at least the next twelve months. The Company's ability to meet its cash requirements on a long-term basis will depend on profitable operations, consistent and timely collections of accounts receivable and additional sources of liquidity such as additional equity offerings or debt financings. ITEM 7. FINANCIAL STATEMENTS. Information called for by this item is set forth in the Company's Consolidated Financial Statements contained in this report and is herein incorporated by this reference. Specific financial statements and supplemental data can be found at the pages listed in the following index: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number Description In This Report Independent Auditors' Report of KPMG Peat Marwick LLP F-2 Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 F-6 Notes to Consolidated Financial Statements F-7 to F-23 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None KPMG Peat Marwick LLP 1600 PNC Center 201 E. 5th Street Cincinnati, OH 45202 Independent Auditors' Report The Board of Directors MedPlus, Inc.: We have audited the accompanying consolidated balance sheets of MedPlus, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MedPlus, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP February 28, 1997 F-2 MEDPLUS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995 ASSETS 1996 1995 Current assets: Cash and cash equivalents 2,700,607 7,494,094 Investment securities 300,510 500,020 Accounts receivable, less allowance for doubtful accounts of $100,000 in 1996 and $50,000 in 1995 3,676,614 2,848,495 Other receivables 463,098 215,688 Inventories 827,619 538,274 Unbilled service contracts 325,352 279,410 Prepaid expenses and other current assets 617,737 456,360 __________ __________ Total current assets 8,911,537 12,332,341 Investment securities - 302,730 Unbilled service contracts 1,137,575 943,446 Capitalized software development costs, net 2,278,358 1,265,906 Fixed assets, net 1,462,818 905,365 Excess of cost over fair value of net assets acquired, net 911,402 940,149 Other assets 145,454 166,704 __________ __________ $ 14,847,144 16,856,641 __________ __________ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of obligations under capital leases $ 38,154 53,093 Accounts payable 1,417,760 1,003,714 Accrued expenses 1,063,109 1,181,263 Payable to selling shareholders of Universal Document - 1,011,353 Deferred revenue 897,224 560,802 Deferred revenue on unbilled service contracts 325,352 279,410 _________ _________ Total current liabilities 3,741,599 4,089,635 Obligations under capital leases, excluding current installments 81,229 103,565 Deferred revenue 28,748 96,446 Deferred revenue on unbilled service contracts 1,137,575 943,446 _________ _________ Total liabilities 4,989,151 5,233,092 _________ _________ Shareholders' equity: Common stock, no par value, authorized 15,000,000 shares; issued and outstanding 5,919,206 shares in 1996 and 5,808,524 shares in 1995 1,076 1,056 Additional paid-in capital 14,734,036 14,035,728 Accumulated deficit (4,849,580) (2,377,388) Unrealized gains on investment securities 1,824 3,258 Deferred compensation under employee stock award plan (29,363) (39,105) ___________ ___________ Total shareholders' equity 9,857,993 11,623,549 ___________ ___________ Commitments $ 14,847,144 16,856,641 ___________ ___________ See accompanying notes to consolidated financial statements. F-3 MEDPLUS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994 Revenues: Systems sales $ 7,205,316 6,564,783 4,889,444 Service, consulting, and other revenues 3,735,140 2,039,788 1,753,248 __________ _________ _________ Total revenues 10,940,456 8,604,571 6,642,692 Cost of revenues: Systems sales 3,291,373 2,812,184 1,889,449 Service, consulting, and other revenues 2,186,559 1,155,632 1,047,394 __________ _________ _________ Total cost of revenues 5,477,932 3,967,816 2,936,843 __________ _________ _________ Gross profit 5,462,524 4,636,755 3,705,849 Operating expenses: Sales and marketing 4,083,250 3,392,359 2,070,034 Research and development 660,424 692,033 187,143 General and administrative 3,441,526 1,589,531 1,169,911 Acquired in-process technology - 1,465,697 - __________ _________ _________ Total operating expenses 8,185,200 7,139,620 3,427,088 __________ _________ _________ Operating income(loss) (2,722,676)(2,502,865) 278,761 Other income(expense), net 252,381 (91,796) 97,885 __________ _________ _________ Income(loss)before income taxes (2,470,295)(2,594,661) 376,646 Income taxes 1,897 21,616 137,757 __________ _________ _________ Net income(loss) $ (2,472,192)(2,616,277) 238,889 __________ _________ _________ Net income(loss)per share $ (0.42) (0.53) .06 __________ _________ _________ Weighted average number of shares of common stock and common stock equivalents outstanding 5,876,482 4,906,530 4,178,757 __________ _________ _________ See accompanying notes to consolidated financial statements. F-4 MEDPLUS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years Ended December 31, 1996, 1995 and 1994
Deferred Unrealized comp- Retained gains ensation earnings (losses) under Total Additional (accumu- on employee share- Common Stock paid-in lated investment stock holders' Shares Amount capital deficit) securities award plan equity __________ _________ _________ ________ __________ __________ _________ Balances at December 31, 1993 3,355,000 $ 610 330,150 (27,374) - - 303,386 Change in tax status to C Corporation - - (27,374) 27,374 - - - Shares surrendered (41,250) (8) - - - - (8) Issuances of common stock, net of issuance costs 1,265,000 230 4,866,631 - - - 4,866,861 Options exercised 165,000 30 14,220 - - - 14,250 Tax benefit associated with exercise of options - - 40,400 - - - 40,400 Net income - - - 238,889 - - 238,889 Unrealized losses on investment securities, net of income tax benefit - - - - (36,129) - (36,129) Balances at December 31, 1994 4,743,750 862 5,224,027 238,889 (36,129) - 5,427,649 Issuances of common stock, net of issuance costs 1,058,774 193 8,766,282 - - - 8,766,475 Net loss - - - (2,616,277) - - (2,616,277) Unrealized gains on investment securities, net of income taxes - - - - 39,387 - 39,387 Deferred compensation under employee stock award plan, net of amortization 6,000 1 45,419 - - (39,105) 6,315 Balances at December 31, 1995 5,808,524 1,056 14,035,728(2,377,388) 3,258 (39,105)11,623,549 Issuances of common stock 64,749 12 403,874 - - - 403,886 Options exercised 36,933 7 220,186 - - - 220,193 Net loss - - - (2,472,192) - - (2,472,192) Unrealized losses on investment securities, net of income taxes - - - - (1,434) - (1,434) Deferred compensation under employee stock award plan, net of amortization 9,000 1 74,248 - - 9,742 83,991 Balances at December 31, 1996 5,919,206 $ 1,076 14,734,036 (4,849,580) 1,824 (29,363) 9,857,993 See accompanying notes to consolidated financial statements. F-5
MEDPLUS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 Cash flows from operating activities: Net income (loss) $(2,472,192)(2,616,277) 238,889 Adjustments to reconcile net income (loss) to net cash used in operating activities: Amortization of capitalized software development costs 357,395 312,510 100,614 Acquired in-process technology - 1,465,697 - Depreciation and amortization 241,838 144,408 70,909 Amortization of excess of cost over fair value of net assets acquired 101,982 6,335 - Amortization of deferred compensation costs 85,689 6,311 - Provision for loss on doubtful accounts 50,000 25,000 15,000 Deferred income taxes 36,825 (21,616) 91,866 Realized (gain) loss on sale of investment securities and fixed assets (6,740) 244,991 - Changes in assets and liabilities, net of business acquisitions: Accounts receivable (878,119)(1,075,437)(1,186,173) Other receivables 121,990 (4,542) (188,087) Inventories (289,345) (204,365) 78,738 Prepaid expenses and other assets (90,757) (260,902) (186,466) Accounts payable and accrued expenses 295,892 841,210 168,022 Deferred revenue 268,724 62,582 66,222 __________ _________ _________ Net cash used in operating activities (2,176,818)(1,074,095) (730,466) __________ _________ _________ Cash flows from investing activities: Capitalization of software development costs (1,369,847) (805,718) (443,869) Purchases of equipment, furniture and fixtures (776,058) (430,284) (356,296) Purchases of investment securities - (236,256)(3,773,267) Proceeds from sales of investment securities and fixed assets 518,507 1,643,312 1,280,870 Payments to selling shareholders of Universal Document (850,625) - - Cash acquired in (payments made for) business acquisitions (108,235) 15,758 - Other advances and investments (454,789) - - Investment in convertible debenture - - (299,500) __________ _________ __________ Net cash provided by (used in) investing activities (3,041,047) 186,812 (3,592,062) __________ _________ __________ Cash flows from financing activities: Proceeds from issuance of common stock, net of issuance costs 461,653 7,897,828 4,881,103 Proceeds from borrowings on line of credit 1,587,815 829,564 - Repayments on line of credit (1,587,815) (829,564) - Principal payments on capital lease obligations and notes payable (37,275) (63,449) (104,709) __________ _________ __________ Net cash provided by financing activities 424,378 7,834,379 4,776,394 __________ _________ __________ Net increase (decrease) in cash and cash equivalents (4,793,487) 6,947,096 453,866 Cash and cash equivalents, beginning of period 7,494,094 546,998 93,132 __________ _________ __________ Cash and cash equivalents, end of period $ 2,700,607 7,494,094 546,998 __________ _________ __________ Interest paid $ 25,845 30,432 30,347 __________ _________ __________ Income taxes paid (refunds received) $ (66,192) (67,928) 143,798 __________ _________ __________ See accompanying notes to consolidated financial statements. F-6 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 and 1995 (1) Description of the Business MedPlus, Inc. (the "Company") provides state-of-the-art information management technology products and consulting services to customers predominantly in the health care industry. The Company's products presently consist of the IntelliCode [tm] Intelligent Bar Code System ("IntelliCode"), the OptiMaxx [tm] Archival System ("OptiMaxx"), the ChartMaxx Electronic Patient Record System ("ChartMaxx"), and Step2000 [tm] Workflow, Document Management, and Application Development System (Step2000). IntelliCode is an intelligent bar coding system for hospitals and other health care organizations. OptiMaxx is an optical disk-based archival system. ChartMaxx is an enterprise-wide electronic patient record system. Step 2000 is workflow, document management, and application development software that enhances the utilization of information on an enterprise-wide basis, regardless of hardware platform or operating environment. With its acquisition of FutureCORE, Ltd. ("FutureCORE"), the Company has also begun to provide process improvement and automation services, primarily in the areas of patient care and laboratory services. Substantially all of the Company's operations, including its headquarters, are located in Cincinnati, Ohio. (2) Summary of Significant Accounting Policies (a) Principles of Consolidation The consolidated financial statements include the accounts of MedPlus, Inc. and its wholly-owned subsidiaries, Universal Document Management Systems, Inc. ("Universal Document") and FutureCORE. All intercompany accounts and transactions have been eliminated in consolidation. (b) Cash and Cash Equivalents Cash equivalents of $2,669,617 and $7,430,032 at December 31, 1996 and 1995, respectively, consist of overnight repurchase agreements and investments in money market funds with initial terms of less than three months. The carrying value of cash and cash equivalents approximates fair value. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Interest income from cash equivalents and investment securities was $327,499 in 1996, $179,863 in 1995, and $128,232 in 1994. (Continued) F-7 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2)Summary of Significant Accounting Policies, Continued (c) Investment Securities The Company accounts for its investment securities under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company's investment securities are classified under SFAS No. 115 as "available-for-sale," and accordingly, are carried at fair market value. Unrealized holding gains and losses are included as a component of shareholders' equity, net of income tax effects, until realized. (d) Revenue Recognition The Company's revenues are derived from systems sales, which include software licenses, bar code label sales, service contracts and consulting services. Revenue is recognized in accordance with the provisions of Statement of Position 91-1, Software Revenue Recognition. For intelligent bar coding systems and workflow and document management software licenses, revenue is recognized at the time of shipment. For optical disk-based archival systems, revenue is recognized upon delivery and customer acceptance of the system. Revenue is recognized on electronic patient record systems using a percentage-of-completion method based on meeting specified performance milestones over the term of the contract. Revenues from labels are recognized at the time of shipment and service contract revenues are recognized ratably over the term of the contracts. Revenues from consulting services are recognized in the period in which the services are performed. Deferred revenues primarily represent service contracts that have or will be billed in advance of the service to be provided. (e) Concentrations of Credit Risk Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, consist primarily of investment securities and trade accounts receivable. The Company's investment securities consist of U.S. government or agency obligations and corporate obligations. The Company's receivables are concentrated in the health care industry. However, the Company's credit risk is limited due to the geographic dispersion and large numbers of customers making up the Company's receivable portfolio. (f) Inventories Inventories are stated at the lower of cost or market and cost is determined by the first-in, first-out (FIFO) method. (Continued) F-8 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) Summary of Significant Accounting Policies, Continued (g) Capitalized Software Development Costs The Company accounts for software development costs in accordance with the provisions of SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Costs incurred in designing and developing computer software products are expensed as research and development until technological feasibility has been established. Technological feasibility is established upon completion of a detail program design or, in its absence, completion of a working model. Upon the achievement of technological feasibility, software production costs are capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Annual amortization expense is the greater of the amount computed, using the ratio of the current year's revenues to the total of current and anticipated future revenues, or the straight-line method over the remaining economic life which does not exceed five years. Amortization of capitalized software development costs amounted to $357,395, $312,510 and $100,614 for the years ended December 31, 1996, 1995 and 1994, respectively. In 1995, amortization of capitalized software development costs included an additional $148,000 related to a product that was not expected to provide significant future economic benefit. Accumulated amortization for capitalized software development costs was $814,574 and $457,179 at December 31, 1996 and 1995, respectively. (h) Fixed Assets Fixed assets are stated at cost, except for equipment held under capital leases which is stated at the present value of minimum lease payments. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from five to ten years. Leasehold improvements and equipment held under capital leases are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. (i) Excess of Cost Over Fair Value of Net Assets Acquired The excess of the cost over fair value of net assets acquired from business acquisitions is being amortized on the straight-line method over the expected periods to be benefited, which range from five to ten years. Accumulated amortization of the excess of the cost over the fair value of net assets acquired was $108,317 and $6,335 at December 31, 1996 and 1995, respectively. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the intangible balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of the intangible impairment, if any, is measured based on (Continued) F-9 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) Summary of Significant Accounting Policies, Continued (i) Excess of Cost Over Fair Value of Net Assets Acquired, Continued projected discounted future operation cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of the intangible asset will be impacted if estimated future operating cash flows are not achieved. (j) Income Taxes At inception, the shareholders of the Company elected to be taxed under Subchapter S of the Internal Revenue Code. As a result of that election, Federal income taxes were the responsibility of the Company's shareholders, as were certain state income taxes. The S Corporation election was terminated on January 1, 1994. The provisions for income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. (k) Stock Option Plan Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (Continued) F-10 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) Summary of Significant Accounting Policies, Continued (l) Net Income (Loss) Per Share Net income (loss) per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding for each period. Common stock equivalents have not been included in the weighted average shares during periods of net loss. The per share calculations include the effect of the Company's 5,500-for-1 stock split of common stock effective April 8, 1994. (m) Supplemental Cash Flow Information In April 1996 and December 1995, the Company issued 14,249 and 99,274 shares of common stock, valued at $160,728 and $868,648, respectively, in connection with the acquisition of Universal Document. The Company entered into capital leases for equipment totaling approximately $128,000 and $6,500 in 1995 and 1994, respectively. In 1996 and 1995, the Company granted employees 8,900 and 6,000 shares of common stock, respectively, under a stock award plan. The market value of the stock at the dates of grant was approximately $74,000 and $45,000 in 1996 and 1995, respectively, and is being amortized over periods of one to three years in accordance with the terms of the awards. In 1994, the Company realized $40,400 of tax benefits associated with the exercise of stock options. The tax benefit reduced the income tax liability and was credited to additional paid-in capital. As these are non-cash transactions, they are not presented in the Consolidated Statements of Cash Flows. (n) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (o) Reclassifications Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform with the current period presentation. (3) Acquisitions Effective June 28, 1996, the Company acquired all of the assets of FutureCORE, a hospital, laboratory and physician services consulting firm. The acquisition has been accounted for under the purchase method; accordingly, the results of operations of FutureCORE have been included in the Company's consolidated financial statements since the date of the acquisition. (Continued) F-11 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (3) Acquisitions, Continued The total consideration paid for these assets consisted of cash of $61,250. The asset purchase agreement also provides for additional consideration contingent upon future net revenue and contribution margin performance of FutureCORE as it relates to its backlog as of June 28, 1996. The purchase price for FutureCORE has been allocated to the identifiable tangible and intangible assets acquired based on their fair market value. The additional contingent consideration, if earned, would be accounted for as an additional cost of the acquisition. Contingent consideration earned in 1996 was not material. Effective December 14, 1995, the Company acquired all of the outstanding shares of Universal Document, a developer of document and workflow management software. The Company also purchased all of the outstanding shares of HWB, Inc. the owner and licensor of the principal software product of Universal Document. The acquisitions have been accounted for under the purchase method; accordingly, results of operations of these entities have been included in the Company's consolidated financial statements since the date of acquisition. Total consideration for the acquisition of Universal Document and HWB consisted of $1,700,000, including cash of $831,352 and 99,274 shares of Company common stock valued at $868,648. The agreements also provide for additional consideration contingent upon future revenue performance of Universal Document, which if earned, would be accounted for as an additional cost of the acquired companies. For the period from December 14, 1995 to December 31, 1995, the contingent consideration earned was $277,845. No additional contingent consideration was earned in 1996. Maximum future potential payments under these agreements for the remaining two-year period ending December 31, 1998 total $3,000,000. The purchase price for the acquired companies has been allocated to the identifiable tangible and intangible assets acquired based on their estimated fair values. Acquired in-process technology related to Universal Document and HWB has been expensed at the date of acquisition. The excess of cost over fair value of net assets acquired is being amortized on the straight line method over ten years. To determine the fair market value of the acquired in-process technology, the Company utilized the income approach which focuses on the income producing capability of the assets acquired and best represents the present value of the future economic benefits expected to be derived from these assets. Technological feasibility for the acquired in-process technology had not been reached based on design and development activities in place, requiring further refinement and testing. The development activities required to complete the acquired in-process technology include validation, quality assurance programs and beta test. The acquired technology represents unique and emerging technology, the application of which is limited to the Company's workflow and document management software strategy. Accordingly, the acquired technology has no alternative future use. The total amount of acquired in-process technology that was charged to the results of operations at the date of acquisition was $1,465,697. (Continued) F-12 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (3) Acquisitions, Continued The following unaudited pro forma data presents the results of operations as if the acquisitions of Universal Document and HWB had occurred at the beginning of each period. This summary is provided for information purposes only. It does not necessarily reflect the actual results that would have occurred had the acquisitions been made as of those dates or of results that may occur in the future. The effect of FutureCORE on the results of operations for periods prior to its acquisition would not have been material. 1995 1994 Revenues $ 9,023,192 7,101,023 Net loss (2,940,717) (1,551,248) Net loss per share $ (.59) (.36) ____________ ___________ (4) Investment Securities Investment securities at December 31, 1996 consisted entirely of a General Electric Capital Corporation bond with a market value of $300,510, cost of $297,660, unrealized gain of $2,850, and a maturity date in May 1997. Investment securities at December 31, 1995 include the following: Market Unrealized Value Cost Gains _________ __________ ___________ Federal Home Loan Bank note $ 500,020 500,000 20 General Electric Capital Corporation bond 302,730 297,660 5,070 _________ __________ ___________ Total investment securities $ 802,750 797,660 5,090 _________ __________ ___________ The fair values of investment securities are based on the quoted market prices at the reporting date for those investments. Other income (loss) in 1996 and 1995 include, respectively, a gain on sale of approximately $19,000 and a permanent impairment loss of approximately $230,000 related to an investment security acquired in 1995. (Continued) F-13 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (5) Fixed Assets Fixed assets consist of the following at December 31, 1996 and 1995: 1996 1995 Equipment $1,271,600 782,764 Furniture and fixtures 400,906 267,305 Leasehold improvements 157,742 31,957 Purchased software 91,860 59,542 __________ _________ 1,922,108 1,141,568 Accumulated depreciation and amortization (459,290) (236,203) __________ _________ $1,462,818 905,365 __________ _________ (6) Bank Agreements In February 1995, the Company executed a $3,000,000 line of credit agreement with a bank. Interest is payable at the bank's prime rate. The line of credit is secured by all assets of the Company, and the Company must maintain a net worth of $4,000,000 and a maximum leverage ratio, both as defined in the credit agreement. In November 1995, the Company amended the credit agreement with the bank that permits the Company to borrow a maximum of $10,000,000, subject to a defined net worth formula, and retains the existing maximum leverage ratio, also as defined. The amended credit agreement was scheduled to expire on December 31, 1997. In December 1996, the Company amended the credit agreement to extend the term to December 31, 1998. The amended credit agreement requires the Company to pay a .25% commitment fee per annum payable quarterly in arrears on the unused portion of the line of credit. At December 31, 1996, the maximum amount available under the line of credit was approximately $6,950,000. No amounts were outstanding under this line of credit at December 31, 1996 and 1995. (7) Common Stock and Common Stock Warrants In March 1994, the Board of Directors approved the filing of a Registration Statement under the Securities Act of 1933 in connection with the initial public offering of shares of common stock of the Company. In April 1994, the Board of Directors authorized a 5,500-for-1 stock split of common stock. All common share and per share amounts in the accompanying consolidated financial statements have been adjusted retroactively to give effect to this stock split. (Continued) F-14 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (7) Common Stock and Common Stock Warrants, Continued MedPlus, Inc. became a publicly traded company in May 1994 with the issuance of 1,265,000 shares of common stock from which the Company received $4,866,861, net of issuance costs. The Company also sold to the underwriter a five-year warrant for $50 to purchase up to 110,000 shares of common stock. The warrant was not exercisable during the first year following the effective date of the offering but was then exercisable at prices increasing from $4.815 to $5.76 per share, depending on the date of exercise. During August and September 1995, the underwriter exercised its right to purchase 59,500 shares of the Company's common stock for $286,493. The underwriter exercised its right to purchase the remaining 50,500 shares for $243,148 during May 1996. At December 31, 1996, no shares remain exercisable under the warrant agreement. In October 1995, the Board of Directors approved the filing of a Registration Statement under the Securities Act of 1933 in connection with a secondary offering of 1,000,000 shares of the Company's common stock, 100,000 shares of which were sold by an officer of the Company. The secondary offering was completed on November 24, 1995, and the Company received $7,611,171, net of issuance costs. In addition, the Company also agreed to sell to the underwriters for $50 a five-year warrant to purchase up to 25,000 shares of common stock. The Company's Board of Directors authorized a common stock repurchase program in November 1996. Under the program, the Company may purchase up to 500,000 shares of the Company's common stock. As of December 31, 1996, no shares have been purchased under this program. (8)Stock Incentive Plans In March 1994, the Company adopted the 1994 Long-Term Stock Incentive Plan (Long-Term Plan) and the Directors' Nondiscretionary Stock Option Plan (Directors' Plan), collectively the "Option Plans." The Long-Term Plan provides for the grant of stock-based incentives to employees in the form of stock options, stock appreciation rights, stock awards, or any combination thereof. The maximum number of shares with respect to which stock incentives may be granted under the Long-Term Plan is currently 1,000,000 shares. A total of 100,000 shares is reserved for issuance under the Directors' Plan. Options granted under the Long-Term Plan may be either nonqualified or incentive options. Under the terms of both the Long-Term Plan and the Directors' Plan, options may not be granted at less than fair market value on the date of the grant. Options granted under both plans are exercisable in installments; however, no options are exercisable earlier than six months or later than ten years from the date of the grant. (Continued) F-15 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Stock Incentive Plans, Continued At December 31, 1996, there were 553,600 additional shares available for grant under the Option Plans. The per share weighted average fair value of stock options granted during 1996 and 1995 was $4.83 and $3.15 on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions: 1996 - expected dividend yield 0%, risk-free interest rate of 6.09%, expected volatility of 38%, and an expected life of 4.78 years; 1995 - expected dividend yield 0%, risk-free interest rate of 6.33%, expected volatility of 34%, and an expected life of 4.48 years. The Company applies APB Opinion No. 25 in accounting for the Option Plans; accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. The Company recognized $85,689 of compensation cost in 1996 related to stock awards granted under the Long-Term Plan. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below: 1996 1995 Net loss As reported $(2,472,192) (2,616,277) Pro forma (3,321,232) (2,826,115) Net loss per share As reported $ (0.42) (0.53) Pro forma (0.56) (0.58) Pro forma net loss reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting periods of six months to five years and compensation cost for options granted prior to January 1, 1995 is not considered. Transactions with respect to stock options for years ended December 31, 1996, 1995 and 1994 were as follows: Number of Weighted Average Shares Exercise Price __________ ________________ Shares under option, December 31, 1993 165,000 $0.0864 Options exercised (165,000) 0.0864 Options granted 60,000 5.58 __________ ________________ Shares under option, December 31, 1994 60,000 5.58 Options granted 177,500 7.47 __________ ________________ Shares under option, December 31, 1995 237,500 6.99 Options exercised (36,933) 5.96 Options forfeited (6,667) 7.56 Options granted 352,500 11.34 __________ ________________ Shares under option, December 31, 1996 546,400 9.86 (Continued) __________ F-16 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Stock Incentive Plans, Continued The following table summarizes information about stock options at December 31, 1996: Options Outstanding Options Exercisable _______________________________________________ __________________ Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise of Contractual Exercise of Exercise Prices Options Life Price Options Price _______________________________________________ __________________ $5.75-8.56 228,400 3.6 $ 7.10 105,562 $ 6.68 9.37-12.81 283,000 4.3 11.58 110,832 11.25 13.94-14.13 35,000 4.4 13.97 - - _______ _________ 546,400 4.0 9.86 216,394 9.02 _______ _________ At December 31, 1995, there were 86,665 options exercisable with a weighted average exercise price of $6.00. No options were exercisable at December 31, 1994. (9) Income Taxes The Company adopted SFAS No. 109 effective January 1, 1994 and recorded a net deferred tax liability of $25,000 representing the tax-effected cumulative temporary differences as of that date. Total income tax expense for the years ended December 31, 1996, 1995 and 1994 was allocated as follows: Years Ended December 31, 1996 1995 1994 Income (loss) from operations $ 1,897 21,616 137,757 Shareholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes - - (40,400) Shareholders' equity, unrealized gains (losses) on marketable securities recorded for financial reporting purposes (806) 20,290 (18,613) ________ ______ ________ $ 1,091 41,906 78,744 ________ ______ ________ (Continued) F-17 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Income Taxes, Continued Income tax expense attributable to income (loss) from operations was as follows: Years Ended December 31, 1996 1995 1994 Federal: Current $ - - 38,691 Deferred 1,897 20,416 83,566 ______ ______ _______ 1,897 20,416 122,257 State: Current - - 7,200 Deferred - 1,200 8,300 ______ ______ _______ - 1,200 15,500 ______ ______ _______ $ 1,897 21,616 137,757 ______ ______ _______ Income tax expense differs from the amounts computed by applying the Federal statutory rate to pre-tax income (loss) as a result of the following: Years Ended December 31, 1996 1995 1994 Computed "expected" tax expense (benefit) $ (839,900) (882,185) 128,060 Acquired in-process technology - 498,337 - Change in valuation allowance 826,518 424,424 - Research and experimentation tax credit (38,879) (42,935) (26,569) Change in tax status from S Corporation to C Corporation - - 25,000 Amortization of excess of cost over fair value of net assets acquired 33,744 2,154 - Other 20,414 21,821 11,266 ________ _______ ________ $ 1,897 21,616 137,757 ________ _______ _______ The significant components of deferred income tax expense (benefit) attributable to income (loss) from operations for the years ended December 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 Deferred tax expense (benefit) (exclusive of the effects of other components listed below) $ (824,621) (402,808) 91,866 Increase in the beginning- of-the-year balance of the valuation allowance for deferred taxes 826,518 424,424 - __________ ________ _______ $ 1,897 21,616 91,866 (Continued)F-18 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Income Taxes, Continued The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows: December 31, 1996 1995 Deferred tax assets: Net operating loss carryforward $ 1,847,491 624,502 Various accruals, deductible when paid 92,083 30,682 Research and experimentation credit carryforward 85,018 69,504 Capital loss carryforward 78,390 83,220 Other 66,460 84,320 _________ _______ Total gross deferred tax assets 2,169,442 892,228 Less valuation allowance (1,326,286) (424,424) _________ _______ Net deferred tax assets 843,156 467,804 _________ _______ Deferred tax liabilities: Software costs capitalized for financial reporting purposes, expensed for tax purposes (662,636) (309,545) Equipment, principally due to differences in depreciation (128,055) (65,810) Other (52,465) (56,430) _________ _______ Total gross deferred tax liabilities (843,156) (431,785) _________ _______ Net deferred tax assets $ - 36,019 _________ _______ In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. At December 31, 1996, the Company has net operating loss carryforwards for Federal income tax purposes of approximately $5,129,000, which are available to offset future Federal taxable income, if any, through 2011. In addition, the Company has research and experimentation credit carryforwards of approximately $85,000 which are also available to offset future Federal taxes payable, if any, through 2011. The Company, also has a capital loss carryforward of approximately $218,000, which is available to offset future capital gains, if any, through 2001. (Continued)F-19 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Related Party Transaction As discussed in Note 3, the Company purchased all of the outstanding common stock of Universal Document Management Systems, Inc. in December, 1995. The majority owner and president of that company has been a director of the Company since 1994. (11) Retirement Savings and Investment Plan The Company has a Retirement Savings and Investment Plan (401 (k) Plan) in which employees may participate by contributing specified percentages of qualified compensation subject to Internal Revenue Service limitation. The Company may make discretionary contributions to a maximum of 100% of each participant's contribution. There were no expenses recorded related to this Plan in 1996 and 1995 and approximately $25,000 in 1994. (12)Commitments (a) DiaLogos Commitment and Guarantee The Company signed a letter of agreement with DiaLogos, Inc. ("DiaLogos"), dated July 12, 1996, which was subsequently amended on January 31, 1997, in which the Company, on or before March 31, 1998, agreed to either (a) pay $1.65 million to DiaLogos in return for 75% of the common shares of DiaLogos, (b) secure a funding commitment for DiaLogos' operations in the amount of $1.65 million from investors and/or lenders, or (c) pay a portion of the $1.65 million as consideration for less than 75% of the common shares of DiaLogos, and secure a funding commitment for the remainder of the $1.65 million from investors or lenders. In the event the Company secures a funding commitment from investors and/or lenders, then DiaLogos will grant the Company the option to purchase 75% of the common shares of DiaLogos less any shares already purchased by the Company and/or investors identified by the Company. The Company's option would be immediately exercisable and remain in effect until December 31, 1999. Under the agreement, the Company will continue to fund the operations of DiaLogos until funding has been obtained as discussed in the preceding paragraph. If the Company or investors identified by the Company decide to directly fund any portion of the $1.65 million, then, at the Company's or investors' option, any amount paid to DiaLogos shall be considered payment for a percentage of common shares of DiaLogos. If the Company secures funding for DiaLogos from investors and/or lenders for $1.65 million, then upon DiaLogos' receipt of such funding, DiaLogos will immediately reimburse the Company for any funds previously paid to it plus interest. Interest will be equal to the prime rate announced by the Company's primary bank lender plus 1% per annum. (Continued) F-20 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) Commitments, Continued (a) DiaLogos Commitment and Guarantee, Continued As of December 31, 1996, the Company had advanced $369,000 to DiaLogos which is included in other receivables. The Company has also converted an additional $110,000 of advances into an equity interest in DiaLogos' common shares. This investment has been accounted for on the equity method, and it has been included in other assets at the net amount of $85,000 at December 31, 1996. Subsequent to December 31, 1996, the Company arranged for approximately $400,000 of funding for DiaLogos from investors, which consisted of officers and directors of the Company. The proceeds of this funding will be used to repay advances made by the Company prior to December 31, 1996. It is the Company's current intention to find other investors to fulfill part or all of the remaining funding commitment to DiaLogos. DiaLogos leases office space from the Company under a sublease expiring June 30, 2002, which requires annual rental payments of $61,000. The Company has also provided a guarantee to a leasing company under which the Company has guaranteed the payments due by DiaLogos under certain lease agreements for equipment and furniture. The future amounts due under the leases, which terminate in 1999 and 2001, are approximately $135,000. DiaLogos provides software, education and services to corporations that are implementing object-oriented systems in the design and redesign of their business processes. (b) Universal Document Consulting Agreements Universal Document has entered into agreements with two consulting firms to assist it in the identification and recruitment of certain software resellers and integrators that Universal Document may acquire or combine with, and to assist Universal Document in an initial public offering of the combined companies. The acquisition of or combination with these resellers and integrators would be concurrent with and contingent upon a successful public offering. The consulting agreements grant the consulting firms warrants to acquire up to 20% of the common shares of Universal Document outstanding prior to a public or private offering of Universal Document stock. One warrant is exercisable for a period of three years from the date that Universal Document completes a public or private offering while the other warrant expires February 19, 2000. The warrants will cease to be effective, however, if a public offering of stock of Universal Document is not completed or if the consulting agreements are terminated prior to a public or private offering. (Continued) F-21 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12)Commitments, Continued (c) Leases Future minimum lease payments under non-cancelable operating leases for the next five fiscal years, net of future minimum rentals under noncancelable subleases of $61,000 annually, are as follows: 1997: $189,000; 1998: $262,000; 1999: $274,000; 2000: $268,000; and 2001: $262,000. Rent expense amounted to $168,000, $81,000 and $98,400 for the years ended December 31, 1996, 1995 and 1994, respectively. (d) Service Contracts The Company has multi-year contracts with various customers to provide service in future periods as follows at December 31, 1996: 1997 $ 989,468 1998 538,219 1999 358,521 2000 206,599 2001 59,521 _________ $ 2,152,328 _________ The Company has recorded these contracts as deferred revenue and unbilled service contracts in the accompanying consolidated financial statements. (e) employment Agreements The Company has entered into an employment agreement with an officer that expires on June 30, 2001. In addition to a defined base salary, the officer is entitled to discretionary bonus and stock incentive arrangements, as approved by the Board of Directors. The annual discretionary bonus is to be determined by the Board of Directors and cannot exceed 100% of the annual base salary. This individual is also entitled to defined termination benefits under specified employment or change in control conditions. The Company has also entered into employment agreements with other officers and employees that generally provide annual salary, discretionary bonus and stock incentive provisions, all subject to the approval of the Board of Directors. (Continued) F-22 MEDPLUS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (13) Quarterly Results of Operations (Unaudited) The following tables set forth selected financial information for 1996 and 1995. First Second Third Fourth Quarter Quarter Quarter Quarter 1996 Revenues $2,324,757 2,772,548 2,806,479 3,036,672 10,940,456 Operating loss (446,783) (399,825) (735,468)(1,140,600)(2,722,676) Net loss (345,561) (313,251) (676,948)(1,136,432)(2,472,192) Net loss per share(a) (0.06) (0.05) (0.11) (0.19) (0.42) Weighted average shares outstanding 5,808,392 5,858,669 5,913,749 5,918,510 5,876,482 First Second Third Fourth Quarter Quarter Quarter Quarter 1995 Revenues $1,858,790 1,943,572 2,596,883 2,205,326 8,604,571 Operating income (loss) (220,332) 6,058 27,209 (2,315,799)(2,502,864) Net income (loss)(b) (116,164) 29,308 33,376 (2,562,797)(2,616,277) Net income (loss) per share (a) (0.02) 0.01 0.01 (0.49) (0.53) Weighted average shares outstanding 4,743,750 4,743,750 4,827,298 5,238,447 4,906,530 (a) Quarterly amounts are not additive. (b) During the fourth quarter of 1995 and in conjunction with the Company's acquisition of Universal Document, approximately $1,466,000 of in-process research and development was charged to the results of operations as of the date of acquisition. F - 23 PART III ITEM 9.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The Company's executive officers and directors are as follows: Name Age Position Richard A. Mahoney 49 Chairman of the Board, Chief Executive Officer and President Philip S. Present II 46 Senior Vice President and Chief Operating Officer E. Andrew Mayo 43 Executive Vice President Gary L. Price 42 Senior Vice President of Business Development Timothy P. McMullen 42 Vice President of Sales and Marketing Daniel A. Silber 48 Vice President of Finance and Chief Financial Officer Jay Hilnbrand 63 Director and General Manager of subsidiary Robert E. Kenny III 41 Secretary and Director Paul J. Stein 49 Director Paul A. Martin 42 Director Directors are elected annually by the shareholders and serve for one year terms. Officers serve at the discretion of the Board of Directors and are elected on an annual basis. Richard A. Mahoney has been the Company's President and a director of the Company since January 1991. Philip S. Present II joined the Company in April 1995 as Vice President of Corporate Development. Mr. Present was named the Chief Operating Officer of the Company in June 1996. From September 1973 to March 1995, Mr. Present was employed by the certified public accounting firm of KPMG Peat Marwick LLP. Mr. Present was elected to the partnership of KPMG Peat Marwick LLP in 1983 and served as Partner-in-Charge of the Information, Communications and Entertainment practice responsible for the Ohio Valley and Southeast areas of the United States. E. Andrew Mayo joined the Company in October 1991 as Executive Vice President. Gary L. Price joined the Company as Vice President, Sales in January 1992 and in June 1996 was named Senior Vice President, Business Development. Timothy P. McMullen joined the Company as Vice President, Corporate Accounts and Managed Care in June 1996 after sixteen years with the Hill-Rom Co. Inc. At Hill-Rom Co., the worlds largest manufacturer and distributor of patient beds and patient environments, he held several senior positions including Vice President of Corporate Accounts, Merchandising, International, and Domestic Sales. Prior to Hill-Rom, he held sales and management positions with Johnson & Johnson and Carnation Corporation. Daniel A. Silber joined the Company as Vice President of Finance and Chief Financial Officer in May 1995. From 1993 until he joined the Company, he was Chief Financial Officer for Saturday Knight LTD, a manufacturer and distributor of bathroom accessories. From 1990-1993, Mr. Silber was Chief Financial Officer for Tipton Associates, a real estate development and management company. Jay Hilnbrand has been a director of the Company since April 1994. Mr. Hilnbrand is the General Manager and a director of Universal Document Management Systems, Inc., a document management software development company, positions he has held since 1990. Universal Document Management Systems, Inc. became a wholly-owned subsidiary of MedPlus in December of 1995. Robert E. Kenny III, an attorney engaged in the private practice of law since 1980, has served as Secretary and a director of the Company since its inception. Paul J. Stein has been a director of the Company since 1991. Mr. Stein has been a self-employed marketing consultant and manufacturer's representative since October 1990. Paul A. Martin has been a director of the Company since August 29, 1996. Mr. Martin has been the Accounts Receivable Manager for CommuniCare Inc., a home health care agency which also owns and operates a nursing home, since 1995. Prior to his position with CommuniCare he was the Director of the business office for Dimensions Health Corp., a hospital and out-patient center management company. Compliance with Section 16(a) of the Securities Exchange Act of 1934 The information set forth under the caption "Compliance With Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 15, 1997, is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by the Form 10-KSB. ITEM 10. EXECUTIVE COMPENSATION. The information set forth under the caption "Executive Compensation" of the Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 15, 1997, is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by the Form 10-KSB. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" of the Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 15, 1997, is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by the Form 10-KSB. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth under the caption "Certain Relationships and Related Transactions" of the Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 15, 1997, is incorporated herein by reference. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by the Form 10-KSB. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are hereby filed as part of this Form 10-KSB: Sequentially Exhibit Number Description of Exhibit Numbered Page 2 Merger Agreement dated December 29, 1995 between MedPlus, Inc. and Universal Document Management Systems, Inc. * 3 Amended Articles of Incorporation and Code of Regulations, as amended ** 10.1 Executive Employment Agreement dated October 31, 1995 between MedPlus, Inc. and Richard A. Mahoney *** 10.2 Employment Agreement dated April 3, 1995 between MedPlus, Inc. and Philip S. Present II *** 10.3 Employment Agreement dated October 2, 1991 between E. Andrew Mayo and MedPlus, Inc. *** 10.4 Employment Agreement dated December 23, 1994 between Gary L. Price and MedPlus, Inc. *** 10.5 Lease between MedPlus, Inc. and Duke Realty Limited Partnership for principal offices, dated April 24, 1995 *** 10.6 First Lease Amendment between MedPlus, Inc. and Duke Realty Limited Partnership for principal offices, dated May 31, 1996 -- 10.7 Second Lease Amendment between MedPlus, Inc. and Duke Realty Limited Partnership for principal offices, dated December 6, 1996 -- 10.8 Letter Agreement between MedPlus, Inc. and Dialogos, Inc. dated January 31, 1997 -- 10.9 Consulting Agreement between Universal Document and Madison Financial Group Ltd. /f/k/a/ DMG Equity Partners LLC dated September 1, 1996 -- 13 Annual Report to Shareholders **** 21 Subsidiaries of MedPlus, Inc. -- 23 Consent of KPMG Peat Marwick -- * Incorporated by reference to the Registrant's Report on Form 8-K filed on January 2, 1996. ** Incorporated by reference to the Registration Statement on Form SB-2, Registration No. 33-77896C, effective May 24, 1994. ***Incorporated by reference to the Registration Statement on Form S-1, Registration No. 33-98696, effective November 21, 1995. **** Pursuant to General Instruction F of Form 10-KSB and Regulation 240.14a(d) of the Securities Exchange Act of 1934, the Issuer's Annual Report to the Security Holders for its fiscal year ended December 31, 1996 has been combined with the required information of Form 10-KSB and is being filed with the U.S. Securities and Exchange Commission and submitted to the registrant's shareholders on an integrated basis. (b)No reports on Form 8-K were filed during the three-month period ended December 31, 1996. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDPLUS, INC., Registrant By: /s/ Richard A. Mahoney Richard Mahoney, President Date: March 27, 1997 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Richard A. Mahoney Chairman of the Board, Richard A. Mahoney Chief Executive Officer and President(Principal Executive Officer) March 27, 1997 /s/ Daniel A. Silber Vice President of Finance Daniel A. Silber andChief Financial Officer (Principal Financial and Accounting Officer) March 27, 1997 /s/ Jay Hilnbrand Director March 27, 1997 Jay Hilnbrand /s/ Paul A. Martin Director March 27, 1997 Paul Martin /s/ Paul J. Stein Director March 27, 1997 Paul J. Stein /s/ Robert E. Kenny III Director March 27, 1997 Robert E. Kenny III EX-10.6 2 FIRST LEASE AMENDMENT THIS FIRST LEASE AMENDMENT (the "Amendment") is executed this 31st day of May, 1996, by and between GOVERNOR'S HILL PARTNERS, an Ohio partnership ("Landlord"), and MEDPLUS, INC., an Ohio corporation ("Tenant"). W I T N E S S E T H: WHEREAS, Landlord and Tenant entered into a certain Lease dated April 24, 1995 (the "Lease"), whereby Tenant leased from Landlord certain premises consisting of approximately 15,000 square feet of space (the "Original Premises") located in an office building commonly known as 8805 Governor's Hill; 8805 Governor's Hill Drive, Suite 100, Cincinnati, Ohio 45249; and WHEREAS, Landlord and Tenant desire the expand the Original Premises over the Term of this Lease; and WHEREAS, Landlord and Tenant desire to amend certain provisions of the Lease to reflect such expansion and changes to the Lease; NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants herein contained and each act performed hereunder by the parties, Landlord and Tenant hereby enter into this Amendment. 1. Amendment of Article 1. (a) Commencing July 1, 1996, Section 1.01 of Article 1 of the Lease is hereby amended by substituting Exhibit A-1, attached hereto and incorporated herein by reference, on which the Original Premises are illustrated, and an expansion of an additional 5,000 rentable square feet (the "First Additional Space") is illustrated, in lieu of Exhibit A attached to the Lease. (b) Commencing July 1, 1996, Subsections A, B, C, D, E and K of Section 1.02 of the Lease are hereby deleted and the following are substituted in lieu thereof: A. Building Name: 8805 Governor's Hill; Address: 8805 Governor's Hill Drive, Suite 100 and 220, Cincinnati, Ohio 45249; B. Rentable Area: 20,000 square feet; Landlord shall use commercially reasonable standards, consistently applied, in determining the Rentable Area and the rentable area of the Building. The Rentable Area shall include the area within the Leased Premises plus a pro rata portion of the area covered by the common areas within the Building, as reasonably determined by Landlord from time to time. Landlord's determination of Rentable Area made in good faith shall conclusively be deemed correct for all purposes hereunder, including without limitation the calculation of Tenant's Building Expense Percentage and Tenant's Minimum Annual Rent. C. Building Expense Percentage: 14.87% D. Minimum Annual Rent: July 1, 1996 - June 30, 1997 $172,500.00; E. Monthly Rent Installments: July 1, 1996 - June 30, 1997 $14,375.00; K. Addresses for payments and notices: Landlord: Governor's Hill Partners c/o Duke Realty Limited Partnership 8044 Montgomery Road, Suite 600 Cincinnati, OH 45236 With Payments to: Governor's Hill Partners c/o Duke Realty Limited Partnership 8044 Montgomery Road, Suite 600 Cincinnati, OH 45236 Tenant: MedPlus, Inc. 8805 Governor's Hill Drive Suite 100 Cincinnati, OH 45249 (c) Commencing July 1, 1997, Section 1.01 of Article 1 of the Lease is hereby amended by adding an additional 4,419 rentable square feet (the "Second Additional Space") which is illustrated on Exhibit A-1 attached hereto. (d) Commencing July 1, 1997, Subsections A, B, C, D and E of Section 1.02 of the Lease are hereby deleted and the following are substituted in lieu thereof: A. Building Name: 8805 Governor's Hill; Address: 8805 Governor's Hill Drive, Suite 100 and 220 Cincinnati, Ohio 45249; B. Rentable Area: 24,419 square feet; Landlord shall use commercially reasonable standards, consistently applied, in determining the Rentable Area and the rentable area of the Building. The Rentable Area shall include the area within the Leased Premises plus a pro rata portion of the area covered by the common areas within the Building, as reasonably determined by Landlord from time to time. Landlord's determination of Rentable Area made in good faith shall conclusively be deemed correct for all purposes hereunder, including without limitation the calculation of Tenant's Building Expense Percentage and Tenant's Minimum Annual Rent. C. Building Expense Percentage: 18.15% D. Minimum Annual Rent: July 1, 1997 - June 30, 1998 $234,624.00; E. Monthly Rental Installments: July 1, 1997 - June 30, 1998 $19,552.00; (e) Commencing July 1, 1998, Section 1.01 of Article 1 of the Lease is hereby amended by adding an additional 2,239 rentable square feet (the "Third Additional Space") which is illustrated on Exhibit A-1 attached hereto. (f) Commencing July 1, 1998, Subsections A, B, C, D and E of Section 1.02 of the Lease are hereby deleted and the following are substituted in lieu thereof: A. Building Name: 8805 Governor's Hill; Address: 8805 Governor's Hill Drive, Suites 100 and 220 Cincinnati, Ohio 45249; B. Rentable Area: 26,658 square feet; Landlord shall use commercially reasonable standards, consistently applied, in determining the Rentable Area and the rentable area of the Building. The Rentable Area shall include the area within the Leased Premises plus a pro rata portion of the area covered by the common areas within the Building, as reasonably determined by Landlord from time to time. Landlord's determination of Rentable Area made in good faith shall conclusively be deemed correct for all purposes hereunder, including without limitation the calculation of Tenant's Building Expense Percentage and Tenant's Minimum Annual Rent. C. Building Expense Percentage: 19.82%; D. Minimum Annual Rent: July 1, 1998 - June 30, 1999 $258,133.56 July 1, 1999 - June 30, 2000 $258,133.56 July 1, 2000 - June 30, 2001 $258,133.56 July 1, 2001 - June 30, 2002 $258,133.56; E. Monthly Rental Installments: July 1, 1998 - June 30, 2002 $21,511.13; 2. Incorporation into Section 2.02. The following shall be added to Section 2.02 of the Lease: "Tenant has personally inspected the First Additional Space, Second Additional Space and Third Additional Space and accepts the same "as is" without representation or warranty by Landlord of any kind and with the understanding that Landlord shall have no responsibility with respect thereto." 3. Tenant's Representations and Warranties. The undersigned represents and warrants to Landlord that (i) Tenant is duly organized, validly existing and in good standing in accordance with the laws of the state under which it was organized; (ii) all action necessary to authorize the execution of this Amendment has been taken by Tenant; and (iii) the individual executing and delivering this Amendment on behalf of Tenant has been authorized to do so, and such execution and delivery shall bind Tenant. Tenant, at Landlord's request, shall provide Landlord with evidence of such authority. 4. Examination of Amendment. Submission of this instrument for examination or signature to Tenant does not constitute a reservation or option, and it is not effective until execution by and delivery to both Landlord and Tenant. 5. Definitions. Except as otherwise provided herein, the capitalized terms used in this Amendment shall have the definitions set forth in the Lease. 6. Incorporation. This Amendment shall be incorporated into and made a part of the Lease, and all provisions of the Lease not expressly modified or amended hereby shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on the day and year first written above. LANDLORD: GOVERNOR'S HILL PARTNERS, an Ohio partnership WITNESSES: /s/ By: /s/ Jeffrey G. Tulloch ____________________________ Jeffrey G. Tulloch (Printed) General Manager /s/ ____________________________ (Printed) TENANT: MEDPLUS, INC., an Ohio corporation WITNESSES: /s/ Jennifer A. Vonasek Jennifer A. Vonasek By: /s/ Daniel A. Silber (Printed) /s/ Melissa L. Walker Printed: Daniel A. Silber Melissa L. Walker (Printed) Title: Vice President, Finance STATE OF OHIO ) ) SS: COUNTY OF HAMILTON ) Before me, a Notary Public in and for said County and State, personally appeared Jeffrey G. Tulloch, by me known and by me known to be the General Manager of Governor's Hill Partners, an Ohio partnership, who acknowledged the execution of the foregoing "First Lease Amendment" on behalf of said partnership. WITNESS my hand and Notarial Seal this ______ day of __________, 1996. /s/ Notary Public _________________________________ (Printed signature) My Commission Expires: My County of Residence: ________________ STATE OF OHIO ) ) SS: COUNTY OF HAMILTON ) Before me, a Notary Public in and for said County and State, personally appeared Daniel A. Silber, by me known and by me known to be the Vice-President, Finance of MedPlus, Inc., an Ohio corporation, who acknowledged the execution of the foregoing "First Lease Amendment" on behalf of said corporation. WITNESS my hand and Notarial Seal this 31st day of May1996. /a/ Jennifer A. Vonasek Notary Public Jennifer A. Vonasek (Printed signature) My Commission Expires: 8-18-97 My County of Residence: Hamilton EX-10.7 3 SECOND LEASE AMENDMENT THIS SECOND LEASE AMENDMENT ( the "Amendment" ) is executed this 6th day of December, 1996 by and between GOVERNOR'S HILL PARTNERS, an Ohio general partnership ("Landlord"), and MEDPLUS, INC., an Ohio corporation ("Tenant"). W I T N E S S E T H: WHEREAS, Landlord and Tenant entered into a certain Lease dated April 24, 1995 as amended May 31, 1996 (collectively, the "Lease" ), whereby Tenant leased from Landlord certain premises consisting of approximately 20,000 rentable square feet of space (the "Leased Premises" ) located in a building commonly known as 8805 Governor's Hill Drive, Suites 100 and 200, Cincinnati, Ohio 45249; and WHEREAS, Landlord and Tenant desire to terminate Tenant's option to terminate this Lease for the reason that Landlord has accommodated Tenant's expansion needs; and WHEREAS, Landlord and Tenant desire to amend certain provisions of the Lease to reflect such termination, changes and addition to the Lease; NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants herein contained and each act performed hereunder by the parties, Landlord and Tenant hereby agree that the Lease is amended as follows: 1. Amendment of Section 18.19. Right of First Refusal. Section 18.19 of the Lease is hereby amended to add the following: "Provided that Tenant is not in default hereunder and subject to any rights of other tenants to the Refusal Space, Tenant shall have the right of first refusal ("Refusal Option") to lease any additional space in the Building ("Refusal Space")as such space becomes available for leasing during the Lease Term. The term for the Refusal Space shall be coterminous with the Lease Term, provided however, that the minimum term for the Refusal Space shall be five (5) years. The Refusal Space shall be offered to Tenant at the rental rate and upon such other terms and conditions, excluding free rent and other concessions, as are then being offered by Landlord to a specific third party prospective tenant for such space, but in no event shall such rental rate be less than the then current rental rate under this Lease. In the event that the Refusal Space is not leased to the initial third party prospective tenant, then this Refusal Option shall remain in effect in the event of an offer to any other specific third party prospective tenant and the Refusal Space shall again be offered to Tenant in accordance herewith. Upon notification in writing by Landlord that the Refusal Space is available, Tenant shall have five (5) business days in which to notify Landlord in writing of its election to lease the Refusal Space at such rental rates described above, in which event this Lease shall be amended to incorporate such Refusal Space. In the event Tenant declines or fails to elect to lease the Refusal Space, then this Refusal Option shall automatically terminate and shall thereafter be null and void as to such space. It is understood and agreed that this Refusal Option shall not be construed to prevent any tenant in the building from extending or renewing its lease." 2. Amendment of Section 18.20. Termination Option. Section 18.20 of the Lease is hereby deleted in its entirety and is of no further force or effect. 3. Additional Provisions. The following new sections shall be added to the Lease: "18.23. Parking. Landlord hereby agrees to provide Tenant with two (2) additional reserved parking spaces designated by Landlord. 18.24 Storage Space. Landlord hereby leases to Tenant and Tenant hereby Leases from Landlord 2,200 rentable square feet of storage space in the area designated on the attached Exhibit A-1 ("Storage Space" ) at a gross rental rate equal to Seventeen Thousand Six Hundred Dollars and Four Cents ($17,600.04) per year payable in monthly installments of One Thousand Four Hundred Sixty-six Dollars and Sixty-seven Cents ($1,466.67) for the term of the Lease. Landlord shall deliver the Storage Space to Tenant and Tenant accepts the Storage Space "As Is" except that Landlord shall add one (1) HVAC box and remove piping and slabs on which equipment was placed in the Storage Space. Tenant shall pay the rent for such Storage Space in the same manner as provided in Section 3.01. The Storage Space rent includes all operating expenses associated with such Storage Space." 4. Tenant's Representatives and Warranties. The undersigned represents and warrants to Landlord that (i) Tenant is duly organized, validly existing and in good standing in accordance with the laws of the state under which it was organized; (ii) all action necessary to authorize the execution of this Amendment has been taken by Tenant; and (iii) the individual executing and delivering this Amendment on behalf of Tenant has been authorized to do so, and such execution and delivery shall bind Tenant. Tenant, at Landlord's request, shall provide Landlord with evidence of such authority. 5. Examination of Amendment. Submission of this instrument for examination or signature to Tenant does not constitute a reservation or option, and it is not effective until execution by and delivery to both Landlord and Tenant. 6. Definitions. Except as otherwise provided herein, the capitalized terms used in this Amendment shall have the definitions set forth in the Lease. 7. Incorporation. This Amendment shall be incorporated into and made a part of the Lease, and all provisions of the Lease not expressly modified or amended hereby shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on the day and year first written above. LANDLORD: GOVERNOR'S HILL PARTNERS, an WITNESSES: Ohio general partnership /s/ Alice Battaglia Alice Battaglia By:/s/ Jeffrey G. Tulloch (Printed) Jeffrey G. Tulloch /s/ Nicole C. Stevens Manager Nicole C. Stevens (Printed) TENANT: WITNESSES: MEDPLUS, INC., an Ohio corporation /s/ Steven W. Neiheisel Steven W. Neiheisel (Printed) By: /s/ Daniel A. Silber /s/ Candace W. Levine Candace W. Levine Printed: Daniel E. Silber (Printed) Title: Vice President, Finance STATE OF OHIO ) ) SS: COUNTY OF HAMILTON ) Before me, a Notary Public in and for said County and State, personally appeared Jeffrey G. Tulloch, by me known and by be known to be the Manager of Governor's Hill Partners, and Ohio general partnership, who acknowledged the execution of the foregoing "Second Lease Amendment" on behalf of said partnership. WITNESS my hand and Notarial Seal this 31st day of December, 1996. /s/ Nicole C. Stevens Notary Public Nicole C. Stevens (Printed Signature) My Commission Expires: 10-31-00 My County of Residence: __________________ STATE OF OHIO ) ) SS: COUNTY OF HAMILTON ) Before me, a Notary Public in and for said County and State, personally appeared Daniel A. Silber, by me known and by me known to be the Vice President, Finance of MedPlus, Inc., an Ohio corporation, who acknowledged the execution of the foregoing "Second Lease Amendment" on behalf of said corporation. WITNESS my hand and Notarial Seal this 6th day of December, 1996. /s/ Amy J. Seltz Notary Public Amy J. Seltz (Printed Signature) My Commission Expires: 9-5-01 My County of Residence: Warren January 31, 1997 Joseph C. Williams President Dialogos, Inc. 3674 Clifton Avenue Cincinnati, Ohio 45220 RE: AMENDMENT TO LETTER OF AGREEMENT: MedPlus, Inc. Financing Commitment to and Possible Acquisition of Common Stock of Dialogos, Inc. Dear Mr. Williams: This letter shall serve as an amendment to that certain Letter of Agreement between MedPlus, Inc., an Ohio corporation ("MedPlus") and Dialogos, Inc., a Delaware corporation (the "Company"), dated July 12, 1996 (the "Letter of Agreement") pursuant to which MedPlus agreed to provide or obtain specified financing for the operations of the Company, and the Company agreed to issue to MedPlus or grant MedPlus an option to purchase, as the case may be, a certain percentage of the Company's common stock (all of the Company's common stock hereinafter referred to as the "Common Shares") in exchange for such financing. Now, therefore, and in consideration of the mutual covenants and agreements herein contained, the Company and MedPlus hereby agree that the Letter of Agreement shall be amended and restated in its entirety as follows: 1. MedPlus shall, on or before March 31, 1998, either (a) agree to pay $1.65 million (the "Total Funding Amount") to the Company as consideration for 75% of the Common Shares, (b) secure a funding commitment for the Company's operations in an amount equal to the Total Funding Amount from investors ("Investors"), some of which may be designated by MedPlus as "Initial Investors" for purposes hereof, and/or lenders ("Lenders") with financing terms reasonably agreed to by the Company and MedPlus or (c) agree to pay a portion of the Total Funding Amount to the Company as consideration for less than 75% of the Common Shares, as more specifically described in paragraph 4 hereof, and secure a funding commitment for the remainder of the Total Funding Amount from Investors and/or Lenders as described in paragraph 1(b) above ((a), (b) and (c) collectively are the "Obligation"). In the event MedPlus satisfies the Obligation by securing a funding commitment from Investors and/or Lenders for any portion of the Total Funding Amount, the Company shall grant MedPlus the option, which option shall be immediately exercisable and remain open until December 31, 1999, to purchase that percentage of the Common Shares which equals 75% less any percentage of the Common Shares already purchased by MedPlus and/or the Initial Investors (the "Option Percentage") (the "MedPlus Option"). 2. Prior to exercising the MedPlus Option, MedPlus shall have entered into an agreement to either (a) pay to any Investors, except the Initial Investors, and/or Lenders an amount equal to their investment, including appreciation thereof as indicated in such agreement, or their loan, including any interest accrued with respect thereto, made by them in or to the Company (such payment hereinafter referred to as the "Buy-Out Amount") or (b) pay to the Company an amount equal to the Buy-Out Amount. The exercise price of the MedPlus Option shall be equal to the Buy-Out Amount. Immediately upon actual payment of the Buy-Out Amount to either the Investors and/or Lenders or the Company, MedPlus shall receive that number of the Common Shares which equals the Option Percentage thereof. 3. The Common Shares will be transferred to MedPlus and/or the Initial Investors free, clear and unencumbered. 4. MedPlus shall fund the general operations of the Company from the date of this Letter of Agreement until the Obligation has been satisfied and funding has actually begun pursuant to either paragraph 1(a), (b) or (c) above (the "Interim Funding"). The Interim Funding shall be provided from time to time in amounts reasonably requested by the Company, which amounts are consistent with funding required to execute the financial plan provided to MedPlus by the Company during June, 1996. If MedPlus or any of the Initial Investors decides or decide to fund directly any portion of the Total Funding Amount, then, at any time prior to March 31, 1998 and at MedPlus' or such Initial Investor's option, as the case may be, any amount so paid to the Company, including the Interim Funding (with Interest thereon, as hereinafter defined), shall be considered payment for a certain percentage of the Common Shares (an "Interim Option"). Upon exercise of an Interim Option, MedPlus or an Initial Investor shall immediately be issued 1% of the Common Shares for every $22,000 paid to the Company as a portion of the Total Funding Amount or as Interim Funding. In the alternative, if MedPlus secures a funding commitment for the Company's operations for any portion of the Total Funding Amount from Investors and/or Lenders pursuant to paragraph 1(b) above, then, immediately upon the Company's receipt of such funding and at MedPlus' request, the Company shall reimburse MedPlus in the amount of such funding for any and all monies paid to or on behalf of the Company by MedPlus to effect the Interim Funding, plus Interest. For purposes of this paragraph 4, "Interest" shall mean interest equal to the prime rate, as announced from time to time by the Provident Bank, Cincinnati, Ohio, plus 1% per annum. 5. The Company shall require each employee and/or consultant thereto to execute a confidentiality agreement, reasonably similar to confidentiality agreements executed by employees and/or consultants in the technology industry, with respect to information obtained by him or her as a result of his or her relationship with the Company. 6. It is a condition precedent to the obligations of MedPlus hereunder that Joseph C. Williams, President and majority stockholder of the Company ("Williams"), shall have executed a voting agreement, in the form attached hereto as Exhibit A, whereby Williams agrees to vote all Common Shares owned by him in favor of electing one person designated by MedPlus as member of the Company's Board of Directors. In addition, the holders of any and all shares issued by the Company before the earlier of (i) the exercise of the MedPlus Option or any Interim Option, (ii) the Rejection, as hereinafter defined, or (iii) the expiration of the MedPlus Option shall be required by the Company to execute a voting agreement in substantially the form attached hereto as Exhibit A. The failure to enforce any portion of this Section 6 at any time by MedPlus shall not be construed as a waiver of its rights hereunder. 7. In the event MedPlus exercises the MedPlus Option and MedPlus and/or the Initial Investors acquire(s) greater than 50% of the Common Shares, MedPlus and the Company agree that the Company shall amend any existing employment agreements with Williams and other key employees of the Company (the "Key Employees") to provide that, for each year during the three-year period ending December 31, 1999, the Key Employees may be granted options to purchase Common Shares ("Incentive Options"). Incentive Options may only be granted by the Company pursuant to the following terms and conditions: (a) The determination of whether to grant Incentive Options in either 1997, 1998 or 1999 shall be based on the achievement of a certain "Contribution Margin" of the Company as budgeted for that fiscal year. (For purposes hereof, "Contribution Margin" shall mean "pre-tax income" as used by MedPlus in its internal financial reporting system). Specifically, prior to January 15th of 1997, 1998 and 1999, MedPlus and the Company shall calculate the Contribution Margin to be used as the basis for determining whether any Incentive Options shall be granted to the Key Employees following the close of such year. The Contribution Margin to be achieved so that Incentive Options may be granted following the close of 1997 is described on Exhibit B hereto. (b) The exercise price per share of any options granted as Incentive Options shall be determined by an independent appraiser selected by the Company; in no event, however, shall such exercise price be less than the price per share paid by MedPlus in exercising the MedPlus Option. (c) In no event shall the number of shares subject to Incentive Options granted to all Key Employees for each of the following years exceed in the aggregate (i) for 1997 and 1998, 3% of all Common Shares outstanding at December 31, 1997 and 1998, respectively and (ii) for 1999, 4% of all Common Shares outstanding at December 31, 1999. (d) If any Incentive Options are issued, then at the time of issuance the Company shall issue to Williams and any Key Employees who are then shareholders of the Company additional shares such that the percentage ownership interest in the Company held by Williams and/or each Key Employee after such issuance is equal to the percentage ownership interest in the Company held by him or her immediately prior to such issuance, plus the percentage increase resulting from the issuance to Williams or a Key Employee of an Incentive Option. This paragraph 7(d) is intended to protect the ownership of Williams and the Key Employees from dilution as the result of the issuance of Incentive Options. (e) If the Company conducts an initial public offering of the Common Shares at any time prior to December 31, 1999 (an "IPO"), then, as of the date of such IPO, the Key Employees shall no longer be entitled to receive Incentive Options as described in this paragraph 7; provided that, MedPlus and the Company agree that in the event of an IPO, they will use their respective best efforts to establish a plan pursuant to which the Key Employees may be granted options to purchase Common Shares. The Company acknowledges, however, that in the event of an IPO, the percentage ownership of all shareholders of the Company, including Williams and the Key Employees, shall be diluted and any options granted to employees of the Company following an IPO also will be subject to dilution. (f) The Company agrees that prior to December 31, 1999, except for the Incentive Options described herein, it will not issue any form of stock incentives to its employees. 8. The Company agrees that it shall be operated in the normal and ordinary course until January 1, 2000, that all necessary corporate and other actions will be taken pursuant to law, and that all applicable laws and governmental regulations will be complied with. 9. MedPlus contemplates the expenditure of substantial sums of time and money in connection with legal, accounting, financial, and due diligence work to be performed in conjunction with the transaction(s) proposed herein. As consideration therefor, during the period from the date of acceptance of this letter to MedPlus' satisfaction of the Obligation or March 31, 1998, whichever is earlier, the Company shall not, directly or indirectly, initiate or hold discussions with any person or entity (other than MedPlus) concerning a purchase, affiliation, or other transfer of any part of the Company's business, directly or indirectly, whether by sale of common shares, merger, consolidation, sale or lease of material assets, affiliation, joint venture, or other material transaction. After March 31, 1998 and until MedPlus affirmatively declines to exercise the MedPlus Option (the "Rejection") or until December 31, 1999, whichever is earlier, the Company shall not accept financial support for any reason from any third party without first offering MedPlus the opportunity to provide such financial support on terms reasonably similar to those offered by such third party. MedPlus shall then have 30 days from the date of such offer to elect to provide such financial support. If the offer is affirmatively rejected by MedPlus or such 30 day period expires, then the Company may accept financial support from such third party on the same terms and conditions contained in the third party's original financing offer. 10. The Company agrees to permit MedPlus' representatives, agents, accountants and attorneys to have reasonable access during regular business hours to the Company's books, records and properties for the purpose of making a detailed examination of the financial condition, assets, liabilities, legal compliance, affairs, business and the conduct of the Company prior to MedPlus' exercise of the MedPlus Option or the Rejection, whichever occurs first. In addition, prior to MedPlus' exercise of the MedPlus Option or the Rejection, whichever occurs first, Dialogos shall have its financial statements audited annually by KPMG Peat Marwick LLP. It is understood and agreed that any public announcement of this transaction will be through a mutually agreed upon joint release. Very truly yours, MEDPLUS, INC. /s/ Daniel A. Silber Daniel A. Silber, Vice-President of Finance and Chief Financial Officer Accepted by: DIALOGOS, INC. /s/ Joseph C. Williams Joseph C. Williams, President EX-10.8 4 CONSULTING AGREEMENT This Consulting Agreement (this "Agreement") is made this 1st day of September, 1996, and is by and between Universal Document Management Systems, Inc. ("UDMS"), an Ohio corporation, and Madison Financial Group Ltd. /f/k/a/ DMG Equity Partners LLC ("Madison"), an Ohio limited liability company. In consideration of the mutual promises hereinafter contained, UDMS and Madison agree as follows. 1. Consulting Services. Madison agrees to provide the following services to UDMS: (a) consulting services in connection with potential acquisitions, corporate reorganizations and restructurings, and private or public offerings, including preparing reports, memoranda, analyses, and other documents for management relating thereto; (b) preparing strategic plans in connection with potential acquisitions, corporate reorganizations and restructurings; (c) search and screening services in connection with management personnel hirings; and (d) performing such other activities which UDMS may reasonably request from time to time. 2. Consulting Fees. In consideration of the services to be provided by Madison to UDMS under this Agreement, UDMS agrees to pay Madison the following compensation: (a) As of September 1, 1996, UDMS grants Madison a warrant to purchase 15% of the outstanding shares of UDMS stock as of the date of this Agreement (the "Warrant"), at a price of $465,100 for the Warrant (see Exhibit A). The Warrant shall be exercisable for a period of three (3) years beginning on the date UDMS completes a public or private offering of its stock. In the event that MedPlus, Inc. (the parent company of UDMS) issues additional consideration to any or all of the selling shareholders of UDMS in connection with the terms and conditions of the Merger Agreement between MedPlus, Inc. and UDMS dated December 29, 1995, then 15% of such additional consideration shall be added to the price of the Warrant. Notwithstanding the provisions of this Section 2(a), however, if Madison terminates this Agreement prior to the completion of a public or private offering of UDMS stock or if UDMS terminates this Agreement more than ninety (90) days prior to completion of a public or private offering of UDMS stock, the Warrant shall cease to be effective and shall not be exercisable by Madison. (b) Provided this Agreement has been in full force and effect for six (6) months, UDMS shall pay Madison a consulting fee of $50,000. No consulting fee, nor any prorated consulting fee, shall be paid to Madison if this Agreement is terminated by either party for any reason before the expiration of said six months. (c) In addition to the consideration described above, UDMS agrees to reimburse Madison for all reasonable out-of-pocket expenses incurred by Madison in connection with the performance of its services under this Agreement. In the event the travel expenses for any single trip are reasonably expected to exceed $2,500, Madison shall be required to obtain prior written approval of UDMS prior to incurring such expenses. 3. Term. The term of this Agreement shall commence as of the date hereof and shall terminate upon the first to occur of (i) written termination by either UDMS or Madison upon thirty (30) days advance notice; (ii) the completion of a public or private offering of UDMS stock; or (iii) two years from the date hereof. 4. Status of Madison. It is understood that Madison is an independent contractor and is not an employee, agent, partner or representative of UDMS, and shall not hold itself out to the public as an employee, agent, partner or representative of UDMS. 5. Noncompetition and Confidentiality. (a) Noncompetition. Madison agrees and covenants that during the Noncompetition Period (as defined in Section 5(c)) and except for any services performed for or on behalf of UDMS or any affiliates thereof pursuant to the terms hereof, it will not, directly or indirectly, engage in any business of the same nature as the business in which UDMS or any of its affiliates now or hereafter does business. Notwithstanding the foregoing, Madison may pursue any business opportunity, whether or not of the same nature as the business in which UDMS or any of its affiliates now or hereafter engages, upon written notification from UDMS that UDMS does not wish to engage in such business opportunity. Madison shall also be permitted and entitled to beneficially own or acquire, for investment purposes only, not more than five percent (5%) of the outstanding capital stock of any publicly held enterprise engaged in any business in which UDMS is engaged. (b) Other Employees. Madison agrees that, during the Noncompetition Period, it shall not, directly or indirectly, for its own account or as agent of any business entity, employ, engage, hire, offer to employ, engage, or hire or otherwise entice or, in any other manner, persuade any employee, officer, executive, or agent of UDMS or its affiliates to discontinue his or her relationship with UDMS or its affiliates. (c) Noncompetition Period. As used herein, the term "Noncompetition Period" shall mean the period beginning on the date hereof and ending six (6) months after the termination of this Agreement pursuant to Section 3 hereof. (d) Confidentiality. Madison acknowledges that it will come into possession or knowledge of Confidential Information, as defined in Section 5(e), relating to the business of UDMS. Except as specifically provided otherwise in this Agreement, Madison shall: (1) hold all Confidential Information in confidence; (2) not disclose or disseminate any Confidential Information; (3) not copy or reproduce any Confidential Information, in whole or in part; and (4) make the Confidential Information available only to its employees, representatives and agents who have a reasonable need for such Confidential Information. UDMS acknowledges that it may be necessary for Madison to disseminate certain confidential information to third parties in the course of its duties hereunder. Prior to disclosing any Confidential Information to third parties, Madison shall give UDMS written notice of the identity of the third party and the information to be disclosed, shall require the third party to enter into a confidentiality agreement in a form approved by UDMS, and shall deliver an original signed copy of said confidentiality agreement to UDMS. Madison shall not use any Confidential Information for any purpose not related to its services under this Agreement. This Section 5(d) shall survive the termination of this Agreement. (e) Confidential Information. "Confidential Information" shall include, but is not limited to, the following types of information regarding UDMS or its affiliates: corporate information, including, without limitation, contractual arrangements, plans, strategies, tactics, terms, conditions, policies, (written or otherwise), resolutions, and any litigation or negotiations; marketing information, including, without limitation, sales or product plans, strategies, tactics, methods, customers (and any information concerning customers), prospects, or market research data; financial information, including, without limitation, cost and performance data, debt arrangement, equity structure, investors, and holdings; personnel information, including, without limitation, personnel lists, resumes, personnel data, organizational structure and performance evaluations; and technical information, including, without limitation, patents, copyrights, source codes, proprietary information, trade secrets, methods, systems, and product specifications. Confidential Information does not include information that: (i) is in the public domain or becomes known in the industry other than as a result of disclosure by Madison or its affiliates or representatives; (ii) was rightfully available to Madison on a non-confidential basis prior to its disclosure to Madison by UDMS or its affiliates, agents or representatives; (iii) becomes rightfully available to Madison on a non-confidential basis from a source other than UDMS or its affiliates, agents, or representatives, provided that such source is not bound by a confidentiality agreement with UDMS or its affiliates, or otherwise prohibited from transmitting the information to Madison by contractual, legal, or fiduciary obligation. (f) Corporate Documents. Madison agrees that all documents that now or hereafter come into its possession relating to UDMS or its affiliates in any manner, or to any of the foregoing matter including, without limitation, memoranda, notebooks, data sheets, records, financial statements, and documents, are and shall remain the property of UDMS and that they and all copies thereof shall be surrendered to UDMS upon termination of this Agreement. (g) Equitable Remedies. In the event of a breach by Madison of any of the provisions of this Section 5, UDMS, in addition to any other remedies it may have at law or in equity, shall be entitled to a permanent injunction in order to prevent or restrain any such breach by the Madison and/or by Madison affiliates, employees, partners, agents, representatives, or any and all persons directly acting for or with Madison. 6. Indemnification. UDMS agrees to indemnify and hold harmless Madison for any liabilities, claims, demands, or obligations asserted against Madison or UDMS by any third party in connection with the performance by UDMS, or any of its employees or representatives, of consulting services pursuant to this Agreement. 7. Entire Agreement. This Agreement contains the parties' entire agreement regarding the consulting services to be performed by Madison to or for the benefit of UDMS and supersedes any prior or oral or written understandings and agreements. The parties can modify this Agreement only by a writing signed by Madison and UDMS. 8. Survival. The obligations contained in Sections 2 and 5 of this Agreement shall survive termination of this Agreement. 9. Assignment. Neither party shall have the right to assign any rights or obligations under this Agreement without the prior written consent of the other party. 10. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. UNIVERSAL DOCUMENT MANAGEMENT SYSTEMS, INC. By: /s/ Philip S. Present II Date: September 1, 1996 Name: Philip S. Present II MADISON FINANCIAL GROUP LTD. By: /s/ Christopher J. Dirksing Date: September 1, 1996 Name: Christopher J. Dirksing Exhibit A UDMS Calculation of Value As of September 1, 1996 Universal Document Management Systems, Inc. Calculation of Value of Warrant September 1, 1996 Value of Universal Document Management Systems, Inc. Purchase Price: Original cash & stock consideration $1,700,000 Contingent cash & stock consideration 280,000 Net liabilities assumed by MedPlus, Inc. 357,283 _________ 2,337,283 Professional fees paid by MedPlus, Inc. related to acquisition 112,569 Contribution Margin: Stub period, 12/13/95-12/31/95 206,179 Eight months ended 8/30/96 183,897 Goodwill amortization, 12/13/95-8/30/96 (72,616) _________ 317,460 _________ Total $2,767,312 _________ Value of Warrant Value of UDMS as calculated above $2,767,312 15% _________ 15% of Calculated Value 415,100 MFG Consulting Fee reimbursement 50,000 _________ Value of Warrant $465,100 _________ EXHIBIT 21 Subsidiaries of MedPlus, Inc. 1. FutureCORE, Inc., an Ohio corporation, doing business as such 2. Universal Document Management Systems, Inc., an Ohio corporation, doing business as such EX-23 5 3. EXHIBIT 23 Independent Auditors' Consent The Board of Directors MedPlus, Inc.: We consent to the incorporation by reference in the registration statements of MedPlus, Inc. and subsidiaries on Form S-8 (No. 33-94426) and Form S-3 (No. 333-20547) of our report dated February 28, 1997, relating to the consolidated balance sheets of MedPlus, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-KSB of MedPlus, Inc. and subsidiaries. /s/ KPMG Peat Marwick LLP Cincinnati, Ohio March 27, 1997 EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FOR THE CONSOLIDATED FINANCIAL STATEMENTS OF MEDPLUS, INC. AND SUBSIDIARIES AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 ADN IS QUALIFIED IN TIS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 2,700,607 300,510 4,239,712 (100,000) 827,619 943,089 1,922,108 (459,290) 14,847,144 3,741,599 0 0 0 1,076 1,824 14,847,144 10,940,456 10,940,456 5,477,932 5,477,932 0 0 0 (2,470,295) 1,897 0 0 0 0 (2,472,192) (.42) 0
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