UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number: 0-22052
PROXYMED, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0202059
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2555 DAVIE ROAD, SUITE 110, FT. LAUDERDALE, FLORIDA 33317
(Address of principal executive offices) (Zip Code)
(954) 473-1001
(Registrant's telephone number)
-------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
COMMON STOCK, $.001 PAR VALUE
18,155,661 SHARES AS OF AUGUST 10, 1999
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
ASSETS 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 3,788,810 $ 4,681,671
Accounts receivable - trade, net 6,838,441 6,383,996
Notes and other receivables 231,552 463,894
Inventory 2,586,303 2,970,210
Other current assets 432,398 254,979
------------ ------------
Total current assets 13,877,504 14,754,750
Property and equipment, net 4,326,091 4,335,944
Goodwill, net 14,141,832 15,539,821
Purchased technology, capitalized software
and other intangible assets, net 11,439,923 13,654,399
Other assets 538,988 551,660
------------ ------------
Total assets $ 44,324,338 $ 48,836,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 700,643 $ 498,453
Accounts payable and accrued expenses 6,126,512 6,244,631
Deferred revenue 677,070 447,178
------------ ------------
Total current liabilities 7,504,225 7,190,262
Long-term debt -- 667,193
Long-term deferred revenue 599,997 700,000
------------ ------------
Total liabilities 8,104,222 8,557,455
------------ ------------
Stockholders' equity:
Common stock - $.001 par value. Authorized
50,000,000 shares; issued and outstanding
18,145,179 and 17,808,172 shares, respectively 18,145 17,808
Additional paid-in capital 86,448,327 82,427,262
Accumulated deficit (49,986,556) (41,906,151)
Note receivable from stockholder (259,800) (259,800)
------------ ------------
Total stockholders' equity 36,220,116 40,279,119
------------ ------------
Total liabilities and stockholders' equity $ 44,324,338 $ 48,836,574
============ ============
See accompanying notes.
2
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Services and license fees $ 5,772,711 $ 4,745,000 $ 10,894,252 $ 8,053,681
Computer systems, prescription drugs
and other tangible goods 5,231,628 5,092,055 11,477,397 6,631,290
------------ ------------ ------------ ------------
11,004,339 9,837,055 22,371,649 14,684,971
------------ ------------ ------------ ------------
Costs and expenses:
Cost of services and license fees 543,550 579,210 1,000,322 1,129,870
Cost of tangible goods 3,833,323 3,763,869 8,210,200 4,983,063
Selling, general and
administrative expenses 7,506,888 5,454,803 14,480,825 9,602,851
Depreciation and amortization 3,526,888 2,099,569 6,795,784 2,730,242
In-process research and
development technology -- 859,830 -- 859,830
------------ ------------ ------------ ------------
15,410,649 12,757,281 30,487,131 19,305,856
------------ ------------ ------------ ------------
Operating loss (4,406,310) (2,920,226) (8,115,482) (4,620,885)
Interest income (expense) 16,311 (10,544) 35,077 (22,502)
------------ ------------ ------------ ------------
Net loss $ (4,389,999) $ (2,930,770) $ (8,080,405) $ (4,643,387)
============ ============ ============ ============
Basic and diluted loss per share
of common stock $ (.25) $ (.19) $ (.45) $ (.34)
============ ============ ============ ============
Weighted average common
shares outstanding 17,913,831 15,134,640 17,866,363 13,496,493
============ ============ ============ ============
See accompanying notes.
3
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 1998
------------- ------------
Cash flows from operating activities:
Net loss $ (8,080,405) $ (4,643,387)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,795,784 2,730,242
In-process research and development technology -- 859,830
Provision for doubtful accounts 86,967 96,769
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts and other receivables (87,920) (4,195,687)
Inventory 383,907 (306,361)
Accounts payable and accrued expenses (561,505) (1,823,657)
Deferred revenue 129,889 316,113
Other, net (166,779) (134,538)
------------ ------------
Net cash used in operating activities (1,500,062) (7,100,676)
------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (1,000,000) (20,529,340)
Acquisition contingency payment -- (500,000)
Payments for acquisition-related costs (450,529) (424,572)
Capital expenditures (577,991) (396,485)
Capitalized software (196,319) (274,067)
------------ ------------
Net cash used in investing activities (2,224,839) (22,124,464)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 2,940,000 29,011,999
Proceeds from exercise of stock options and warrants 149,839 1,362,991
Draw on line of credit -- 325,000
Payment of note payable and long-term debt (257,799) (1,025,488)
------------ ------------
Net cash provided by financing activities 2,832,040 29,674,502
------------ ------------
Net increase (decrease) in cash (892,861) 449,362
Cash and cash equivalents at beginning of period 4,681,671 3,249,429
------------ ------------
Cash and cash equivalents at end of period $ 3,788,810 $ 3,698,791
============ ============
See accompanying notes.
4
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION - The accompanying unaudited condensed
consolidated financial statements of ProxyMed, Inc. and
subsidiaries have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the
information and disclosures required by generally accepted
accounting principles. However, such information reflects all
adjustments (consisting solely of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.
The results of operations for the three and six months ended June
30, 1999 are not necessarily indicative of the results to be
expected for the full year. Reference is made to ProxyMed's annual
report on Form 10-K for the year ended December 31, 1998. As a
result of the merger with Key Communication Services, Inc. ("Key")
in December 1998, the accounts of Key are included as of May 1,
1998 (due to a leveraged buyout consummated on April 30, 1998 by
Key`s shareholders). Certain prior period amounts have been
reclassified to conform with the current period presentation.
(B) REVENUE RECOGNITION - Electronic transaction processing fee
revenue is recorded in the period the service is rendered. Revenue
from sales of software, software licenses, computer hardware and
manufactured goods is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or
determinable and collectibility is probable. The same criteria is
applied to each element of multiple element arrangements after
allocating the revenues to individual elements based on
vendor-specific objective evidence of fair value. Revenue from
hardware leases, software rentals and maintenance fees is
recognized ratably over the applicable period. Revenue from
ProxyMed's prescription drug dispensing activities is reported at
net realizable amounts from insurance providers and patients at
the time the individual prescriptions are delivered to the
patients.
(C) NET LOSS PER SHARE - Basic loss per share of common stock is
computed by dividing net loss by the weighted average shares of
common stock outstanding during the period. Diluted per share
results reflect the potential dilution from the exercise or
conversion of securities into common stock; however, stock options
and warrants totaling 3,209,227 shares and 2,493,596 shares at
June 30, 1999 and 1998, respectively, were excluded from the
calculation of diluted per share results because their effect was
antidilutive.
5
(2) ACQUISITION OF BUSINESS - In January, 1999, ProxyMed acquired the
electronic transaction processing business and assets of Specialized
Medical Management, Inc., a provider of healthcare financial electronic
transaction processing services primarily in the Southwestern United
States, for $1,000,000 in cash. Additionally, costs of $174,000 associated
with the acquisition were incurred, and 10,000 shares of unregistered
common stock and warrants to purchase 20,000 shares of ProxyMed's common
stock at $11.44 (together valued at $181,563) were issued to an unrelated
third-party as a finder's fee for this transaction. The value of the shares
was computed based on the fair market value of the common stock, and the
value of the warrant was computed using the Black-Scholes method, subject
in both cases to a discount due to restrictions on the marketability of the
securities for one year from the date of issuance. The acquisition was
accounted for as a purchase, and the purchase price was allocated as
follows: net working capital ($206,408), property and equipment ($38,546)
and other intangible assets ($111,060). The excess of the consideration
paid over the estimated fair value of the net assets acquired in the amount
of $999,549 was recorded as goodwill and is being amortized over three
years. Pro forma operating results from this acquisition are not
significantly different from historical results reported.
(3) CONTINGENCY PAYMENT - In July, 1999, the Company paid $500,000 and issued
26,846 shares of unregistered common stock to the former owner of Hayes
Computer Systems, Inc. ("HCS") for meeting certain operating criteria in
the second 12-month period subsequent to the April 1997 acquisition of HCS,
as defined in the asset purchase agreement. Recently, in connection with
the Company's new initiative to develop proxymed.com, our healthcare portal
website, management decided to adopt Microsoft technology for email, and
abandoned the Krypton Internet Messaging Server in-process research and
development technology acquired in its acquisition of HCS. Accordingly, the
contingent payment was recorded as goodwill, and is being amortized through
April 30, 2000.
(4) SALE OF COMMON STOCK - On June 10, 1999, the Company sold 250,000 shares of
unregistered common stock at $12.00 per share in a private placement, plus
five-year warrants for the purchase of an aggregate of 120,000 shares of
common stock for $10.00 per share, resulting in net proceeds of $2,940,000
after costs of $60,000. As part of the sale, the Company issued a five-year
warrant to the private placement agent for the purchase of 35,000 shares of
the Company's common stock at $13.31.
6
(5) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 1998
------------ ------------
Common stock issued for payment of long-term debt $ 250,000 $ --
============ ============
Acquisition of businesses:
Contingent common stock issued for prior year acquisition $ 500,000 $ 500,000
============ ============
Common stock and warrants issued for businesses acquired $ 181,563 $ 5,345,325
Other acquisition costs accrued 174,000 550,000
Details of acquisitions: --
Working capital components, other than cash (206,408) (386,586)
Property and equipment (38,546) (363,540)
Goodwill (999,549) (14,900,729)
Purchased technology -- (11,000,000)
Other intangible assets (111,060) --
Loans and notes payable -- 226,190
------------ ------------
Net cash used in acquisitions $ (1,000,000) $(20,529,340)
============ ============
7
(6) SEGMENT INFORMATION - ProxyMed operates in the following reportable
segments which are separately managed: healthcare electronic transaction
processing and communication devices, network engineering services, and
prescription drug dispensing. Intersegment sales are not material and there
were no foreign sales for any periods presented.
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 1998
------------ ------------
Net revenues:
Healthcare electronic transaction
processing and communication devices $ 15,290,749 $ 8,512,150
Network engineering services 6,071,503 5,411,923
Prescription drug dispensing 1,009,397 760,898
------------ ------------
$ 22,371,649 $ 14,684,971
============ ============
Operating income (loss):
Healthcare electronic transaction
processing and communication devices $ (4,964,386) $ (2,043,034)
Network engineering services (19,281) (864,659)
Prescription drug dispensing (75,801) (22,949)
Corporate (3,056,014) (1,690,243)
------------ ------------
$ (8,115,482) $ (4,620,885)
============ ============
Total assets:
Healthcare electronic transaction
processing and communication devices $ 34,475,055 44,367,461
Network engineering services 4,202,559 5,198,739
Prescription drug dispensing 1,011,965 1,074,976
Corporate 4,634,759 4,970,069
------------ ------------
$ 44,324,338 $ 55,611,245
============ ============
(7) RESOLUTION OF CONTINGENCY - ProxyMed was the defendant in a lawsuit filed
April 28, 1999 in the United States District Court, Eastern District of
Virginia (Case No. CA2-99-CV-604-A) by Advanced Health Corporation ("AHT"),
alleging patent infringement. On May 26, 1999, the lawsuit was settled
without any admission of liability. Under the terms of the settlement, the
Company received a license for all of AHT's existing and future patents in
the electronic prescription writing field and will pay royalties to AHT,
which are not expected to be material.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
ProxyMed is a healthcare information services company providing financial
and clinical electronic transaction processing services and healthcare
technology software products to physicians and other healthcare providers such
as nursing homes, pharmacies, commercial and hospital laboratories, insurance
companies and managed care organizations. In addition, we derive revenues from
network engineering services and related computer hardware sales principally to
state government agencies, sales and leasing of computer peripheral equipment to
various healthcare and non-healthcare customers, contract manufacturing of
circuit boards to non-healthcare customers, and the dispensing of prescription
drugs to patients who are residing in long-term care facilities. Our products
and services are provided from our four principal operating facilities located
in Fort Lauderdale and Tallahassee, Florida; Santa Ana, California; and New
Albany, Indiana.
We operate in the following reportable segments which are separately
managed: healthcare electronic transaction processing and communication devices,
network engineering services, and prescription drug dispensing. Business
combinations were consummated during the periods presented and are included in
the financial statements after their respective dates of acquisition.
Specialized Medical Management, Inc. was acquired by us in January 1999; Key
Communications Service, Inc. merged with us in December 1998 (accounts of Key
Communications are included as of May 1, 1998 due to a leveraged buy-out
consummated on April 30, 1998 by Key Communications' shareholders); and
Integrated Medical Systems was acquired in May 1998. These entities are
reportable under the healthcare electronic transaction processing and
communication devices segment.
In May 1999, we announced and commenced the development of proxymed.com, a
healthcare portal website aimed at increasing connectivity through the use of
the internet. Proxymed.com will offer a secure, single access point through the
web for all connectivity needs of physicians and other healthcare providers. It
will also facilitate healthcare e-commerce services, information and provider
directories. Microsoft Corporation and Renaissance Interactive, Inc. are
currently working with us to complete the design and development of this
healthcare portal website. Proxymed.com will integrate our existing desktop
products into a single internet-based solution for healthcare providers, and we
will host and manage proxymed.com upon its planned introduction in September
1999. Proxymed.com is reportable under the healthcare electronic transaction
processing and communication devices segment.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET REVENUES. Consolidated net revenue for the three months ended June 30,
1999 increased by $1,167,284, or 12%, to $11,004,339 from consolidated net
revenue of $9,837,055 for the three months ended June 30, 1998. Of this
increase, revenues from our healthcare electronic transaction processing and
communication devices segment increased by $2,132,000 over the 1998 period
primarily due to the net effect of: (i) increases from our acquisitions of Key
Communications, Specialized Medical Management and Integrated Medical Systems
($3,459,000), which were all consummated during or subsequent to the 1998
period, (ii) decreases from the sales of non-exclusive source code licenses for
our clinical software products ($1,115,000), (iii) increases from network
connectivity fees received from a pharmacy ($200,000), and (iv) decreases in
sales of ClinScan(R), our laboratory ordering and results reporting software
system ($360,000). Additionally, our network engineering services segment
revenue decreased by $1,069,000 due to customers purchasing earlier in 1999, and
our drug dispensing segment revenue increased by $105,000, compared to the 1998
period, due to new customers.
COST OF SALES AND GROSS PROFIT MARGIN. Cost of services and license fees
includes labor and travel costs, third-party support arrangements, third-party
electronic transaction processing costs and internet-related communication fees.
Cost of sales for computer systems, prescription drugs and other tangible goods
includes hardware, third-party software, prescription and non-prescription drugs
and dispensing supplies, manufactured goods and direct labor and consumable
materials used in contract manufacturing.
Consolidated gross profit margin for the three months ended June 30, 1999
was 60% compared to 56% for the three months ended June 30, 1998. This increase
is primarily due to the impact of lower sales in our network engineering
services segment, which typically carries lower gross profit margins due to
hardware sales. The gross margin in our healthcare electronic transaction
processing and communication devices segment was 74% in the 1999 period compared
to 78% in the 1998 period; this decrease was primarily due to the favorable
impact in the 1998 period from higher sales of non-exclusive clinical source
code software licenses. The gross profit margin in our network engineering
services segment was 27% in the 1999 period and was comparable to 25% in the
1998 period. The gross profit margin in our drug dispensing segment was 23% in
the 1999 period compared to 30% in the 1998 period; this decrease is primarily
due to an adjustment of $36,500 from a physical inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general
and administrative expenses for the three months ended June 30, 1999 increased
by $2,052,085, or 38%, to $7,506,888 from consolidated SG&A expenses of
$5,454,803 for the three months ended June 30, 1998. Of this increase, SG&A
expenses from our healthcare electronic transaction processing and communication
devices segment increased by $1,328,000 over the 1998 period due to the net
effect of (i) increases in
10
SG&A from our acquisitions of Key Communications, Specialized Medical Management
and Integrated Medical Systems ($1,567,000), all of which were acquired during
or subsequent to the 1998 period, (ii) development expenses related to
proxymed.com ($199,000), and (iii) net decreases of $438,000 from existing
segment operations in payroll, facility and telecommunication costs due to
consolidation of our operations. In addition, our corporate SG&A expenses
increased primarily for payroll, marketing, and facility and telecommunication
costs to support our growth ($508,000), and charges related to the settlement of
litigation and activities associated with our announced engagement of Salomon
Smith Barney to help us evaluate our strategic alternatives ($282,000). SG&A
expenses in our network engineering services segment decreased by a net of
$102,000 primarily due to reductions in payroll costs partially offset by
increased selling expenses; while SG&A expenses in our drug dispensing segment
increased by $36,000 primarily due to increased payroll costs and uncollectible
accounts receivable.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization
expense increased $1,427,319, or 68%, to $3,526,888 for the three months ended
June 30, 1999 from $2,099,569 for the three months ended June 30, 1998. This
increase was primarily due to amortization charges for goodwill and other
intangible assets associated with our recent acquisitions.
IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY. As a result of a contingent
payment made to the former owner of Hayes Computer Systems in 1998, we recorded
a charge of $859,830 in 1998 related to the expensing of in-process research and
development technology. Recently, in connection with our new initiative to
develop proxymed.com, management decided to adopt Microsoft technology for email
and abandoned the Krypton Internet Messaging Server in-process research and
development technology acquired in its acquisition of Hayes Computer Systems.
Accordingly, the 1999 contingent payment was recorded as goodwill, and is being
amortized through April 30, 2000.
INTEREST, NET. The change in net interest was not significant.
NET LOSS. As a result of the foregoing, we recorded a net loss of
$4,389,999 for the three months ended June 30, 1999, as compared to a net loss
of $2,930,770 for the three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET REVENUES. Consolidated net revenues for the six months ended June 30,
1999 increased by $7,686,678, or 52%, to $22,371,649 from consolidated net
revenues of $14,684,971 for the six months ended June 30, 1998. Of this
increase, revenues from our healthcare electronic transaction processing and
communication devices segment increased by $6,779,000 over the 1998 period
primarily due to the net effect of: (i) increases from our acquisitions of Key
Communications, Specialized Medical Management and Integrated Medical Systems
($10,209,000), which were all consummated during or subsequent to the 1998
period, (ii) decreases from the sales of
11
non-exclusive source code licenses for our clinical software products
($2,616,000), (iii) increases from network connectivity fees received from a
pharmacy ($200,000), and (iv) decreases in sales of ClinScan, our laboratory
ordering and results reporting software system ($653,000). Additionally, due to
increases in sales volume, both our network engineering services segment
revenues increased by $660,000, and our drug dispensing segment revenue
increased by $249,000, over the 1998 period.
COST OF SALES AND GROSS PROFIT MARGIN. Cost of services and license fees
includes labor and travel costs, third-party support arrangements, third-party
electronic transaction processing costs and internet related communication fees.
Cost of sales for computer systems, prescription drugs and other tangible goods
includes hardware, third-party software, prescription and non-prescription drugs
and dispensing supplies, manufactured goods and direct labor and consumable
materials used in contract manufacturing.
Consolidated gross profit margin for the six months ended June 30, 1999 was
59% and was comparable to 58% for the six months ended June 30, 1998. The gross
margin in our healthcare electronic transaction processing and communication
devices segment was 74% in the 1999 period compared to 80% in the 1998 period;
this decrease was primarily due to the favorable impact in the 1998 period from
higher sales of non-exclusive clinical source code software licenses. The gross
profit margin in our network engineering services segment was 27% in the 1999
period and was comparable to 28% in the 1998 period. The gross profit margin in
our drug dispensing segment was 27% in the 1999 period compared to 32% in the
1998 period; this decrease is primarily due to an adjustment of $36,500 from a
physical inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general
and administrative expenses for the six months ended June 30, 1999 increased by
$4,877,974, or 51%, to $14,480,825 from consolidated SG&A expenses of $9,602,851
for the six months ended June 30, 1998. Of this increase, SG&A expenses from our
healthcare electronic transaction processing and communication devices segment
increased by $3,585,000 over the 1998 period due to the net effect of (i)
increases in SG&A from our acquisitions of Key Communications, Specialized
Medical Management and Integrated Medical Systems ($4,702,000), all of which
were acquired during or subsequent to the 1998 period, (ii) development expenses
related to proxymed.com ($199,000), and (iii) net decreases of $1,316,000 from
existing segment operations in payroll, facility and telecommunication costs due
to consolidation of our operations. In addition, our corporate SG&A expenses
increased primarily for payroll, marketing, and facility and telecommunication
costs to support our growth ($1,066,000), and charges related to the settlement
of litigation and activities associated with our announced engagement of Salomon
Smith Barney to help us evaluate our strategic alternatives ($282,000). SG&A
expenses in our network engineering services segment decreased by a net of
$139,000 primarily due to reductions in payroll costs partially offset by
increased selling expenses; while SG&A expenses in our drug dispensing segment
increased by $84,000 primarily due to additional payroll costs and uncollectible
accounts receivable.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and amortization
expense increased $4,065,542, or 149%, to $6,795,784 for the six months ended
June 30,
12
1999 from $2,730,242 for the six months ended June 30, 1998. This increase was
primarily due to amortization charges for goodwill and other intangible assets
associated with our recent acquisitions.
IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY. As a result of a contingent
payment made to the former owner of Hayes Computer Systems in 1998, we recorded
a charge of $859,830 in 1998 related to the expensing of in-process research and
development technology. Recently, in connection with our new initiative to
develop proxymed.com, management decided to adopt Microsoft technology for
email, and abandoned the Krypton Internet Messaging Server in-process research
and development technology acquired in its acquisition of Hayes Computer
Systems. Accordingly, the 1999 contingent payment was recorded as goodwill, and
is being amortized through April 30, 2000.
INTEREST, NET. The change in net interest was not significant.
NET LOSS. As a result of the foregoing, we recorded a net loss of
$8,080,405 for the six months ended June 30, 1999, as compared to a net loss of
$4,643,387 for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In the six month period ended June 30, 1999, cash used in operating
activities totaled $1,500,062. This was primarily due to our net loss partially
offset by depreciation and amortization charges. In January 1999, we purchased
the healthcare electronic transaction processing assets of Specialized Medical
Management for $1,000,000 in cash. Additionally, we spent approximately $774,000
for fixed assets and capitalized software development costs, $451,000 for
acquisition-related costs, and paid $250,000 in cash and issued 25,000 shares of
common stock for our debt obligation to the former owner of Clinical
MicroSystems, Inc. These activities were financed through available cash
resources, a private placement sale of 250,000 shares of our common stock
resulting in net proceeds of $2,940,000, and $149,839 in proceeds from the
exercise of stock options and warrants. After these expenditures and sales of
equity, we had cash and cash equivalents totaling $3,788,810 as of June 30,
1999.
These available funds continue to be used for operations, the further
development and marketing of our products and services (including proxymed.com,
our recently announced healthcare portal website), equipment and other general
corporate purposes. In July 1999, as a result of the attainment of certain
specified operating criteria, we issued 26,846 shares of common stock and paid
$500,000 in cash in final payment for the Hayes Computer System acquisition.
Furthermore, as a result of acquisitions made in 1997, we are obligated to pay
$750,000 in April 2000 to the former owner of Clinical Microsystems, and
$500,000 to the former owner of PreScribe. The Clinical MicroSystems payment may
be made at least 50% in cash and the balance, if any, in common stock. In
addition, we are continuously evaluating acquisition opportunities and
13
other strategic alternatives that add synergies to our product offerings and
business strategy.
In general, we believe that the long-term effects of our various
acquisitions will be accretive to our operating results and our liquidity. While
no assurances can be given that revenue synergies will occur, we expect that
there will be opportunities to increase revenues by cross-selling products and
services to the customers of the acquired entities, as well as revenue
opportunities from the development of new services from our product development
efforts, including proxymed.com. In addition, we expect to experience cost
reduction synergies from the operations that have been or are planned to be
combined. These savings will occur primarily from elimination of facilities,
duplicate personnel in the areas of network operations, management and customer
service, duplicate marketing efforts and other general and administrative costs.
For example, we believe cost reductions have been achieved, or will be achieved,
from the following measures. The electronic transaction processing operations
relating to the acquisitions of Integrated Medical Systems, US HealthData
Interchange, Inc. and Specialized Medical Management have been merged into one
location. The lab operations relating to the Clinical MicroSystems products and
the Key Communications operations have been merged together. The PreScribe
technology has been merged with our pre-existing prescription electronic
transaction processing products. Hayes Computer Systems will continue to be
operated from its existing location as a separate segment, but we plan to
operate the proxymed.com network operations from this location. However, on a
short-term basis, we generally incur additional expenses resulting from our
acquisitions due to stay-pay incentives during the transition period and moving
costs for employees that are retained. We do not expect our interest costs to
increase as a result of our acquisitions, as most of the financing for the
acquisitions resulted from issuances of our equity securities, and debt carried
by the acquired entities was paid off. While amortization of goodwill and other
intangible assets from our acquisitions will not affect our future cash
outflows, we expect that such acquisition-related charges will approximate
$3,100,000 per quarter through the first quarter of 2000 and then decrease to
$2,800,000 per quarter through the second quarter of 2001.
In July 1999, we signed an accounts receivable-based revolving line of
credit agreement of up to $5,000,000. Borrowings are based on 85% of eligible
accounts receivable, repayable on July 31, 2000, collateralized by a lien on all
of our assets, and bear interest at the prime rate plus 2% payable monthly. In
July 1999, we borrowed $1,000,000 from this credit facility. In connection with
this new credit facility, we have let an existing credit facility expire. Under
that facility, we were able to borrow up to $5,000,000, subject to availability
of collateral which consisted of certificates of deposit and U.S. Treasury
Notes.
At the current time, we do not have any material commitments for capital
expenditures. However, our capital spending will increase over the next several
quarters as the infrastructure for proxymed.com is completed. Although these
expenditures are not expected to have a significant impact on our financial
position, we may seek additional financing for these expenditures.
14
The ratio of current assets to current liabilities was 1.8 times at June
30, 1999 and 2.1 times at December 31, 1998. This decrease is primarily due to
our use of cash for operations, the acquisition of Specialized Medical
Management and capital expenditures as described above. For the periods ended
June 30, 1999 and 1998, accounts receivable turnover for us was 6.3 times in the
1999 period and is comparable to 5.9 times in the 1998 period. Our inventory
turnover was 6.9 times in the 1999 period compared to 5.0 times in the 1998
period and is attributable to higher inventory turnover at Key Communications
and in our network engineering services segment.
We expect to continue to incur negative net cash flow from operations until
we begin receiving higher levels of revenues from our healthcare electronic
transaction processing and communication devices segment and/or from cash
generated by our network engineering services segment. Management is committed
to the strategy of investing funds in further marketing and development of our
products and services, specifically for proxymed.com, our healthcare web portal,
which eventually will integrate our existing desktop products into a single
internet-based solution. We may also pursue additional acquisitions which are
deemed to be in accordance with our business strategy. All of these plans may
require additional equity or debt financing. We believe that we have to access
sources of cash to continue to fund our operating needs, our research and
development activities, our acquisition obligations and our strategic needs. In
the recent past, we have raised cash to fund our operations and pay for
acquisitions from the private placement sales of our common stock. We believe
that we can continue to finance our short-term cash needs in this manner as well
as utilize our asset-based debt financing. However, we are currently evaluating
the long-term cash needs of proxymed.com, and we may require cash through the
public equity markets.
FUTURE OUTLOOK
We continue to grow through concentration on our core healthcare electronic
transaction processing and communication devices segment, our business
relationships, our strategic acquisitions and other plans (such as proxynet.com)
to increase the usage of our healthcare information technology products and
services to achieve requisite economies of scale. Over the last several
quarters, we have successfully reduced our operating losses before non-cash
charges. Such non-cash charges are significant and result primarily from
amortization expenses related to our acquisitions. However, with the announced
development, marketing and implementation of proxymed.com, we anticipate that
our operating losses may grow until we generate sufficient recurring revenues
from our products and services to cover the total of our cash and non-cash
expenses. There can be no assurance that we will realize an adequate level of
recurring revenues from the sale of our products and services, or that revenues
from our operations or those of our recently acquired businesses and any future
acquisitions will ultimately result in achievement of profitability.
15
YEAR 2000 COMPLIANCE
GENERAL. Many currently installed computer systems and software products
are coded to accept only two digit dates. Such systems may not be able to
distinguish 20th century dates from 21st century dates. To address these and any
other Year 2000 operational issues which may affect us, in September 1998 we
appointed a Year 2000 Committee and hired a Year 2000 project manager to review
our internal computer systems and our products and services as well as review
the progress of our principal customers, vendors and resellers.
The Committee has developed a priority order list of our products and
services and has commenced the Year 2000 project plan in accordance with this
list. Our Year 2000 project plan consists of four phases: assessment,
remediation, validation and distribution.
The primary purpose of the assessment phase is to list and analyze the
inventory of our products sold and supported. The major issues encountered
during this phase are the identification of language the software is written in,
the source code and any third-party libraries in a product. The remediation
phase is where changes to the programs and codes are actually made. The
validation phase is where the remediated products are tested and then submitted
for independent verification and validation. The distribution phase,
specifically for proprietary products, is where the remediated products are
provided to our customers.
PRODUCTS AND SERVICES. With respect to our products and services, we met
our expected completion date of June 1999 for distribution of remediated
proprietary laboratory, financial, and prescription software applications.
Remediation of our financial and clinical networks is expected to be completed
and Year 2000 ready by the end of the fourth quarter of 1999. All new software
application releases are being prepared in accordance with our Year 2000
readiness standards.
Concurrently, we have contacted all third party vendors whose proprietary
tools and library products are incorporated into our products in order to
determine their respective Year 2000 readiness status. Certain of those third
parties have required actions to be taken by us. Such actions have been
performed in accordance with instructions provided by the vendor. If for any
reason certain of these vendors will not be Year 2000 Ready in accordance with
our needs, we will address these issues in our Contingency Plan.
Finally, we have contacted our customers to inform them of our Year 2000
readiness status. Updates to that information are posted on our website.
ACQUISITIONS. The Committee is also responsible for identifying Year 2000
issues that may be present in acquisition candidates, as Year 2000 compliance is
a factor in determining the suitability of an acquisition. Recent acquisitions
have included representations from the sellers regarding Year 2000 compliance so
that we may have recourse in the event that unforeseen Year 2000 issues arise.
16
Based on representations made at time of our merger with Key
Communications, we believe that Key Communications' products and services will
operate satisfactorily in a Year 2000 environment. We have completed the
assessment, remediation and validation phases of their products and services to
verify those representations, and based on procedures performed to date, we do
not expect additional actions to be required.
Concerning our acquisition of Specialized Medical Management, we have
identified three potential Year 2000 issues. First, all of Specialized Medical
Management's customers require a software upgrade. We are in the process of
replacing their software with our Year 2000-ready products and expect that this
will be completed by November 1999. Second, Specialized Medical Management's
financial transactions network is being combined with our existing financial
transactions network, which is Year 2000 compliant, by November 1999. Third,
certain financial transaction services currently provided to a certain payer
will either be remediated or we will purchase a replacement.
INTERNAL SYSTEMS, VENDORS AND SUPPLIERS. We are continuing with the
assessment and remediation phases with respect to our internal administrative
systems. Risk assessment is being evaluated on all documentation received from
our vendors, suppliers, and clinical and financial transaction processing
partners. Final attempts to contact unresponsive requests will be completed by
the end of August 1999, and alternatives will be explored on an as-needed basis
by the end of October 1999. Again, if for any reason, certain of these vendors
will not be Year 2000 Ready in accordance with our needs, we will address these
issues in our Contingency Plan.
COSTS. Since the formation of the Year 2000 Committee in September 1998, we
have spent approximately $118,000, through July 31, 1999, primarily for
personnel costs. The total estimated budget for expenditures directly related to
our Year 2000 effort is approximately $500,000. The budget includes staffing
costs for employees hired specifically to address Year 2000 issues; however, it
does not include the internal staff costs incurred or to be incurred as these
costs are considered part of the normal release structure of our products. The
estimated budget also includes hardware upgrade costs, much of which would have
been incurred in our normal equipment replacement plans. As such, anticipated
total spending for the Year 2000 effort is not expected to have a significant
impact on our ongoing results of operations.
CONTINGENCY PLAN. While some "worst case scenarios" are associated with
risks outside our control (including power and communications), we have started
assessing those scenarios within our control. The Year 2000 Committee has
identified the major areas of concern to be the handling of data formatting and
transmitting compliant data, and our customers' usage of our software products.
To deal with some of these concerns, we have informed our financial network
users of the availability of an algorithm to allow those with non-compliant
formats to continue transmitting to payers in a Year 2000 compatible format. Our
customer support departments are currently developing policies and procedures
and mock testing scenarios to assist our hardware and software customers
17
with Year 2000 related issues. While the development is ongoing, a permanent
plan for Year 2000 readiness is expected to be completed by the end of the third
quarter of 1999.
We expect that by the fourth quarter 1999, we will have a documented
business continuity plan to cover all aspects of our customer and internal
concerns, including our products and services, alternative vendors/suppliers,
backup power sources and staffing issues to assure coverage immediately before
and after the millennium. However, due to the general uncertainty inherent in
the Year 2000 issue, there can be no assurance that all Year 2000 problems will
be foreseen and corrected on a timely basis.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document contains "forward-looking statements" within the meaning of
the federal securities laws. These forward-looking statements include
assumptions, beliefs and opinions relating to ProxyMed's growth strategy based
upon ProxyMed's interpretation and analysis of healthcare industry trends, and
management's ability to successfully develop, implement, market and sell its
network transaction processing services, software programs, clinical and
financial transaction services, and e-commerce systems to physicians and other
healthcare providers. This strategy assumes that ProxyMed will be able to
successfully develop and execute its strategic relationships, especially with
the providers of healthcare information systems, with pharmacy chains and
independent pharmacy owners, and with clinical medical laboratories. Many known
and unknown risks, uncertainties and other factors, including general economic
conditions and risk factors detailed from time to time in ProxyMed's Securities
and Exchange Commission filings, may cause these forward-looking statements to
be incorrect and may cause actual results to be materially different from any
future results expressed or implied by these assumptions, opinions and beliefs.
ProxyMed expressly disclaims any intent or obligation to update any
forward-looking statements.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported on Form 10-Q for the period ended March 31,
1999, ProxyMed was the defendant in a lawsuit filed April 28, 1999 in
the United States District Court, Eastern District of Virginia (Case
No. CA2-99-CV-604-A) by AHT, alleging patent infringement. On May 26,
1999, the lawsuit was settled without any admission of liability. Under
the terms of the agreement, we received a license for all of AHT's
existing and future patents in the electronic prescription writing
field and will pay royalties to AHT, which are not expected to be
material.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On June 10, 1999, the Company sold 250,000 shares of
unregistered common stock at $12.00 per share in a private
placement, plus five-year for the purchase of an aggregate of
120,000 shares of the Company's common stock at $10.00 per
share, resulting in net proceeds of $2,940,000. Commonwealth
Associates represented the Company as private placement agent
in the transaction for which it received a five-year warrant
for the purchase of 35,000 shares of the Company's common
stock at $13.31 per share. Other costs of the transaction
aggregated approximately $60,000. Proceeds from this offering
are being used for general working capital purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting held on June 28, 1999, the shareholders
approved the following resolutions:
- ELECTION OF DIRECTORS. The following persons were elected to serve on the
Board of Directors until the next annual meeting of the shareholders or until
the election and qualification of their respective successors: Harold S. Blue,
John Paul Guinan, Bennett Marks, Kevin E. Moley, Bertram J. Polan, Peter A. A.
Saunders and Eugene R. Terry. The total number of votes cast for directors was
14,114,132, and each director received between 14,104,201 and 14,105,201 votes
in favor and between 8,931 and 9,931 votes withheld.
- ADOPTION OF THE PROPOSED 1999 STOCK OPTION PLAN. The total number of
votes cast for this proposal, which provides for the issuance of up to 350,000
of common stock upon the exercise of options by our employees, officers and
directors effective June 28, 1999, was 14,114,132. Of these votes, 13,991,925
were in favor, 97,220 were against, and 24,987 abstained (including broker
non-votes).
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27 - Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
June 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROXYMED, INC.
(Registrant)
AUGUST 13, 1999 /S/ BENNETT MARKS
- --------------- ----------------------------------
(Date) Bennett Marks
Co-President, Chief Financial
Officer and Principal Accounting
Officer
21
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule