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, 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)
FLORIDA 65-0202059
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2501 DAVIE ROAD, SUITE 230, 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
15,656,943 SHARES AS OF AUGUST 7, 1998
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,751,145 $ 2,654,423
Accounts receivable - trade, net 7,040,187 2,364,455
Notes and other receivables 701,099 826,998
Inventory 1,324,323 1,202,431
Other current assets 380,734 319,838
------------ ------------
Total current assets 13,197,488 7,368,145
Property and equipment, net 2,836,421 2,323,174
Goodwill, net 18,223,646 4,338,515
Purchased and capitalized software costs, net 15,772,807 5,530,226
Other assets 544,825 43,061
------------ ------------
Total assets $ 50,575,187 $ 19,603,121
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 467,096 $ 735,980
Accounts payable and accrued expenses 4,268,972 4,239,073
Deferred revenue 730,215 426,686
------------ ------------
Total current liabilities 5,466,283 5,401,739
Long-term debt 635,159 1,049,630
------------ ------------
Total liabilities 6,101,442 6,451,369
------------ ------------
Stockholders' equity:
Common stock - $.001 par value. Authorized
50,000,000 shares; issued and outstanding
15,656,943 (after deducting 110,000 shares in
treasury) and 11,781,872 shares, respectively 15,657 11,782
Additional paid-in capital 78,911,825 42,695,386
Accumulated deficit (34,453,737) (29,555,416)
------------ ------------
Total stockholders' equity 44,473,745 13,151,752
------------ ------------
Total liabilities and stockholders' equity $ 50,575,187 $ 19,603,121
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Services and license fees $ 3,670,525 $ 701,286 $ 6,979,206 $ 821,858
Prescription drugs and
computer systems 3,776,766 2,638,437 5,316,001 2,948,031
------------ ------------ ------------ ------------
7,447,291 3,339,723 12,295,207 3,769,889
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 3,585,985 2,229,062 5,355,839 2,447,270
Selling, general and
administrative expenses 4,198,235 2,641,629 8,346,283 4,546,123
Depreciation and amortization 2,029,304 165,601 2,659,977 265,864
------------ ------------ ------------ ------------
9,813,524 5,036,292 16,362,099 7,259,257
------------ ------------ ------------ ------------
Operating loss (2,366,233) (1,696,569) (4,066,892) (3,489,368)
Other income (expense):
In-process research and
development technology (859,830) (4,332,654) (859,830) (8,632,654)
Interest, net 40,359 36,443 28,401 172,362
------------ ------------ ------------ ------------
Net loss $ (3,185,704) $ (5,992,780) $ (4,898,321) $(11,949,660)
============ ============ ============ ============
Basic and diluted loss per share
of common stock $ (.23) $ (.59) $ (.38) $ (1.21)
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,898,321) $(11,949,660)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,659,977 265,864
Acquired in-process research and
development technology 859,830 8,632,654
Provision for doubtful accounts 81,077 19,570
Amortization of covenant not-to-compete (20,000) (40,000)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts and other receivables (3,985,408) (1,492,034)
Inventory (121,892) (26,176)
Accounts payable and accrued expenses (1,460,897) 1,081,010
Deferred revenue 323,529 (102,446)
Other, net (63,566) (50,007)
------------ ------------
Net cash used in operating activities (6,625,671) (3,661,225)
------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (Notes 6 and 10) (20,529,340) (5,892,770)
Payment of prior acquisition contingency (Note 6) (500,000) --
Maturities of U.S. Treasury Notes -- 3,000,000
Capital expenditures (373,000) (483,394)
Purchased and capitalized software (274,067) (2,509,679)
------------ ------------
Net cash used in investing activities (21,676,407) (5,885,843)
------------ ------------
Cash flows from financing activities:
Net proceeds from sale of common stock (Note 7) 29,011,999 8,259,250
Proceeds from exercise of stock options and warrants 1,362,991 541,119
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 29,398,800 8,236,036
------------ ------------
Net increase (decrease) in cash 1,096,722 (1,311,032)
Cash and cash equivalents at beginning of period 2,654,423 6,020,358
------------ ------------
Cash and cash equivalents at end of period $ 3,751,145 $ 4,709,326
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) 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 six months ended June 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.
(2) 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.
(3) INVENTORY - Inventory, consisting of finished goods, is stated at the lower
of cost (first-in, first-out method) or market.
(4) 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.
(5) 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 (12,815,336 shares and 9,886,040 shares for
the six months ended June 30, 1998 and 1997, respectively; and 13,772,326
shares and 10,203,109 shares for the three months ended June 30, 1998 and
1997, respectively). Diluted per share results reflect the potential
dilution from the exercise or conversion of securities into common stock;
however, stock options, warrants and contingent shares totaling 2,673,596
and
5
<PAGE>
3,001,686 shares at June 30, 1998 and 1997, respectively, were excluded
from the calculation of diluted per share results for both periods
presented because their effect was antidilutive.
(6) 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 7). 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, 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 $3,473,923 and
$5,010,555 for the six months ended June 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
------- -------
<S> <C> <C>
Revenues $13,932,886 $ 9,736,446
Net loss $(7,388,262) $(9,752,666)
Basic and diluted net loss
per share of common stock $ (0.49) $ (0.74)
</TABLE>
(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
<PAGE>
(7) 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
$1,197,866. 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 6).
Based on information provided by Bellingham as of August 7, 1998, it
beneficially owned 6,514,842 shares or approximately 41% of the Company's
outstanding common stock.
(8) SOURCE CODE LICENSE SALES - On March 30, 1998 the Company sold a
non-exclusive source code license and related services for ProxyCare(TM),
its advanced online information system for pharmacies affiliated with
long-term care facilities, to a national institutional pharmacy company for
$1,800,000. Additionally, on April 17, 1998, the Company sold a similar
license to another national institutional pharmacy company for $1,800,000.
In addition to the source code license, both sales include ongoing network
services, database subscriptions and implementation support services for
which recurring revenues will be earned as provided for in the agreements.
For the six months ended June 30, 1998, $3,040,500 was earned and recorded
as revenue, and the balance will be recorded as revenue in subsequent
periods as services are performed.
(9) 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
<PAGE>
(10) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash paid for interest $ 70,098 $ --
============ ============
Common stock issued for acquisition
contingent payment (Note 6) $ 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
------------ ------------
Net cash from acquisitions $(20,529,340) $ (5,892,770)
============ ============
</TABLE>
(11) 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales:
Healthcare EDI and software
products and services $ 6,122,386 $ 481,650
Network integration services 5,411,923 2,645,296
Prescription drug dispensing 760,898 642,943
------------ ------------
$ 12,295,207 $ 3,769,889
============ ============
Operating income (loss):
Healthcare EDI and software
products and services $ (2,349,062) $ (2,326,502)
Network integration services (4,616) 178,549
Prescription drug dispensing (22,948) (23,667)
Corporate (1,690,266) (1,317,748)
------------ ------------
$ (4,066,892) $ (3,489,368)
============ ============
Total assets:
Healthcare EDI and software
products and services $39,331,403 $ 6,629,526
Network integration services 5,198,739 2,862,764
Prescription drug dispensing 1,074,976 994,348
Corporate 4,970,069 8,834,424
------------ ------------
$50,575,187 $ 19,321,062
============ ============
</TABLE>
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a healthcare information systems 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(TM), 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
are subject to extensive and evolving statutory and regulatory framework on both
the state and federal levels.
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 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.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET REVENUES. Consolidated net revenue for the three months ended June
30, 1998 increased by $4,107,568, or 123%, to $7,447,291 from consolidated net
revenue of $3,339,723 for the three months ended June 30, 1997. The increase in
net revenue resulted primarily from the following increases in the healthcare
EDI and software products and services segment revenue: (i) financial
transactions from the acquisitions of USHDI and IMS, which were both consummated
subsequent to the prior year period ($1,077,000); (ii) the Company's sale of
a software license for ProxyCare(TM), its advanced online information system for
pharmacies affiliated with long-term care facilities ($1,540,000); and (iii) an
increase in ClinScan software and related systems revenue ($269,000).
Additionally, network integration services segment sales increased by
approximately $1,141,000 over the prior year period, due to the acquisition of
HCS which was consummated on April 30, 1997, and drug dispensing segment revenue
increased by $72,000 over the prior year period.
GROSS PROFIT MARGIN. Consolidated gross profit margin for the three
months ended June 30, 1998 was 52% compared to 33% for the three months ended
June 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 85% in the 1998 period compared
to 90% in the 1997 period. The gross profit margin in the network integration
services segment was 25% in both the 1998 and 1997 periods. The gross profit
margin in the drug dispensing segment was 30% in the 1998 period compared to 36%
in the 1997 period; this decrease is due to higher margin non-recurring revenue
in the 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for the three months ended June 30, 1998
increased by $1,556,606, or 59%, to $4,198,235 from consolidated selling,
general and administrative expenses of $2,641,629 for the three months ended
June 30, 1997. The increase in selling, general and administrative expenses
resulted primarily from the following: (i) additional payroll and related costs
($1,139,000), selling expenses ($81,000), and occupancy costs ($114,000) 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 ($226,000); and
(iii) consulting fees to various software and business consultants primarily for
the healthcare EDI and software products and services segment (decrease of
$135,000). Consolidated selling, general and administrative expenses as a
percentage of consolidated net sales decreased to 57% in the 1998 period from
79% 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.
10
<PAGE>
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense increased $1,863,703, or 1,125%, to $2,029,304 for the
three months ended June 30, 1998 from $165,601 for the three months ended June
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 ($1,111,000); (ii) amortization of
internal use software at IMS for the financial claims processing network
($458,000); (iii) amortization of capitalized software costs for healthcare EDI
and software products and services, many of which were completed in 1997
($109,000); (iv) exclusivity charges payable to Walgreen Co. ("Walgreens")'s
associated with the acquisition of the PreScribe(TM) software which was acquired
in June 1997 ($125,000); and (v) increases in depreciation for new equipment
purchases and other fixed assets acquired in the recent acquisitions ($61,000).
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 of $40,359 for the three months
ended June 30, 1998 is comparable to $36,443 for the three months ended June 30,
1997.
OTHER. As a result of the acquisition of HCS, the Company recorded a
charge of $4,332,654 in the three months ended June 30, 1997 related to the
expensing of in-process research and development technology. In the three months
ended June 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 $3,185,704 for the three months ended June 30, 1998, as compared to a net
loss of $5,992,780 for the three months ended June 30, 1997.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET REVENUES. Consolidated net revenue for the six months ended June
30, 1998 increased by $8,525,318, or 226%, to $12,295,207 from consolidated net
revenue of $3,769,889 for the six months ended June 30, 1997. The increase in
net revenue resulted primarily from the following increases in the healthcare
EDI and software products and services segment revenue: (i) financial
transactions from the acquisitions of USHDI and IMS ($1,833,000); (ii) the
Company's sale of two software licenses for ProxyCare(TM), its advanced online
information system for pharmacies affiliated with long-term care facilities
($3,041,000); and (iii) an increase in ClinScan software and related systems
revenue ($719,000). Additionally, network integration services segment sales
increased by approximately $2,767,000 over the prior year period and drug
dispensing segment revenue increased by $118,000 over the prior year period.
GROSS PROFIT MARGIN. Consolidated gross profit margin for the six
months ended June 30, 1998 was 56% compared to 35% for the six months ended June
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 85% in the 1998 period compared to 89% in
the 1997 period. The gross profit margin in the network integration services
segment was 28% in the 1998 period compared to 25% in the 1997 period; this
increase is as primarily due to increases in higher margin Internet access fee
revenues. The gross profit margin in the drug dispensing segment was 32% in the
1998 period compared to 35% in the 1997 period; this decrease is due to higher
margin non-recurring revenue in the 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for the six months ended June 30, 1998
increased by $3,800,160, or 84%, to $8,346,283 from consolidated selling,
general and administrative expenses of $4,546,123 for the six months ended June
30, 1997. The increase in selling, general and administrative expenses resulted
primarily from the following: (i) additional payroll and related costs
($2,939,000); selling expenses, ($88,000); occupancy costs ($256,000), office
expenditures and training seminars ($111,000) 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 ($385,000); (iii) consulting fees to
various software and business consultants primarily for the healthcare EDI and
software products and services segment (decrease of $270,000); and (iv)
additional marketing expenditures including travel to potential customers
primarily for the healthcare EDI software products and services segment
($72,000). Consolidated selling, general and administrative expenses as a
percentage of consolidated net sales decreased to 68% in the 1998 period from
121% 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.
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<PAGE>
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense increased $2,394,113, or 901%, to $2,659,977 for the six
months ended June 30, 1998 from $265,864 for the six months ended June 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 ($1,231,000); (ii) amortization of internal use
software at IMS for the financial claims processing network ($458,000); (iii)
amortization of capitalized software costs for healthcare EDI and software
products and services, many of which were completed in 1997 ($336,000), (iv)
exclusivity charges payable to Walgreens associated with the acquisition of the
PreScribe software which was acquired in June 1997 ($250,000); and (v) increases
in depreciation for new equipment purchases and other fixed assets acquired in
the recent acquisitions ($119,000). As mentioned previously, 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.
INTEREST, NET. Net interest income decreased $143,961, or 84%, to
$28,401 for the six months ended June 30, 1998 from $172,362 for the six months
ended June 30, 1997, primarily due lower average cash balances in 1998.
OTHER. As a result of the acquisition of CMS and HCS, the Company
recorded a charge of $8,632,654 in the six months ended June 30, 1997 related to
the expensing of in-process research and development technology. In the six
months ended June 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 $4,898,321 for the six months ended June 30, 1998, as compared to a net loss
of $11,949,660 for the six months ended June 30, 1997.
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LIQUIDITY AND CAPITAL RESOURCES
In the six month period ended June 30, 1998, cash used in operating
activities totaled $6,625,671. 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 $29,011,099 (see Note 7 to the
Condensed Consolidated Financial Statements), and $1,362,991 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 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. for exclusivity rights under its
contract for the purchase of PreScribe. After these receipts and expenditures,
the Company had cash and cash equivalents totaling $3,751,145 as of June 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 is scheduled to expire 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
June 30, 1998. Prior to expiration of this line of credit, the Company intends
to renew or renegotiate this arrangement with its current bank or seek
alternative sources 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 2.4 times in the
1998 period compared to 2.7 times in the 1997 period; this decrease is primarily
due to the increase in accounts payable and accrued liabilities recorded for the
acquisition of IMS. Accounts receivable turnover for the Company was 4.9 times
in the 1998 period compared to 5.2 times in the 1997 period; this decrease
reflects the impact of significant network integration segment sales late in the
second quarter of 1998, which were not collected by the end of the period.
Inventory turnover for the network integration services and drug dispensing
segments combined of 7.6 times in the 1998 period was comparable to 7.3 times
in the 1997 period.
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 integration services segment. Management is
committed to the strategy of investing
14
<PAGE>
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
The Company has appointed a Year 2000 Committee and is currently
expending resources to review its own internal computer systems, products and
services, and is also reviewing the progress of its principal customers, vendors
and resellers in identifying and addressing issues that their own computer
systems, products and services may have in correctly interrelating and
processing date information as the Year 2000 approaches and is reached. Although
the Company believes that its proprietary software and EDI products, when used
prior to, during and after the turn-of-the-century, are or will be programmed on
a timely basis to process turn-of-the-century dates, the Company does not make
any assurances with regard to any third-party software or tools that are part of
the Company's product offering or services. Because of the nature of the
Company's business, the success of the Company's efforts may depend on the
success of its providers, payors and third-party vendors in dealing with the
Year 2000 matter.
Based on the results of the Committee's efforts achieved to date, the
Company believes that the expenses of the Company's continuing efforts to
identify and address issues, or the expenses or liabilities to which the Company
may become subject as a result, are not currently considered to be material as
to its own internal computer systems, products and services. There can be no
assurances, however, that the Company will not incur additional costs, which may
be material, with respect to such issues in the future. In addition, the Company
may face significant risks to the extent that suppliers of products, services
and systems purchased by the Company and licensed to others with whom the
Company transacts business (such as its ECP partners and participating
physicians, pharmacies, laboratories and other healthcare providers) do not
operate on computer systems or products that comply with the Year 2000
requirements. In the event any such third parties do not timely meet the Year
2000 requirements, the Company's operating results could be materially adversely
affected.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 2 - CHANGE IN SECURITIES.
(c) 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. Commonwealth Associates represented
the Company as underwriter in the transaction, for which it
received $731,330 in commissions, $254,476 as a
non-accountable expense allowance, and a five-year warrant
to purchase 94,978 shares of the Company's common stock for
$12.10 per share. Other costs of the transaction aggregated
approximately $212,000. Of the funds raised, $20,620,000 was
used for the acquisition of IMS on May 19, 1998.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual meeting held on May 21, 1998, 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, Samuel X. Kaplan, Bennett Marks, Bertram J. Polan, Peter
A. A. Saunders and Eugene R. Terry. The total number of votes cast for directors
was 6,497,303, and each director received 6,494,581 votes in favor and 2,722
votes withheld.
- AMENDMENT OF RESTATED ARTICLES OF INCORPORATION. The total number of
votes cast for this matter, which increased the number of common shares
authorized to 50,000,000 shares, was 6,497,303. Of these votes, 6,469,132 were
in favor, 27,171 were against, and 1,000 abstained (including broker non-votes).
ITEM 5 - OTHER INFORMATION.
On May 21, 1998, the Board of Directors elected the following persons
to serve as executive officers of the Company: Harold S. Blue, Chairman of the
Board and Chief Executive Officer; John Paul Guinan, President; Bennett Marks,
Executive Vice President Finance, Chief Financial Officer and Treasurer; Frank
M. Puthoff, Executive Vice President, Chief Legal Officer and Secretary; James
H. Pickering, Executive Vice President - Operations and Chief Operating Officer;
and Bruce S. Roberson, Executive Vice President Strategic and Business
Development.
16
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 - Financial Data Schedule
(b) During the quarter ended June 30, 1998, the following report on
Form 8-K was filed:
- May 19, 998 - Report on the acquisition of the capital
stock of WPJ, Inc. d/b/a Integrated Medical Systems
("IMS").
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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, 1998 /s/ BENNETT MARKS
- --------------- -------------------------------------
(Date) Bennett Marks
Executive Vice President - Finance,
Chief Financial Officer and Principal
Accounting Officer
18
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,751,145
<SECURITIES> 0
<RECEIVABLES> 7,454,565
<ALLOWANCES> (414,378)
<INVENTORY> 1,324,323
<CURRENT-ASSETS> 13,197,488
<PP&E> 3,822,564
<DEPRECIATION> (986,143)
<TOTAL-ASSETS> 50,575,187
<CURRENT-LIABILITIES> 5,466,283
<BONDS> 0
0
0
<COMMON> 15,657
<OTHER-SE> 78,911,826
<TOTAL-LIABILITY-AND-EQUITY> 44,473,745
<SALES> 5,316,001
<TOTAL-REVENUES> 12,295,207
<CGS> 5,355,839
<TOTAL-COSTS> 16,382,099
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (28,401)
<INCOME-PRETAX> (4,898,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,898,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,898,321)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
