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 SEPTEMBER 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.
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(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)
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(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
18,193,102 SHARES AS OF NOVEMBER 9, 1999
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 2,243,656 $ 4,681,671
Accounts receivable - trade, net 6,780,657 6,383,996
Notes and other receivables 165,082 463,894
Inventory 3,112,787 2,970,210
Other current assets 608,576 254,979
------------ ------------
Total current assets 12,910,758 14,754,750
Property and equipment, net 5,042,001 4,335,944
Goodwill, net 12,238,057 15,539,821
Purchased technology, capitalized software
and other intangible assets, net 10,586,774 13,654,399
Other assets 488,617 551,660
------------ ------------
Total assets $ 41,266,207 $ 48,836,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 3,000,000 $ --
Current portion of long-term debt 718,120 498,453
Accounts payable and accrued expenses 5,616,926 6,244,631
Deferred revenue 613,888 447,178
------------ ------------
Total current liabilities 9,948,934 7,190,262
Long-term debt -- 667,193
Long-term deferred revenue 549,996 700,000
------------ ------------
Total liabilities 10,498,930 8,557,455
------------ ------------
Stockholders' equity:
Common stock - $.001 par value. Authorized
50,000,000 shares; issued and outstanding
18,171,307 and 17,808,172 shares, respectively 18,171 17,808
Additional paid-in capital 86,539,517 82,427,262
Accumulated deficit (55,530,611) (41,906,151)
Note receivable from stockholder (259,800) (259,800)
------------ ------------
Total stockholders' equity 30,767,277 40,279,119
------------ ------------
Total liabilities and stockholders' equity $ 41,266,207 $ 48,836,574
============ ============
See accompanying notes.
2
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues:
Services and license fees $ 5,154,922 $ 5,700,937 $ 16,049,174 $ 13,754,618
Computer systems, prescription drugs
and other tangible goods 5,316,845 6,000,744 16,794,241 12,632,034
------------ ------------ ------------ ------------
10,471,767 11,701,681 32,843,415 26,386,652
------------ ------------ ------------ ------------
Costs and expenses:
Cost of services and license fees 682,382 483,249 1,682,705 1,613,119
Cost of tangible goods 4,027,358 4,653,247 12,237,557 9,636,310
Selling, general and
administrative expenses 7,612,201 6,626,156 22,093,025 16,229,007
Depreciation and amortization 3,671,723 3,273,224 10,467,507 6,003,466
In-process research and
development technology -- -- -- 859,830
------------ ------------ ------------ ------------
15,993,664 15,035,876 46,480,794 34,341,732
------------ ------------ ------------ ------------
Operating loss (5,521,897) (3,334,195) (13,637,379) (7,955,080)
Interest income (expense), net (22,159) (55,200) 12,919 (77,702)
------------ ------------ ------------ ------------
Net loss $ (5,544,056) $ (3,389,395) $(13,624,460) $ (8,032,782)
============ ============ ============ ============
Basic and diluted loss per share
of common stock $ (.31) $ (.19) $ (.76) $ (.54)
============ ============ ============ ============
Weighted average common
shares outstanding 18,159,063 17,755,121 17,963,929 14,922,470
============ ============ ============ ============
See accompanying notes.
3
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Net loss $(13,624,460) $ (8,032,782)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 10,467,507 6,003,466
In-process research and development technology -- 859,830
Provision for doubtful accounts 192,145 223,902
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts and other receivables (7,853) (2,306,754)
Inventory (142,577) (1,135,660)
Prepaid expenses (260,112) 15,098
Accounts payable and accrued expenses (626,422) (1,372,463)
Deferred revenue 16,706 1,264,379
Other, net (90,125) 9,773
------------ ------------
Net cash used in operating activities (4,075,191) (4,471,211)
------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (1,000,000) (20,529,340)
Acquisition contingency payment (500,000) (500,000)
Payments for acquisition-related costs (506,060) (458,331)
Capital expenditures (1,648,899) (963,655)
Capitalized software (631,121) (456,184)
------------ ------------
Net cash used in investing activities (4,286,080) (22,907,510)
------------ ------------
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 241,055 1,365,929
Draw on line of credit 3,000,000 475,000
Payment of note payable and long-term debt (257,799) (1,065,662)
------------ ------------
Net cash provided by financing activities 5,923,256 29,787,266
------------ ------------
Net increase (decrease) in cash (2,438,015) 2,408,545
Cash and cash equivalents at beginning of period 4,681,671 3,249,429
------------ ------------
Cash and cash equivalents at end of period $ 2,243,656 $ 5,657,974
============ ============
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
(the "Company") 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 nine months ended September
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 Communications Service, 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 3,549,480
shares and 2,750,762 shares at September 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 - In June 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 per share.
6
(5) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NINE MONTHS ENDED SEPTEMBER 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.
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------ ------------
Net revenues:
Healthcare electronic transaction
processing and communication devices $ 22,579,659 $ 15,959,254
Network engineering services 8,653,286 9,227,241
Prescription drug dispensing 1,610,470 1,200,157
------------ ------------
$ 32,843,415 $ 26,386,652
============ ============
Operating loss:
Healthcare electronic transaction
processing and communication devices $ (8,883,684) $ (4,540,286)
Network engineering services (372,421) (855,927)
Prescription drug dispensing (94,799) (29,554)
Corporate (4,286,475) (2,529,313)
------------ ------------
$(13,637,379) $ (7,955,080)
============ ============
Total assets:
Healthcare electronic transaction
processing and communication devices $ 32,441,618 $ 39,862,793
Network engineering services 3,777,896 5,566,310
Prescription drug dispensing 1,080,171 1,019,280
Corporate 3,966,522 6,922,184
------------ ------------
$ 41,266,207 $ 53,370,567
============ ============
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, internet access services, 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 WPJ,
Inc. (d/b/a 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 the use of our
connectivity services through the use of the internet, and in November 1999, the
website was introduced. 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. continue to work with us to complete the functionality of this healthcare
portal website. ProxyMed.com will integrate our existing desktop products into a
single internet-based solution for healthcare providers. ProxyMed.com is
reportable under the healthcare electronic transaction processing and
communication devices segment.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUES. Consolidated net revenue for the three months ended
September 30, 1999 decreased by $1,229,914, or 11%, to $10,471,767 from
consolidated net revenue of $11,701,681 for the three months ended September 30,
1998. Of this decrease, revenues from our healthcare electronic transaction
processing and communication devices segment decreased by $158,000 over the 1998
period primarily due to the net effect of: (i) increases in volume from internal
growth and the Specialized Medical Management acquisition ($1,349,000), (ii)
increases from the inclusion of internet service provider revenue in
proxyMed.com ($237,000), and (iii) decreases in revenue from ClinScan, our
laboratory ordering and results reporting software system, from a non-exclusive
source code license sale in the 1998 period ($1,750,000). Additionally, our
network engineering services segment revenue decreased by $1,234,000 due to
customers purchasing earlier in 1999 and the shifting of internet service
provider revenue to proxyMed.com ($237,000), while our drug dispensing segment
revenue increased by $162,000, 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, certain telecommunication
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 September
30, 1999 was 55% which is comparable to 56% for the three months ended September
30, 1998. The gross margin in our healthcare electronic transaction processing
and communication devices segment was 68% in the 1999 period compared to 76% in
the 1998 period; this decrease was primarily due to the favorable impact in the
1998 period from the sale of a non-exclusive ClinScan(R) source code software
license. The gross profit margin in our network engineering services segment was
24% in the 1999 period compared to 19% in the 1998 period; this increase is
primarily due to lower margins on the higher hardware sales in the 1998 period.
The gross profit margin in our drug dispensing segment was 29% in the 1999
period compared to 34% in the 1998 period; this decrease is primarily due to a
shift in the mix of patients that we service from higher margin private-pay to
lower margin third-party insured patients.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for the three months ended September 30,
1999 increased by $986,045, or 15%, to $7,612,201 from consolidated SG&A
expenses of $6,626,156 for the three months ended September 30, 1998. Of this
increase, SG&A expenses from our healthcare electronic transaction processing
and communication devices segment increased by $641,000 over the 1998 period due
primarily from (i) net increases in SG&A for internal growth primarily for
payroll and related costs (including costs to
10
integrate Specialized Medical Management customers), and selling expenditures
($276,000), and (ii) development and marketing expenses related to proxyMed.com
($365,000). In addition, our corporate SG&A expenses increased primarily for
payroll, facility and telecommunication costs to support our growth ($362,000).
SG&A expenses in our network engineering services segment decreased by a net of
$55,000 primarily due to reductions in payroll costs partially offset by
increased selling expenses and bad debts; while SG&A expenses in our drug
dispensing segment increased by $38,000 primarily due to increased payroll costs
and bad debts.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense increased $398,499, or 12%, to $3,671,723 for the three
months ended September 30, 1999 from $3,273,224 for the three months ended
September 30, 1998. This increase was primarily due to amortization charges for
goodwill and other intangible assets associated with our acquisitions of
Specialized Medical Management and Hayes Computer Systems.
INTEREST, NET. The change in net interest was not significant.
NET LOSS. As a result of the foregoing, we recorded a net loss of
$5,544,056 for the three months ended September 30, 1999, as compared to a net
loss of $3,389,395 for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUES. Consolidated net revenues for the nine months ended
September 30, 1999 increased by $6,456,763, or 24%, to $32,843,415 from
consolidated net revenues of $26,386,652 for the nine months ended September 30,
1998. Of this increase, revenues from our healthcare electronic transaction
processing and communication devices segment increased by $6,621,000 over the
1998 period primarily due to the net effect of: (i) increased volumes from
internal growth and our acquisitions of Key Communications, Specialized Medical
Management and Integrated Medical Systems ($10,503,000), which were all
consummated during or subsequent to the 1998 period, (ii) revenue from network
connectivity fees received from a pharmacy ($200,000), (iii) increases from the
inclusion of internet service provider revenue and the sale of a non-exclusive
source code license in proxyMed.com ($668,000), and (iv) decreases from the
sales of non-exclusive source code licenses for our clinical and laboratory
software products, which were sold in the 1998 period ($4,750,000).
Additionally, our network engineering services segment revenue decreased by
$574,000 due to changes in sales volumes and the shifting of internet service
provider revenue to proxyMed.com ($237,000), while our drug dispensing segment
revenue increased by $410,000 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, certain telecommunication
costs and internet related communication fees. Cost of sales for computer
systems, prescription drugs and other tangible goods
11
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 nine months ended September
30, 1999 was 58% and was comparable to 57% for the nine months ended September
30, 1998. The gross margin in our healthcare electronic transaction processing
and communication devices segment was 72% 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 and laboratory source
code software licenses. The gross profit margin in our network engineering
services segment was 26% in the 1999 period and was comparable to 24% in the
1998 period. The gross profit margin in our drug dispensing segment was 28% in
the 1999 period compared to 33% in the 1998 period; this decrease is primarily
due to a shift in the mix of patients that we service from higher margin
private-pay to lower margin third-party insured patients.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for the nine months ended September 30, 1999
increased by $5,864,018, or 36%, to $22,093,025 from consolidated SG&A expenses
of $16,229,007 for the nine months ended September 30, 1998. Of this increase,
SG&A expenses from our healthcare electronic transaction processing and
communication devices segment increased by $4,226,000 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
($3,662,000), all of which were acquired during or subsequent to the 1998
period, including costs associated with the integration of previously separate
processing networks for financial transactions and (ii) development and
marketing expenses related to proxyMed.com ($564,000). In addition, our
corporate SG&A expenses increased primarily for payroll, marketing, and facility
and telecommunication costs to support our growth ($1,428,000) 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 $194,000 primarily due to reductions in payroll
costs partially offset by increased selling expenses and bad debts; while SG&A
expenses in our drug dispensing segment increased by $122,000 primarily due to
additional payroll costs and bad debts.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense increased $4,464,041, or 74%, to $10,467,507 for the nine
months ended September 30, 1999 from $6,003,466 for the nine months ended
September 30, 1998. This increase was primarily due to amortization charges for
goodwill and other intangible assets associated with our recent acquisitions and
the Hayes Computer Systems contingency payment described below.
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. In 1999, in connection with our new
initiative to develop proxyMed.com, management decided to adopt Microsoft
technology for email, and
12
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
$13,624,460 for the nine months ended September 30, 1999, as compared to a net
loss of $8,032,782 for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In the nine month period ended September 30, 1999, cash used in
operating activities totaled $4,075,191. 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
$2,280,000 for fixed assets and capitalized software development costs, $506,000
for acquisition-related costs, paid $500,000 in cash and issued 26,846 shares of
common stock in final payment for the Hayes Computer Systems acquisition, 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,
draws of $3,000,000 on our revolving line of credit, and $241,055 in proceeds
from the exercise of stock options and warrants. After these expenditures and
sales of equity, we had cash and cash equivalents totaling $2,243,656 as of
September 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 healthcare portal website), equipment and other general corporate purposes.
As a result of acquisitions made in 1997 and 1998, we are obligated to pay
approximately $300,000 for a final assessment of a tax audit at Key
Communications, $750,000 in April 2000 to the former owner of Clinical
Microsystems, and $500,000 in June 2000 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 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.
13
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, moving
costs for employees that are retained, and the merging of different transaction
networks. 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
(which has ranged from 10% to 10.25%). As of September 30, 1999, we borrowed
$3,000,000 under 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.
The ratio of current assets to current liabilities was 1.3 times at
September 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, capital expenditures, and draws on our line of credit, as
described above. For the periods ended September 30, 1999 and 1998, accounts
receivable turnover for us was 6.1 times in the 1999 period compared to 7.2
times in the 1998 period and is attributable to higher sales made at the end of
the 1998 period in both the healthcare electronic transaction processing and
communication device and network engineering services segments. Our inventory
turnover was 5.6 times in the 1999 period compared to 3.7 times in the 1998
period and is attributable to higher inventory turnover at Key Communications
and in our network engineering services segment.
14
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 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
proxyMed.com) to increase the usage of our healthcare information technology
products and services to achieve requisite economies of scale. Prior to the
second quarter of 1999, we had 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, the business plan for proxyMed.com, or
those of our recently acquired businesses and any future acquisitions will
ultimately result in achievement of profitability.
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.
15
The Committee developed a priority order list of our products and
services and 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 September 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.
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, 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 the end of November 1999. Second, Specialized Medical
Management's financial
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transactions network is being combined with our existing financial transactions
network, which is Year 2000 compliant, by the end of November 1999. Third,
certain financial transaction services currently provided to a certain payer is
currently being remediated and is expected to be completed by the end of
November 1999.
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 were completed by the
end of October 1999. Alternatives are being explored on an as-needed basis by
the end of November 1999. Again, if for any reason certain of these vendors will
not be Year 2000 compliant 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 $242,000, through October 31, 1999, primarily
for personnel and hardware 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 expected to be
within our budget and 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 with
Year 2000 related issues. While the development is ongoing, a permanent plan for
Year 2000 business continuity was completed in September 1999. These
contingencies plan for potential disruption and data corruption issues brought
about by the Year 2000.
In the event that there is a system problem due to a Year 2000 date, we
will immediately attempt to diagnose and fix the problem. Each particular
problem will dictate an alternate method of processing to maintain business
continuity. In the event that a Year 2000 problems occurs at an external entity,
that entity will be informed of the problem and we will continue to review and
repair the dates until the problem is fixed. 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 or that the
costs to do so will not be material.
17
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.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
2 - Employment Agreement dated September 8, 1999
between Michael Bedell and ProxyMed, Inc.
27 - Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 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)
NOVEMBER 12, 1999 /S/ BENNETT MARKS
- ----------------- -----------------
(Date) Bennett Marks
Executive Vice-President, Chief
Financial Officer and Principal
Accounting Officer
20
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
2 Employment Agreement dated September 8, 1999
between Michael Bedell and ProxyMed, Inc.
27 Financial Data Schedule.