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, 1998
[ ] 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)
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FLORIDA 65-0202059
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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2555 DAVIE ROAD, SUITE 110, FT. LAUDERDALE, FLORIDA 33317
(Address of principal executive offices) (Zip Code)
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(954) 473-1001
(Registrant's telephone number)
2501 DAVIE ROAD, SUITE 230, FT. LAUDERDALE, FLORIDA 33317
(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
15,717,443 SHARES AS OF NOVEMBER 6, 1998
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
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PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 5,719,178 $ 2,654,423
Accounts receivable - trade, net 4,586,265 2,364,455
Notes and other receivables 403,020 826,998
Inventory 2,211,635 1,202,431
Other current assets 277,399 319,838
------------ ------------
Total current assets 13,197,497 7,368,145
Property and equipment, net 3,103,357 2,323,174
Goodwill, net 16,671,539 4,338,515
Purchased and capitalized software costs, net 14,660,371 5,530,226
Other assets 559,656 43,061
------------ ------------
Total assets $ 48,192,420 $ 19,603,121
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 478,874 $ 735,980
Accounts payable and accrued expenses 4,565,641 4,239,073
Deferred revenue 953,438 426,686
------------ ------------
Total current liabilities 5,997,953 5,401,739
Long-term debt 651,176 1,049,630
Long-term deferred revenue 750,000 -
------------ ------------
Total liabilities 7,399,129 6,451,369
------------ ------------
Stockholders' equity:
Common stock - $.001 par value.
Authorized 50,000,000 shares;
issued and outstanding 15,717,443
(after deducting 110,000 shares
in treasury) and 11,781,872 shares,
respectively 15,717 11,782
Additional paid-in capital 79,174,503 42,695,386
Accumulated deficit (38,137,129) (29,555,416)
Stock subscription receivable (259,800) -
------------ ------------
Total stockholders' equity 40,793,291 13,151,752
------------ ------------
Total liabilities and stockholders' equity $ 48,192,420 $ 19,603,121
============ ============
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See accompanying notes.
2
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PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
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Revenues:
Services and license fees $ 3,878,091 $ 887,872 $10,837,297 $ 1,709,730
Prescription drugs and
computer systems 3,786,243 3,143,268 9,102,244 6,091,299
----------- ----------- ----------- ------------
7,664,334 4,031,140 19,939,541 7,801,029
----------- ----------- ----------- ------------
Costs and expenses:
Cost of sales 3,665,064 2,761,450 9,020,903 5,208,720
Selling, general and
administrative expenses 4,552,413 4,134,083 12,878,696 8,680,206
Depreciation and amortization 3,155,774 398,642 5,815,751 664,506
----------- ----------- ----------- ------------
11,373,251 7,294,175 27,715,350 14,553,432
----------- ----------- ----------- ------------
Operating loss (3,708,917) (3,263,035) (7,775,809) (6,752,403)
Other income (expense):
In-process research and
development technology - - (859,830) (8,632,654)
Interest, net 25,525 70,470 53,926 242,832
----------- ----------- ----------- ------------
Net loss $(3,683,392) $(3,192,565) $(8,581,713) $(15,142,225)
=========== =========== =========== ============
Basic and diluted loss per share
of common stock $ (.23) $ (.29) $ (.62) $ (1.47)
=========== =========== =========== ============
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See accompanying notes.
3
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PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
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Cash flows from operating activities:
Net loss $ (8,581,713) $(15,142,225)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 5,815,751 664,506
Acquired in-process research and
development technology 859,830 8,632,654
Provision for doubtful accounts 186,146 22,570
Other operating charges - 632,958
Compensatory options and warrants - 26,100
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts and other receivables (1,746,381) (2,197,741)
Inventory (1,009,204) 19,220
Accounts payable and accrued expenses (906,684) 1,431,130
Deferred revenue 1,296,752 (196,993)
Other, net 58,097 (47,053)
------------ ------------
Net cash used in operating activities (4,027,406) (6,154,874)
------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash
acquired (20,529,340) (5,892,770)
Payment of prior acquisition
contingency (500,000) -
Maturities of U.S. Treasury Notes - 4,500,000
Capital expenditures (824,051) (1,094,839)
Purchased and capitalized software (456,186) (2,929,041)
------------ ------------
Net cash used in investing activities (22,309,577) (5,416,650)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock 29,011,999 9,282,250
Proceeds from exercise of stock options
and warrants 1,365,929 1,014,603
Purchase of treasury stock - (554,958)
Payment of long-term debt (750,000) -
Payment of loans and notes payable (226,190) (9,375)
Draw on line of credit - 2,500,000
Repayment of line of credit - (2,500,000)
------------ ------------
Net cash provided by financing activities 29,401,738 9,732,520
------------ ------------
Net increase (decrease) in cash 3,064,755 (1,839,004)
Cash and cash equivalents at beginning of period 2,654,423 6,020,358
------------ ------------
Cash and cash equivalents at end of period $ 5,719,178 $ 4,181,354
============ ============
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See accompanying notes.
4
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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, 1998 are not necessarily indicative of the results to
be expected for the full year. Reference is made to the Company's
annual report on Form 10-K for the year ended December 31, 1997.
Certain prior period amounts have been reclassified to conform with
the current period presentation.
(b) REVENUE RECOGNITION - Revenue from sales of software, software
licenses and computer hardware 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 amounts paid to individual
elements based on vendor-specific objective evidence of fair value.
Transaction fee revenue is recorded in the period the service is
rendered. Revenue from software rentals and maintenance fees is
recognized ratably over the applicable period. Revenue from the
Company'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) CHANGE IN ACCOUNTING ESTIMATE - Goodwill previously recorded from
the acquisitions of Clinical MicroSystems, Inc. ("CMS") in March
1997 and US HealthData Interchange, Inc. ("USHDI") in November 1997
is being amortized on the straight-line method over 3 years
beginning April 1, 1998. Goodwill from these acquisitions was
previously being amortized on the straight-line method over 15
years. This change in estimate results in an additional
amortization expense of approximately $243,000 per quarter.
(d) 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 (13,783,360 shares and
10,313,911 shares for the nine months ended September 30, 1998 and
1997, respectively; and 15,677,015 shares and 11,169,651 shares for
the three months ended September 30, 1998 and 1997, respectively).
Diluted per share results reflect the potential dilution from the
exercise or conversion
5
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of securities into common stock; however, stock options, warrants
and contingent shares totaling 2,750,762 and 2,774,287 shares at
September 30, 1998 and 1997, respectively, were excluded from the
calculation of diluted per share results for both periods presented
because their effect was antidilutive.
(2) ACQUISITION OF BUSINESSES
(a) INTEGRATED MEDICAL SYSTEMS - On May 19, 1998, the Company acquired
100% of the capital stock of WPJ, Inc., d/b/a Integrated Medical
Systems ("IMS"), a privately-owned company based in Santa Ana,
California. IMS provides electronic processing of transactions
including medical claims, encounters and other financial
transactions. The purchase price was $26,515,325, consisting of
$20,620,000 in cash, 481,836 unregistered shares of the Company's
common stock and $550,000 in acquisition related costs. The
acquisition was accounted for as a purchase. The cash portion of
the purchase price was funded through the private placement sale of
common stock (see Note 3). The excess of the consideration paid
over the estimated fair value of net assets acquired in the amount
of approximately $14,901,000 has been recorded as goodwill, and is
being amortized on the straight-line basis over 3 years.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company and all its 1998 and 1997
acquisitions, (CMS, Hayes Computers Systems, Inc. ("HCS"), USHDI
and IMS) as if the acquisitions of these businesses had occurred at
the beginning of 1997, including additional pro forma amortization
of goodwill and other intangibles of $3,496,763 and $7,528,565 for
the nine months ended September 30, 1998 and 1997, respectively,
but excluding one-time charges for acquired in-process research and
development technology. These pro forma results do not necessarily
represent results that would have occurred if the acquisitions had
taken place at those dates, or of results which may occur in the
future.
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NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
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Revenues $ 21,597,220 $ 15,329,851
Net loss $(11,094,494) $(15,708,791)
Basic and diluted net loss
per share of common stock $ (0.73) $ (1.16)
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(b) CONTINGENCY PAYMENT - On June 26, 1998, the Company paid $500,000
in cash and 30,303 shares of unregistered common stock to the
former owner of HCS for meeting certain operating criteria in the
12-month period subsequent to the April 1997 acquisition of HCS, as
defined in the asset purchase agreement. As a result, the Company
allocated this contingent payment to the long-term assets acquired,
as follows: $859,830 to in-process research and development
technology (which is expensed), $85,617 to property and equipment,
and $54,553 to capitalized software.
6
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(3) CAPITAL TRANSACTIONS - On February 20, 1998, the Company sold 500,000
shares of unregistered common stock at $6.50 per share in a private
placement to Bellingham Industries Inc. ("Bellingham"). Additionally, on
March 3, 1998, the Company sold 200,000 shares of unregistered common stock
at $7.56 per share under a private placement subscription agreement to
Bellingham. As part of the latter sale, the Company issued a five-year
warrant to Bellingham for the purchase of 100,000 shares of the Company's
common stock at $7.56 per share.
On May 19, 1998 and June 1, 1998 the Company sold an aggregate of 2,313,416
shares of unregistered common stock at $11.00 per share in a private
placement resulting in net proceeds of $24,250,000 after costs of
$1,197,867. Bellingham purchased 1,363,632 shares in the offering for
$15,000,000. Of the funds raised, $20,620,000 was used for the acquisition
of IMS (see Note 2).
The unregistered common stock sold to Bellingham through private placements
was subsequently registered pursuant to the Company's S-3 Registration
Statement filed on July 1, 1998 and effective August 27, 1998. Based on
information provided by Bellingham as of October 31, 1998, it beneficially
owned 6,514,842 shares or approximately 41% of the Company's outstanding
common stock.
(4) NEW ACCOUNTING PRONOUNCEMENTS - Effective December 31, 1997, the Company
adopted Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition." The adoption of SOP No. 97-2 did not have a material effect
on the timing of the Company's revenue recognition. Also effective December
31, 1997, the Company adopted SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." When indications
of impairment are present, the carrying value of such software is assessed
based upon an analysis of estimated future cash flows on an undiscounted
basis and before interest charges. The adoption of SOP No. 98-1 did not
have a material effect on the Company's financial statements.
7
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(5) Supplemental Disclosure of Cash Flow Information
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NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
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Cash paid for interest $ 70,098 $ -
============ ===========
Common stock issued for acquisition
contingent payment $ 500,000 $ -
============ ===========
Acquisition of businesses:
Common stock issued for
businesses acquired $ 5,345,325 $ 2,310,808
Debt issued for businesses acquired - 1,649,555
Other acquisition costs accrued 550,000 1,055,000
Details of acquisitions:
Working capital components,
other than cash (386,586) (473,334)
In-process research and development
technology - (8,632,654)
Property and equipment (363,540) (430,617)
Goodwill (14,900,729) (997,744)
Capitalized software (11,000,000) (383,159)
Loans and notes payable 226,190 9,375
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Net cash used in acquisitions $(20,529,340) $(5,892,770)
============ ===========
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(6) SEGMENT INFORMATION - The Company operates in the following reportable
segments which are separately managed: healthcare EDI and software products
and services, network integration services, and prescription drug
dispensing. Intersegment sales are not material and there were no foreign
sales for any periods presented.
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NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
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Net sales:
Healthcare EDI and software
products and services $ 9,512,143 $ 750,104
Network integration services 9,227,241 6,123,244
Prescription drug dispensing 1,200,157 927,681
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$19,939,541 $ 7,801,029
=========== ===========
Operating income (loss):
Healthcare EDI and software
products and services $(5,221,035) $(4,222,000)
Network integration services 4,115 439,690
Prescription drug dispensing (33,555) (63,280)
Corporate (2,525,334) (2,906,813)
----------- -----------
$(7,775,809) $(6,752,403)
=========== ===========
Total assets:
Healthcare EDI and software
products and services $31,941,054 $ 7,092,647
Network integration services 5,566,310 3,451,454
Prescription drug dispensing 1,058,798 1,014,457
Corporate 9,626,258 6,964,768
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$48,192,420 $18,523,326
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8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is a healthcare information services company providing
clinical and financial EDI transaction processing services to physicians and
other healthcare providers through their existing practice management
information systems and through the Company's own software products. The Company
provides these services by establishing connectivity between various healthcare
providers (such as pharmacies, labs, hospitals, insurers and managed care
organizations) through ProxyNet/trademark/, the Company's national healthcare
information network. In addition, the Company derives revenue from network
integration services and related computer hardware sales, and through the
dispensing of prescription drugs to patients who reside in long-term care
facilities. Substantially all of the Company's services are provided from its
operating facilities located in Florida and California. The Company's operations
and most of its customers are subject to extensive and evolving federal and
state statutes and regulations.
The Company operates in the following reportable segments which are
separately managed: healthcare EDI software products and services, network
integration services, and prescription drug dispensing. Acquisitions were
consummated during the periods presented and are included in the financial
statements after their respective dates of acquisition, as follows: Clinical
MicroSystems, Inc. ("CMS"), acquired in March 1997; US HealthData Interchange,
Inc. ("USHDI"), acquired in November 1997; and Integrated Medical Systems
("IMS"), acquired in May 1998; are reportable under the healthcare EDI and
software products and services segment. Hayes Computer Systems, Inc. ("HCS"),
acquired in April 1997, is reportable under the network integration services
segment.
This report contains "forward-looking statements" within the meaning of
the federal securities laws. These forward-looking statements include, among
others, statements relating to the Company's growth strategy, which is based
upon the Company's interpretation and analysis of healthcare industry trends and
management's ability to successfully develop, implement, market and sell its
online transaction processing services to physicians and other healthcare
providers. This strategy assumes that physicians will prefer "one-stop shopping"
for online services and that the Company will be able to successfully acquire or
develop all of the necessary clinical and financial transaction sets and
implement them into the Company's existing products and services. This strategy
also assumes that the Company will be able to successfully develop and execute
its strategic relationships, especially with the providers of information
systems to physicians under the Company's Electronic Commerce Partner ("ECP")
program, and with pharmacy chains, independent pharmacy owners and pharmacy
information vendors. Many known and unknown risks, uncertainties and other
factors including general economic conditions, healthcare reform initiatives,
millennium compliance issues that may arise, and risk factors detailed from time
to time in the Company's Securities and Exchange Commission filings may cause
these assumptions to prove incorrect and may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Risks to completing the Company's Year 2000
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Readiness Plan include the availability of resources, the Company's ability to
discover and correct the potential Year 2000 sensitive problems which could have
a serious impact on specific facilities, and the ability of suppliers to bring
their systems into Year 2000 compliance. The Company expressly disclaims any
intent or obligation to update any forward looking statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998,
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997
NET REVENUES. Consolidated net revenue for the three months ended
September 30, 1998 increased by $3,633,194, or 90%, to $7,664,334 from
consolidated net revenue of $4,031,140 for the three months ended September 30,
1997. Of this increase, $3,131,000 arose primarily from the following increases
in the sales of healthcare EDI and software products and services segment: (i)
financial transactions from the acquisitions of USHDI and IMS, which were both
consummated subsequent to the prior year period; and (ii) the Company's sale of
a non-exclusive source code software license for ClinScan/trademark/, its
laboratory ordering and results reporting software system. Additionally, sales
from the network integration services segment increased by approximately
$337,000 over the prior year period and drug dispensing segment revenue
increased by $155,000 over the prior year period.
GROSS PROFIT MARGIN. Consolidated gross profit margin for the three
months ended September 30, 1998 was 52% compared to 31% for the three months
ended September 30, 1997. This increase is primarily due to the impact of higher
sales in the 1998 period for the healthcare EDI and software products and
services segment. The gross margin for this segment was 91% in the 1998 period
compared to 85% in the 1997 period. The gross profit margin in the network
integration services segment was 19% in the 1998 period compared to 28% in the
1997; this decrease was primarily due to lower margins on hardware sales and
higher Internet access service costs. The gross profit margin in the drug
dispensing segment was 34% in the 1998 period compared to 29% in the 1997
period; this increase is due to a favorable one-time physical inventory
adjustment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for the three months ended September 30,
1998 increased by $418,329, or 10%, to $4,552,413 from consolidated selling,
general and administrative expenses of $4,134,084 for the three months ended
September 30, 1997. The increase in selling, general and administrative expenses
resulted primarily from the following: (i) additional payroll and related costs
($881,000), selling expenses ($104,000), and occupancy costs ($56,000) related
to the acquisitions of USHDI and IMS; (ii) marketing expenditures including
travel, primarily for the healthcare EDI and software products and services
segment (decrease of $123,000); (iii) telecommunication costs including those
related to the Company's claims processing networks from the USHDI and IMS
acquisitions and establishment of telecommunications with the Company's trading
partners ($136,000); (iv) consulting fees to various software and business
consultants primarily for the healthcare EDI and software products and services
segment (decrease of $134,000); (v) additional provision for uncollectible
accounts receivable primarily for the healthcare EDI and software products and
services segment ($93,000); and (vi) other operating charges in the 1997 period
related to the write-off of certain fixed assets and computer software which had
no continuing future benefit to the Company, and termination and severance
payments for certain employees (decrease of $633,000). Consolidated selling,
general and administrative expenses as a percentage of consolidated
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net sales decreased to 59% in the 1998 period from 103% in the 1997 period, as
the rate of increase in sales in 1998 exceeded the rate of increase in selling,
general and administrative expenses due to the development of a recurring
revenue base in the healthcare EDI and software products and services and
network integration segments and the elimination of duplicate operating costs
associated with the Company's acquisitions.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense increased $2,757,132, or 692%, to $3,155,774 for the three
months ended September 30, 1998 from $398,642 for the three months ended
September 30, 1997. This increase was due to the following factors: (i)
amortization charges for goodwill and other intangible assets associated with
the Company's acquisitions completed in 1997 and 1998 ($1,586,000); (ii)
amortization of internal use software at IMS for the financial claims processing
network ($974,000); and (iii) amortization of capitalized software costs for
healthcare EDI and software products and services, many of which were completed
in 1997 ($164,000).
INTEREST, NET. Net interest income decreased $44,945, or 64%, to
$25,525 for the three months ended September 30, 1998 from $70,470 for the three
months ended September 30, 1997 primarily due to lower average cash balances in
1998.
NET LOSS. As a result of the foregoing, the Company recorded a net loss
of $3,683,392 for the three months ended September 30, 1998, as compared to a
net loss of $3,192,565 for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998,
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
NET REVENUES. Consolidated net revenue for the nine months ended
September 30, 1998 increased by $12,138,512, or 156%, to $19,939,541 from
consolidated net revenue of $7,801,029 for the nine months ended September 30,
1997. Of this increase, $8,669,000 arose primarily from the following increases
in the sales of healthcare EDI and software products and services segment: (i)
financial transactions from the acquisitions of USHDI and IMS; (ii) the
Company's sale of two software licenses and related services for
ProxyCare/trademark/, its online information system for pharmacies affiliated
with long-term care facilities; and (iii) an increase in ClinScan/trademark/
software and related systems revenue, including the sale of a non-exclusive
source code license. Additionally, sales from the network integration services
segment increased by approximately $3,103,000 over the prior year period and
drug dispensing segment revenue increased by $272,000 over the prior year
period.
GROSS PROFIT MARGIN. Consolidated gross profit margin for the nine
months ended September 30, 1998 was 55% compared to 33% for the nine months
ended September 30, 1997. This increase is primarily due to the impact of higher
sales in the 1998 period for the healthcare EDI and software products and
services segment; the gross margin for this segment was 87% in both periods. The
gross profit margin in the network integration services segment was 24% in the
1998 period compared to 27% in the 1997 period; this decrease is primarily due
to the lower margins on increased computer hardware sales. The gross profit
margin in the drug dispensing segment was 33% in both periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for the nine months ended September 30, 1998
increased by $4,198,490, or 48%, to $12,878,696 from consolidated selling,
general and administrative expenses of $8,680,206 for the nine months ended
September 30, 1997. The increase in selling, general and administrative expenses
resulted primarily from the following: (i) additional payroll and related costs
($3,820,000); selling expenses, ($192,000); occupancy costs ($312,000), office
expenditures and training seminars ($146,000) related to the acquisitions of
HCS, USHDI and IMS; (ii) telecommunication costs including those related to the
Company's claims processing networks from the USHDI and IMS acquisitions,
establishment of communications with the Company's trading partners, and the
network integration services segment ($521,000); (iii) consulting fees to
various software and business consultants primarily for the healthcare EDI and
software products and services segment (decrease of $404,000); (iv) additional
provision for uncollectible accounts receivable primarily for the healthcare EDI
software products and services segment ($164,000); and (v) other operating
charges in the 1997 period related to the write-off of certain fixed assets and
computer software which had no continuing future benefit to the Company, and
termination and severance payments for certain employees (decrease of $633,000).
Consolidated selling, general and administrative expenses as a percentage of
consolidated net sales decreased to 65% in the 1998 period from 111% in the 1997
period, as the rate of increase in sales in 1998 exceeded the rate of increase
in selling, general and administrative expenses, due to the development of a
recurring revenue base in the healthcare EDI and software products and services
and network
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integration segments and the elimination of duplicate operating costs associated
with the Company's acquisitions.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense increased $5,151,245, or 775%, to $5,815,751 for the nine
months ended September 30, 1998 from $664,506 for the nine months ended
September 30, 1997. This increase was due to the following factors: (i)
amortization charges for goodwill and other intangible assets associated with
the Company's acquisitions completed in 1997 and 1998 ($2,817,000); (ii)
amortization of internal use software at IMS for the financial claims processing
network ($1,432,000); (iii) amortization of capitalized software costs for
healthcare EDI and software products and services, many of which were completed
in 1997 ($500,000); and (iv) amounts payable to Walgreens associated with the
acquisition of the PreScribe software which was acquired in June 1997
($250,000). Effective for the quarter ended June 30, 1998, the Company changed
the estimated useful life of the amortization of goodwill for the USHDI and CMS
acquisitions to three years which will result in additional amortization expense
of approximately $243,000 per quarter.
INTEREST, NET. Net interest income decreased $188,906, or 78%, to
$53,926 for the nine months ended September 30, 1998 from $242,832 for the nine
months ended September 30, 1997, primarily due lower average cash balances in
1998.
OTHER. As a result of the acquisitions of CMS and HCS, the Company
recorded a charge of $8,632,654 in the nine months ended September 30, 1997
related to the expensing of in-process research and development technology. In
the nine months ended September 30, 1998, the Company paid the former owner of
HCS contingent consideration of $500,000 in cash and 30,303 shares of
unregistered common stock for meeting certain operating criteria in the 12-month
period subsequent to the acquisition, as defined in the asset purchase
agreement. As a result, the Company allocated this contingent payment to the
long-term assets acquired, including $859,830 to in-process research and
development technology which was expensed in the 1998 period.
NET LOSS. As a result of the foregoing, the Company recorded a net loss
of $8,581,713 for the nine months ended September 30, 1998, as compared to a net
loss of $15,142,225 for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In the nine month period ended September 30, 1998, cash used in
operating activities totaled $4,027,406. These activities were financed through
available cash resources, private placement sales of 3,013,416 shares of the
Company's common stock resulting in net proceeds of $29,011,999 (see Note 3 to
the Consolidated Financial Statements), and $1,365,929 in proceeds from the
exercise of stock options and warrants. During this period, the Company acquired
IMS for $25,965,325 in cash (financed through a private placement) plus common
stock and made several cash payments related to acquisitions completed in 1997
including: a debt payment under its obligation to the former owner of CMS for
$750,000, a contingency payment to the former owner of HCS in the amount of
$500,000 for meeting certain operating criteria in the 12 months subsequent to
the acquisition, and $500,000 to Walgreens under its contract for the purchase
of PreScribe. Additionally, the Company incurred approximately $350,000 in net
costs (principally leasehold improvements, relocation expenses and rent
deposits) for the relocation of its corporate offices and its network and
development operations in Fort Lauderdale in September 1998. After these
receipts and expenditures, the Company had cash and cash equivalents totaling
$5,719,178 as of September 30, 1998. These available funds continue to be used
for operations, the further development and marketing of the Company's products
and services, equipment and other general corporate purposes. In addition, the
Company is continuously evaluating acquisition opportunities that add synergies
to the Company's product offerings and business strategy.
The Company has a revolving bank line of credit of up to $5,000,000,
subject to availability of suitable collateral, which was renewed in August
1998. Borrowings, if any, are due on demand, collateralized by certificates of
deposit and U.S. Treasury Notes, and bear interest at the prime rate less 3/4%.
There are no outstanding borrowings on this line of credit as of September 30,
1998. The Company may also seek alternative sources of financing, such as
pledging of accounts receivable and leasing of fixed asset acquisitions, at
similar or more favorable terms, depending upon market conditions.
As a result of the acquisitions of CMS, HCS and PreScribe in 1997, the
Company is obligated to make certain payments in the next 12 months. These
payments are as follows: $500,000 for CMS, $1,000,000 for HCS, and $500,000 for
PreScribe. The CMS and HCS payments may be made at least 50% in cash and the
balance, if any, in common stock.
The ratio of current assets to current liabilities was 2.2 times in the
1998 period which was comparable to 2.0 times in the 1997 period. Accounts
receivable turnover for the Company was 5.7 times in the 1998 period which was
comparable to 5.9 times in the 1997 period. Inventory turnover for the network
integration services and drug dispensing segments combined was 6.4 times in the
1998 period compared to 10.8 times in the 1997 period; this decrease is
attributable to increased inventory levels in the network integration services
segment.
The Company expects to continue to incur negative net cash flow from
operations until it begins receiving higher levels of recurring revenues from
the sale of its healthcare EDI and software products and services and/or from
cash generated by its network
12
<PAGE>
integration services segment. Management is committed to the strategy of
investing funds in further marketing and development of its products and
services and may pursue additional acquisitions which are deemed to be in
accordance with its business strategy, both of which may require additional
equity or debt financing. However, there can be no assurances that such
financing will be available under terms and conditions acceptable to the
Company.
FUTURE OUTLOOK
The Company believes it is making progress in its acquisition strategy,
its strategic relationships and other plans to increase the usage of its
healthcare information technology products and services to achieve requisite
economies of scale. It has successfully reduced its operating losses before
non-cash charges, which are significant and result primarily from amortization
from its acquisitions. However, the Company anticipates that it will continue to
incur operating losses until it generates sufficient recurring revenues from
these products and services to cover its expenses. There can be no assurance
that the Company will realize an adequate level of recurring revenues from the
sale of its products and services, or that revenues from these operations or
those of its recently acquired businesses and any future acquisitions will
ultimately result in achievement of profitability.
YEAR 2000
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 the Company, the Company has
appointed a Year 2000 Committee and has hired a Year 2000 project manager, who
is reviewing the Company's internal computer systems, its products and services,
as well as reviewing the progress of the Company's principal customers, vendors
and resellers. The Company expects that all of its proprietary software products
and its clinical and financial transaction processing networks will be Year 2000
compliant by June 1999.
The Committee has developed a priority order list of Company products
and services and has commenced the Year 2000 project plan in accordance with
this plan. The Company's Year 2000 project plan consists of three phases:
Assessment, Remediation and Validation.
The primary purpose of the Assessment phase is to list and analyze the
inventory of every product sold and supported. The major issues encountered
during this phase are the identification of language the software is written in,
the source code and the third party libraries used. 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 Assessment phase for all products and services is approximately
eighty percent complete. The Assessment phase for the top three priority Company
proprietary products has been fully completed, with one product currently in the
Remediation phase.
13
<PAGE>
The Company expects the top three priority products to have completed the
Validation phase by the end of the fourth quarter of 1998. All other products
and services will complete the Validation phase by the end of the second quarter
of 1999.
Concurrently, the Company has commenced contacting all third parties
whose proprietary tools and library products are incorporated into the Company's
proprietary products in order to determine their respective Year 2000 readiness
status. In addition, the Company has started contacting the Company's customers
to inform them of the Company's Year 2000 readiness status. This initial Year
2000 readiness disclosure information and any updates to that information will
be posted on the Company's website. (The Company's website address is
www.proxymed.com.) The Company plans to have contacted all of its significant
clinical and financial transaction processing partners by the end of the fourth
quarter of 1998 in order to assess their Year 2000 readiness status.
Upon completion of the Validation phase of the Year 2000 project plan
as it relates to the Company's proprietary products and services, the Company's
internal operational systems will be re-assessed and remediated with upgrades or
alternatives, if necessary, and all critical vendors and suppliers will be
contacted for Year 2000 readiness status inquiry. The Company plans to have
completed its internal operational systems Year 2000 compliance by the end of
the third quarter of 1999.
The current estimated budget for expenditures directly related to the
Company's Year 2000 effort is approximately $400,000. The Company's actual costs
incurred to date are not material. 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 the Company's products. The
estimated budget also includes hardware upgrade costs, much of which would have
been incurred in the Company's normal equipment replacement plans. Anticipated
spending for the Company's Year 2000 effort is not expected to have a
significant impact on the Company's ongoing results of operations.
The Company will be developing contingency plans by the end of the
first quarter of 1999 to deal with possible Year 2000 failures. Due to the
general uncertainty inherent in the Year 2000 problem, there can be no assurance
that all Year 2000 problems, globally, will be foreseen and corrected on a
timely basis. While some of the Company's worst case scenarios are associated
with risks outside the control of the Company (including power and
communications), the Company has started assessing those scenarios within its
control and will attempt to develop contingency plans designed to deal with its
customers' concerns concerning the handling of data formatting and transmitting
compliant data.
14
<PAGE>
PART II - OTHER INFORMATION
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 September 30, 1998.
15
<PAGE>
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 10, 1998 /s/ Bennett Marks
- ----------------- -----------------------------------------
(Date) Bennett Marks
Co-President, Chief Financial Officer and
Principal Accounting Officer
16
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule.
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,719,178
<SECURITIES> 0
<RECEIVABLES> 5,072,017
<ALLOWANCES> (485,752)
<INVENTORY> 2,211,635
<CURRENT-ASSETS> 13,197,497
<PP&E> 4,130,694
<DEPRECIATION> (1,027,337)
<TOTAL-ASSETS> 48,192,420
<CURRENT-LIABILITIES> 5,997,953
<BONDS> 0
0
0
<COMMON> 15,717
<OTHER-SE> 79,174,503
<TOTAL-LIABILITY-AND-EQUITY> 40,793,291
<SALES> 9,102,244
<TOTAL-REVENUES> 19,939,541
<CGS> 9,020,903
<TOTAL-COSTS> 27,715,350
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (53,926)
<INCOME-PRETAX> (8,581,713)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,581,713)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,581,713)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
