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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number: 000-22052
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, FORT LAUDERDALE, FLORIDA 33317
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(Address of principal executive offices) (Zip Code)
(954) 473-1001
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(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
6,741,772 SHARES AS OF AUGUST 12, 2002
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
PROXYMED, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
June 30, December 31,
2002 2001
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 26,812,600 $ 12,601,000
Accounts receivable - trade, net 7,034,100 5,588,800
Other receivables 90,900 88,800
Inventory 3,151,200 3,351,100
Other current assets 618,500 330,600
------------- -------------
Total current assets 37,707,300 21,960,300
Property and equipment, net 3,990,200 3,831,700
Goodwill, net 11,322,300 7,960,400
Purchased technology, capitalized software and other intangibles, net 2,002,800 2,075,800
Other assets 53,300 53,300
------------- -------------
Total assets $ 55,075,900 $ 35,881,500
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Note payable $ -- $ 7,000,000
Accounts payable and accrued expenses 5,251,400 5,344,600
Deferred revenue 642,300 222,300
------------- -------------
Total current liabilities 5,893,700 12,566,900
Long-term deferred revenue and other long-term liabilities 337,300 442,100
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Total liabilities 6,231,000 13,009,000
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Stockholders' equity:
Series C 7% Convertible preferred stock - $.01 par value. Authorized
300,000 shares; issued and outstanding 3,000 and 34,650 shares,
respectively; liquidation preference $300,000
and $3,465,000, respectively -- 300
Common stock - $.001 par value. Authorized 13,333,333 shares;
issued and outstanding 6,741,644 (after deducting 15,061
shares in treasury) and 4,894,433 shares, respectively 6,700 4,900
Additional paid-in capital 145,753,000 120,276,500
Accumulated deficit (96,728,900) (97,223,300)
Note receivable from stockholder (185,900) (185,900)
------------- -------------
Total stockholders' equity 48,844,900 22,872,500
------------- -------------
Total liabilities and stockholders' equity $ 55,075,900 $ 35,881,500
============= =============
See accompanying notes.
2
PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Transaction fees, services and license fees $ 6,757,700 $ 5,780,100 $ 13,466,900 $ 10,114,400
Communication devices, computer systems
and other tangible goods 5,869,300 4,423,200 10,663,200 8,491,800
------------ ------------ ------------ ------------
12,627,000 10,203,300 24,130,100 18,606,200
------------ ------------ ------------ ------------
Costs and expenses:
Cost of transaction fees, services and license fees 2,067,500 1,605,600 4,199,300 2,284,800
Cost of tangible goods 3,716,900 3,115,300 6,964,500 5,762,600
Selling, general and administrative expenses 5,941,300 5,062,800 11,434,200 10,687,700
Depreciation and amortization 584,000 2,282,400 1,152,500 5,302,200
------------ ------------ ------------ ------------
12,309,700 12,066,100 23,750,500 24,037,300
------------ ------------ ------------ ------------
Operating income (loss) 317,300 (1,862,800) 379,600 (5,431,100)
Interest income (expense), net 128,200 (30,700) 114,800 70,500
------------ ------------ ------------ ------------
Net income (loss) 445,500 (1,893,500) 494,400 (5,360,600)
Deemed dividends and other charges -- 2,195,300 611,700 4,656,400
------------ ------------ ------------ ------------
Net income (loss) applicable to common shareholders $ 445,500 $ (4,088,800) $ (117,300) $(10,017,000)
============ ============ ============ ============
Basic net income (loss) per share: $ 0.07 $ (2.56) $ (0.02) $ (6.67)
============ ============ ============ ============
Basic weighted average shares outstanding 6,660,913 1,599,636 5,892,026 1,500,997
============ ============ ============ ============
Diluted net income (loss) per share: $ 0.06 $ (2.56) $ (0.02) $ (6.67)
============ ============ ============ ============
Diluted weighted average shares outstanding 6,873,585 1,599,636 5,892,026 1,500,997
============ ============ ============ ============
See accompanying notes
3
PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
-----------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 494,400 $ (5,360,600)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,152,500 5,302,200
Provision for (recovery of) doubtful accounts (17,800) 31,400
Provision for obsolete inventory 120,000 50,500
Compensatory stock options and warrants -- 433,300
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts and other receivables (912,700) (42,700)
Inventory 214,400 (287,600)
Prepaid expenses (277,400) (206,900)
Accounts payable and accrued expenses (569,300) (174,400)
Deferred revenue 45,600 52,300
Other, net (25,500) (108,100)
------------ ------------
Net cash provided by (used in) operating activities 224,200 (310,600)
------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (2,870,600) (3,000,000)
Short term investments -- (3,000,000)
Redemption of short term investments -- 3,000,000
Capital expenditures (689,900) (396,400)
Capitalized software (200,400) --
Payments for acquisition-related costs -- (23,200)
------------ ------------
Net cash used in investing activities (3,760,900) (3,419,600)
------------ ------------
Cash flows from financing activities:
Proceeds from stock offering, net 24,886,100 --
Payment of note payable related to acquisition of business (7,000,000) --
Dividends on preferred stock -- (1,600)
Collections on notes receivable 18,300 25,500
Payment of note payable, capital leases and long-term debt (156,100) (100,900)
------------ ------------
Net cash provided by (used in) financing activities 17,748,300 (77,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 14,211,600 (3,807,200)
Cash and cash equivalents at beginning of period 12,601,000 8,841,100
------------ ------------
Cash and cash equivalents at end of period $ 26,812,600 $ 5,033,900
============ ============
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
("ProxyMed" or 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 accounting principles generally accepted in the
United States of America. 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 six months ended June 30, 2002 are
not necessarily indicative of the results to be expected for the full
year. The unaudited consolidated financial statements included herein
should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Company's Form 10-K
for the year ended December 31, 2001.
In August 2001, our Board of Directors effected a 1-for-15 reverse
stock split of the Company's common stock, par value $.001 per share.
All share and per share amounts have been restated to reflect this
transaction.
(b) Revenue Recognition - Electronic transaction processing fee revenue is
recorded in the period the service is rendered. Certain transaction fee
revenue may be subject to revenue sharing or rebates per agreements
with resellers, vendors or gateway partners and are recorded as gross
revenues. 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 are
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. Revenue from certain
up-front fees is amortized ratably over the expected life of the
customer. Revenue from hardware leases, network access and maintenance
fees is recognized ratably over the applicable period.
5
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
(c) Net Income (Loss) Per Share - Basic net income (loss) per share is
computed by dividing net income (loss) applicable to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per share reflects
the potential dilution from the exercise or conversion of securities
into common stock; however, 597,036 stock options and warrants
outstanding at June 30, 2002 were excluded from the calculation of
diluted net income per share for the three months ended June 30, 2002
because the exercise price of these options and warrants was greater
than the average market price of the Company's common stock during the
period. Additionally, 1,664,934 and 2,371,931 stock options and
warrants outstanding June 30, 2002 and 2001, respectively, as well as
common shares issuable on the conversion of both Series B (2001 period
only) and Series C preferred stock (20,000 and 1,649,167 shares, if
converted on June 30, 2002 and 2001, respectively), were excluded from
the calculation of diluted net loss per share for the six months ended
June 30, 2002 and the three and six months ended June 30, 2001,
respectively, because their effect was antidilutive.
The following sets forth the computation of basic and diluted net
income (loss) per share for the three and six months ended June 30,
2002 and 2001:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income (loss) applicable to common shareholders $ 445,500 $ (4,088,800) $ (117,300) $(10,017,000)
============ ============ ============ ============
Common shares outstanding:
Weighted average common shares used in computing
basic net income (loss) per share 6,660,913 1,599,636 5,892,026 1,500,997
Plus incremental shares from assumed conversions:
Convertible preferred stock 20,000 -- -- --
Stock options 40,776 -- -- --
Warrants 151,896 -- -- --
------------ ------------ ------------ ------------
212,772 -- -- --
------------ ------------ ------------ ------------
Weighted average common shares used in computing
diluted net income (loss) per share 6,873,685 1,599,636 5,892,026 1,500,997
============ ============ ============ ============
Net income (loss) per common share:
Basic $ 0.07 $ (2.56) $ (0.02) $ (6.67)
============ ============ ============ ============
Diluted $ 0.06 $ (2.56) $ (0.02) $ (6.67)
============ ============ ============ ============
6
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
(d) New Accounting Pronouncements - In May 2002, the Financial Accounting
Standards Board issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 rescinds the automatic treatment of gains or
losses from extinguishments of debt as extraordinary unless they meet
the criteria for extraordinary items as outlined in APB Opinion No. 30,
"Reporting the Results of Operations, Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". In addition, SFAS No. 145 also
requires sale-leaseback accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions
and makes various technical corrections to existing pronouncements. The
provisions of SFAS No. 145 related to the rescission of FASB Statement
No. 4 are effective for fiscal years beginning after May 15, 2002, with
early adoption encouraged. All other provisions of SFAS No. 145 are
effective for transactions occurring after May 15, 2002, with early
adoption encouraged. The Company does not anticipate that SFAS No. 145
will have a material effect on its financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal
Activities". The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan.
Previous accounting guidance was provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring)". SFAS No. 146 replaces Issue 94-3. The provisions of
SFAS No. 146 are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company does not
anticipate that SFAS No. 146 will have a material effect on its
financial statements.
7
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
(2) Acquisition of Business
In May 2002, the Company acquired all of the capital stock of KenCom
Communications & Services, Inc. ("KenCom"), a privately-owned provider of
laboratory communication solutions, for $3,275,000 in cash (of which $100,000
was withheld by the Company) and 30,034 shares of unregistered ProxyMed common
stock (valued at $600,000). The number of shares of common stock issued was
based on the average of the closing prices of the Company's common stock for the
five days immediately preceding the closing. The Company will register these
shares no later than one year after the closing. The shares of common stock
(which are being held in escrow by the Company) and the $100,000 in cash are
being held against any unknown liabilities, and if unused, will be released
after one year and after six months from the closing, respectively. The
acquisition was accounted for as a purchase, and the Company has not finalized
its allocation methodology associated with the acquisition. Based on the
preliminary allocation, the Company believes the excess of the purchase price
over the fair value of the net assets acquired (amounting to $3,371,900) will be
primarily goodwill with other amortizable intangibles representing customer
relationships and technology.
(3) Inventory
Inventory consists of the following at June 30, 2002:
Materials, supplies and component parts $2,311,800
Work in process 509,400
Finished goods 330,000
----------
$3,151,200
==========
8
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
(4) Goodwill and Other Intangible Assets
(a) Goodwill - The Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002
resulting in the reduction of approximately $808,000 of amortization
relating to its existing goodwill each quarter, which would have
otherwise been recorded through the first quarter of 2004.
SFAS No. 142 also requires that goodwill be tested at least annually
for impairment using a two-step process. The first step is to identify
a potential impairment and, in transition, this step must be measured
as of the beginning of the fiscal year. The second step of the goodwill
impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be
completed by the end of the Company's fiscal year. The Company
completed the first step of the transitional goodwill impairment test
and did not record an impairment charge as a result of applying SFAS
No. 142 during the first quarter of 2002.
The changes in the carrying amounts of goodwill for the six months
ended June 30, 2002 by operating segment are as follows:
Electronic
healthcare Laboratory
transaction communication
processing solutions Total
------------ ------------- -----------
Balance as of December 31, 2001 $ 7,430,700 $ 529,700 $ 7,960,400
Goodwill acquired during the period -- 3,361,900 3,361,900
----------- ----------- -----------
Balance as of June 30, 2002 $ 7,430,700 $ 3,891,600 $11,322,300
=========== =========== ===========
9
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
In accordance with SFAS No. 142, a reconciliation of the previously
reported net loss applicable to common shareholders and net loss per
share to the amounts adjusted for the exclusion of goodwill
amortization, net of any related income tax effect, is as follows:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------------
2002 2001 2001 2002
=========== =========== ============== ===========
Reported net income (loss) applicable to common shareholders $ 445,500 $(4,088,800) $ (10,017,000) $ (117,300)
Goodwill amortization -- 1,284,900 2,851,000 --
----------- ----------- -------------- -----------
Adjusted net loss applicable to common shareholders $ 445,500 $(2,803,900) $ (7,166,000) $ (117,300)
=========== =========== ============== ===========
Basic weighted average common shares outstanding 6,660,913 1,599,636 1,500,997 5,892,026
=========== =========== ============== ===========
Basic net income (loss) per share of common stock:
Reported net income (loss) applicable to common shareholders $ 0.07 $ (2.56) $ (6.67) $ (0.02)
Goodwill amortization -- 0.80 1.90 --
----------- ----------- -------------- -----------
Adjusted net income (loss) applicable to common shareholders $ 0.07 $ (1.76) $ (4.77) $ (0.02)
=========== =========== ============== ===========
Diluted weighted average common shares outstanding 6,873,585 1,599,636 1,500,997 5,892,026
=========== =========== ============== ===========
Diluted net income (loss) per share of common stock:
Reported net income (loss) applicable to common shareholders $ 0.06 $ (2.56) $ (6.67) $ (0.02)
Goodwill amortization -- 0.80 1.90 --
----------- ----------- -------------- -----------
Adjusted net income (loss) applicable to common shareholders $ 0.06 $ (1.76) $ (4.77) $ (0.02)
=========== =========== ============== ===========
(b) Other Intangible Assets - The carrying amounts of other intangible
assets for as of June 30, 2002 and December 31, 2001, by category, are
as follows:
June 30, 2002 December 31, 2001
----------------------------------------------- -----------------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
----------- ----------- ----------- ----------- ------------ -----------
Capitalized software $ 3,569,800 $(1,668,000) $ 1,901,800 $ 3,369,400 $(1,469,900) $ 1,899,500
Other intangibles 862,500 (761,500) $ 101,000 852,500 (676,200) 176,300
----------- ----------- ----------- ----------- ----------- -----------
$ 4,432,300 $(2,429,500) $ 2,002,800 $ 4,221,900 $(2,146,100) $ 2,075,800
=========== =========== =========== =========== =========== ===========
Amortization expense of capitalized software and other intangible
assets was $134,500 and $644,600 for the three months ended June 30,
2002 and 2001, and $283,400 and $1,764,300 for the six months ended
June 30, 2002 and 2001, respectively.
As of June 30, 2002, estimated future amortization expense of other
intangible assets is as follows: $232,700 for the remaining quarters of
2002, $356,800 in 2003, $334,500 in 2004, $249,400 in 2005, $227,700 in
2006 and $227,700 in 2007.
10
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
(5) Debt Obligation
In January 2002, the Company paid in full its $7 million promissory
note related to its May 2001 acquisition of MDP Corporation.
(6) Equity Transactions
(a) Series C Preferred Conversion Offer - On December 13, 2001, the Company
offered to convert its then outstanding Series C Preferred into shares
of common stock at a reduced conversion price (the "Conversion Offer").
For a period of sixty days ending February 11, 2002, the holders of the
Series C Preferred shares were able convert such shares at a reduced
conversion price of $13.05 per share instead of the original conversion
price of $15.00. As of December 31, 2001, holders of 83.0% of the
outstanding Series C Preferred had converted their shares into
1,296,126 shares of common stock and, as a result, the Company recorded
a deemed dividend charge of $3,365,400 included in the net loss
applicable to common shareholders in the fourth quarter of 2001. At the
conclusion of the Conversion Offer on February 11, 2002, holders of
98.5% of the outstanding Series C Preferred had converted their shares
into a total of 1,538,636 common shares. A deemed dividend charge of
$611,700 was recorded in the first quarter of 2002 for conversions
consummated after the 2001 year end. As of June 30, 2002, there were
3,000 unconverted shares of Series C Preferred which are convertible
into 20,000 shares of common stock.
(b) Sale of Common Stock - On April 5, 2002, the Company sold 1,569,366
shares of unregistered common stock at $15.93 per share (the "Primary
Shares") in a private placement to General Atlantic Partners 74, L.P.,
GAP Coinvestment Partners II, L.P., Gapstar, LLC, GAPCO GmbH & Co. KG.
(the "General Atlantic Purchasers"), four companies affiliated with
General Atlantic Partners, LLC ("GAP"), a private equity investment
fund and received net proceeds of $24.9 million. In addition, the
Company also issued two-year warrants for the purchase of 549,279
shares of common stock exercisable at $15.93 per share (the "GAP
Warrants"). No placement agent was used in this transaction. The
Company granted the General Atlantic Purchasers and certain of their
transferees and affiliates certain demand and "piggy back" registration
rights starting one year from closing. Additionally, in connection with
the transaction, a general partner of GAP was appointed as a director
to fill a vacancy on the Company's Board of Directors.
11
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
As a result of the purchase of the Primary Shares, the General Atlantic
Purchasers own approximately 23.4% of the then outstanding shares of
the Company's common stock. At the Company's Annual Meeting of
Shareholders held on May 22, 2002, the shareholders of the Company
approved that the GAP Warrants may be exercised at any time after April
5, 2003, and prior to April 5, 2004, pursuant to the original terms of
the warrant.
(c) Stock Options - In January 2002, 40,000 vested stock options for three
resigning directors were amended to allow for an extension of the
exercise period through December 31, 2003.
Additionally, in January 2002, the Company's Board of Directors agreed
to cancel up to 37,767 stock options with exercise prices ranging from
$57.45 to $202.50 issued to current officers and employees of the
Company with the intent of reissuing the same number of options in the
future at the then current market price.
At the Company's Annual Meeting of Shareholders held on May 22, 2002,
the shareholders approved a new 2002 Stock Option Plan pursuant to
which options to purchase 600,000 shares of common stock may be issued
to employees, officers and directors.
Additionally, in May 2002, the Company's outside directors were granted
a total of 55,000 options at an exercise price of $20.20 to compensate
the directors upon initial appointment to the board, re-election to the
board, and participation in sub-committees. Option grants for initial
and subsequent re-election to the board vest equally over a three-year
period. Options for participation in sub-committees vest in full after
five years but may be accelerated to vest after each sub-committee
meeting attended.
In June 2002, the Company's Board of Directors authorized the issuance
of a total of 85,734 options to employees and officers of the Company
as part of a structured retention and reward plan. Of this amount,
47,267 options were granted at an exercise price of $17.36 per share.
Included in these grants were a total of 25,000 options granted to the
Company's chairman/chief executive officer and president/chief
operating officer. The balance of 38,467 options will be granted to
other employees and officers in September 2002 at the then current
market price. In general, these options are for a ten-year term and
vest equally over a three-year period.
12
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
Also in June 2002, the Company's Board of Directors authorized the
issuance of a total of 112,913 options to ProxyMed's executive and
senior management as part of their compensation plan for the 2002 year.
Of this amount, 56,440 options were granted to the Company's
chairman/chief executive officer and president/chief operating officer
at an exercise price of $17.36. The balance of 56,473 options will be
granted to other executive and senior management in September 2002 at
the then current market price. All of these options vest after five
years and contain a clause that enables the accelerated vesting of a
portion or all of the options if specific, pre-determined individual
and company goals are met during the 2002 year.
(7) Segment Information
ProxyMed operates in two reportable segments which are separately
managed: Electronic healthcare transaction processing and Laboratory
communication solutions. Electronic healthcare transaction processing includes
transaction and value-added services principally between physicians and
insurance companies (Payer Services) and physicians and pharmacies (Prescription
Services); and Laboratory communication solutions includes the sale, lease and
service of communication devices principally to laboratories and the contract
manufacturing of printed circuit boards (Laboratory Services). Intersegment
sales are not material, and there were no foreign sales for any periods
presented.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net revenues:
Electronic healthcare transaction processing $ 5,331,600 $ 4,085,800 $ 10,609,700 $ 6,807,500
Laboratory communication devices and services 7,295,400 6,117,500 13,520,400 11,798,700
------------ ------------ ------------ ------------
$ 12,627,000 $ 10,203,300 $ 24,130,100 $ 18,606,200
============ ============ ============ ============
Operating income (loss):
Electronic healthcare transaction processing $ (103,500) $ (1,947,700) $ 48,800 $ (5,193,700)
Laboratory communication devices and services 1,125,000 891,000 1,717,600 1,879,500
Corporate and consolidating (704,200) (806,100) (1,386,800) (2,116,900)
------------ ------------ ------------ ------------
$ 317,300 $ (1,862,800) $ 379,600 $ (5,431,100)
============ ============ ============ ============
June 30,
Total assets: 2002 2001
------------ ------------
Electronic healthcare transaction processing $ 14,212,600 $ 16,349,100
Laboratory communication devices and services 13,365,400 7,182,700
Corporate and consolidating 27,497,900 6,052,700
------------ ------------
$ 55,075,900 $ 29,584,500
============ ============
13
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (unaudited), Continued
(8) Supplemental Disclosure of Cash Flow Information
Six Months Ended June 30,
---------------------------------
2002 2001
----------- -----------
Common stock issued for payment of preferred stock dividends $ -- $ 830,500
=========== ===========
Acquisition of businesses:
Common stock issued for business acquired 600,000 --
Debt issued for business acquired -- 7,000,000
Amounts withheld from cash paid 100,000 --
Other acquisition costs 22,000 30,300
Details of acquisition:
Working capital components, other than cash 108,900 (303,100)
Property and equipment (337,700) (165,000)
Goodwill and other intangible assets (3,361,900) (9,558,400)
Other, net (1,900) (3,800)
----------- -----------
Net cash used in acquisitions $(2,870,600) $(3,000,000)
=========== ===========
(9) Income Taxes
As of June 30, 2002 the Company had a net deferred tax asset of
approximately $32.8 million, which was fully offset by a valuation allowance.
Realization of the net deferred tax asset is dependent upon the Company
generating sufficient taxable income prior to the expiration of the federal net
operating loss carryforwards. The Company will adjust this valuation reserve
accordingly, if during future periods, management believes the Company will
generate sufficient taxable income to realize the net deferred tax asset.
(10) Subsequent Event
On July 30, 2002, the Company acquired the assets of MDIP, Inc. (d/b/a
Medical Data Insurance Processing), a privately-held company providing UB92
institutional claims processing, for $2.4 million in cash, of which $250,000 was
placed in an third-party escrow account for a period of one year. The
acquisition will be accounted for as a purchase and is expected to result in
goodwill and other intangible assets of approximately $2.3 million.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
ProxyMed is an electronic healthcare transaction processing services
company providing connectivity services and related value-added products to
physicians, payers, medical laboratories, pharmacies, and other healthcare
providers. Our electronic transaction processing services support a broad range
of both financial and clinical transactions. To facilitate these services, we
operate ProxyNet(R), our secure, proprietary national electronic information
network, which provides physicians and other healthcare providers with direct
connectivity to one of the industry's largest group of payers, the largest group
of clinical laboratories, and the largest group of chain and independent
pharmacies. Our products and services are currently provided from our main
operating facilities located in Fort Lauderdale, Florida; New Albany, Indiana;
Santa Ana, California; and Atlanta, Georgia.
We operate in two reportable segments which are separately managed:
Electronic healthcare transaction processing and Laboratory communication
solutions. Electronic healthcare transaction processing includes transaction and
value-added services principally between physicians and insurance companies
(Payer Services) and physicians and pharmacies (Prescription Services); and
Laboratory communication solutions includes the sale, lease and service of
communication devices principally to laboratories and the contract manufacturing
of printed circuit boards (Laboratory Services).
Our business strategy is to leverage our leadership position in
connectivity services in order to establish ProxyMed as the premier provider of
automated financial, clinical and administrative transaction services primarily
between small physician offices (offices with one to nine physicians) and
payers, clinical laboratories and pharmacies. Through strategic relationships
and partnerships with front-end solutions providers, our goal is to drive more
healthcare transactions through ProxyNet while remaining neutral in the battle
for the physician's desktop. Additionally, since we have a substantial existing
customer base of physicians and other healthcare providers, we believe that
there are opportunities to increase revenues by cross-selling our existing
products and services to these current customers, as well as revenue
opportunities from the development of new services from our development efforts,
including Internet-based transaction services, and from opportunities afforded
by the Health Insurance Portability and Accountability Act of 1996, as amended
(known as HIPAA) as it relates to privacy, security and education. We remain
committed to developing additional capabilities and value-added products and
services for our back-end connectivity network.
To facilitate our ability to fund our internal and strategic growth
plans, on April 5, 2002, we sold 1,569,366 shares of unregistered common stock
at $15.93 per share, including a two-year warrant for the purchase of 549,279
shares of common stock also at $15.93 per share, in a private placement to four
entities affiliated with General Atlantic Partners, LLC ("GAP"), a private
equity investment fund, resulting in net proceeds to us of $24.9 million. No
placement agent was used in the transaction and we granted the GAP entities
certain demand and "piggy back" registration rights starting one
15
year from closing. Additionally, in connection with the transaction, a general
partner of GAP was appointed as a director to fill a vacancy on our Board of
Directors.
With our investment from GAP to bolster our cash position, we are poised
to take advantage of the opportunities in the healthcare connectivity industry
and become the premier provider of electronic connectivity solutions for the
small physician practice. Our focus for 2002 and beyond is on internal growth
primarily through cross-selling opportunities and external growth through
strategic acquisitions. Our first strategic acquisition was completed on May 6,
2002 with the purchase of KenCom Communications & Services, Inc. ("KenCom"), a
provider of laboratory communication solutions, for $3,275,000 in cash and
30,034 shares of our common stock (valued at $600,000). We also recently
completed the acquisition of the assets of MDIP, Inc. (d/b/a Medical Data
Insurance Processing and "MDIP"), a privately-held company providing UB92
institutional claims processing, on July 30, 2002 for $2.4 million in cash.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001.
NET REVENUES. Consolidated net revenues for the three months ended June
30, 2002 increased by $2,423,700, or 24%, to $12,627,000 from consolidated net
revenues of $10,203,300 for the three months ended June 30, 2001. Net revenues
classified by our reportable segments are as follows:
Three Months Ended June 30,
---------------------------
2002 2001
----------- -----------
Electronic healthcare transaction processing $ 5,331,600 $ 4,085,800
Laboratory communication solutions 7,295,400 6,117,500
----------- -----------
$12,627,000 $10,203,300
=========== ===========
Electronic healthcare transaction processing segment net revenues
increased by 31% primarily due to a 30% increase in the number of electronic
clinical and financial healthcare transactions processed through ProxyNet, from
21.9 million transactions in the second quarter of 2001 to 28.5 million
transactions in 2002. The 2001 period included only two months of electronic
claim and patient statement transactions from MDP Corporation ("MDP"), which was
acquired in May 2001. For the 2002 period, approximately 42% of our revenues
came from our Electronic healthcare transaction processing segment, whereas only
40% was from this segment for the 2001 period. For the remainder of 2002 and
beyond, it is anticipated that our greatest growth will come from this segment.
Laboratory communication solutions segment net revenues increased by
19% primarily due to the acquisition of KenCom and an increase in contract
manufacturing revenues, offset by decreases in sales and leases of communication
devices, and field services revenues.
16
COST OF SALES. Consolidated cost of sales remained constant as a
percentage of net revenues at 46% for the three months ended June 30, 2002 and
2001. Cost of sales classified by our reportable segments is as follows:
Three Months Ended June 30,
---------------------------
2002 2001
---------- ----------
Electronic healthcare transaction processing $2,067,600 $1,606,600
Laboratory communication solutions 3,716,800 3,114,300
---------- ----------
$5,784,400 $4,720,900
========== ==========
Cost of sales in the Electronic healthcare transaction processing
segment consists of transaction fees, services and license fees, including
third-party electronic transaction processing costs, certain telecommunication
costs, revenue sharing and rebate arrangements with our business partners,
third-party database licenses, and certain labor and travel expenses. Cost of
sales as a percentage of revenues remained constant at 39% for both periods
presented.
Cost of sales in the Laboratory communication solutions segment
includes hardware, third-party software, and consumable materials. Cost of sales
as a percentage of revenues remained constant at 51% for both periods presented.
The 2002 period included a favorable cost of goods pricing adjustment that
reduced cost of sales by approximately 3% of revenues in the period offset by a
shift in the revenue mix from lower cost leases to higher cost contract
manufacturing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated SG&A for the
three months ended June 30, 2002 increased by $878,500, or 17%, to $5,941,300
from consolidated SG&A of $5,062,800 for the three months ended June 30, 2001.
Consolidated SG&A expenses as a percentage of consolidated revenues decreased to
47% in the 2002 period compared to 50% in the same period last year. SG&A
expenses classified by our reportable segments are as follows:
Three Months Ended June 30,
---------------------------
2002 2001
---------- ----------
Electronic healthcare transaction processing $3,003,900 $2,373,400
Laboratory communication solutions 2,284,800 1,978,000
Corporate 652,600 711,400
---------- ----------
$5,941,300 $5,062,800
========== ==========
Electronic healthcare transaction processing segment SG&A expenses for
the 2002 period increased 27% over the same period last year primarily due to
adding associates in our Payer Services transaction business sales and marketing
teams to drive our core revenue growth and adding personnel in our technical and
development areas as it relates to our HIPAA compliance efforts and expenses
incurred at our Atlanta operations as a result of our acquisition of MDP in May
2001. We anticipate that SG&A expenses in this segment will grow for the
remainder of 2002 as we add
17
additional sales staff to drive revenues and staff to ready our networks,
processing platforms, customers and partners for HIPAA.
Laboratory communication solutions segment SG&A expenses in the 2002
period increased by 16% over the same period last year primarily due to expenses
incurred for the May 2002 acquisition and operations of KenCom plus increases in
contract manufacturing personnel.
Corporate SG&A expenses decreased 8% in 2002 over the same period last
year primarily due to the non-cash compensatory warrants recorded in the 2001
period.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization decreased by $1,698,400 to $584,000 for the three months ended June
30, 2002 from $2,282,400 for the three months ended June 30, 2001 primarily from
a reduction in amortization expense due to the conclusion of amortization of
certain intangible assets in 2001 related to prior acquisitions in our
Electronic healthcare transaction processing segment and the adoption of SFAS
No. 142 on January 1, 2002. Depreciation and amortization classified by our
reportable segments is as follows:
Three Months Ended June 30,
---------------------------
2002 2001
---------- ----------
Electronic healthcare transaction processing $ 363,600 $2,053,500
Laboratory communication solutions 168,800 134,200
Corporate 51,600 94,700
---------- ----------
$ 584,000 $2,282,400
========== ==========
OPERATING INCOME (LOSS). As a result of the foregoing, consolidated
operating income for the three months ended June 30, 2002 was $317,300 compared
to an operating loss of $1,862,800 for the three months ended June 30, 2001.
Operating income classified by our reportable segments is as follows:
Three Months Ended June 30,
---------------------------
2002 2001
---------- -----------
Electronic healthcare transaction processing $ (103,500) $(1,947,700)
Laboratory communication solutions 1,125,000 891,000
Corporate (704,200) (806,100)
---------- -----------
$ 317,300 $(1,862,800)
========== ===========
INTEREST, NET. Consolidated net interest income for the three months
ended June 30, 2002 was $128,200 compared to net interest expense of $30,700 for
the three months ended June 30, 2001. This net increase is primarily due to the
payoff in January 2002 of our note payable for our acquisition of MDP and higher
cash balances as a result of our investment from GAP in April 2002, although
effective interest rates are lower in the 2002 period compared to the 2001
period on the cash invested.
NET INCOME (LOSS). As a result of the foregoing, consolidated net
income for the three months ended June 30, 2002 was $445,500 compared to a net
loss of $1,893,500 for the three months ended June 30, 2001.
18
DEEMED DIVIDENDS AND OTHER CHARGES. There were no dividend and other
charges incurred in the three months ended June 30, 2002. For the three months
ended June 30, 2002, we incurred total deemed dividend and other charges of
$2,195,300 primarily as a result of non-cash accounting charges from the
exchange of 271,700 warrants into 218,828 shares of common stock by our Series B
preferred stockholders in April 2001 and quarterly dividends paid to our Series
C preferred shareholders through the issuance of 29,373 shares of common stock
in July 2001.
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS. As a result of the
foregoing, we reported a net income applicable to common shareholders of
$445,500 for the three months ended June 30, 2002 compared to a net loss
applicable to common shareholders of $4,088,800 for the three months ended June
30, 2001.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001.
NET REVENUES. Consolidated net revenues for the six months ended June 30,
2002 increased by $5,523,900 or 30%, to $24,130,100 from consolidated net
revenues of $18,606,200 for the six months ended June 30, 2001. Net revenues
classified by our reportable segments are as follows:
Six Months Ended June 30,
---------------------------
2002 2001
----------- -----------
Electronic healthcare transaction processing $10,609,700 $ 6,807,500
Laboratory communication solutions 13,520,400 11,798,700
----------- -----------
$24,130,100 $18,606,200
=========== ===========
Electronic healthcare transaction processing segment net revenues
increased by 56% primarily due to a 45% increase in the number of electronic
clinical and financial healthcare transactions processed through ProxyNet from
37.9 million transactions in the 2001 period to 54.9 million transactions in
2002. The 2001 period included only two months of electronic claim and patient
statement transactions from MDP, which was acquired in May 2001. For the 2002
period, approximately 44% of our revenues came from our Electronic healthcare
transaction processing segment, whereas only 37% was from this segment for the
2001 period. For the remainder of 2002 and beyond, it is anticipated that our
greatest growth will come from this segment.
Laboratory communication solutions segment net revenues increased by
15% primarily due to the acquisition of KenCom and an increase in contract
manufacturing revenues, offset by decreases in sales and leases of communication
devices, and field services revenues.
19
COST OF SALES. Consolidated cost of sales increased as a percentage of
net revenues to 46% for the six months ended June 30, 2002 from 43% for the six
months ended June 30, 2001. Cost of sales classified by our reportable segments
is as follows:
Six Months Ended June 30,
---------------------------
2002 2001
----------- -----------
Electronic healthcare transaction processing $ 4,199,300 $ 2,285,900
Laboratory communication solutions 6,964,500 5,761,500
----------- -----------
$11,163,800 $ 8,047,400
=========== ===========
Cost of sales in the Electronic healthcare transaction processing
segment consists of transaction fees, services and license fees, including
third-party electronic transaction processing costs, certain telecommunication
costs, revenue sharing and rebate arrangements with our business partners,
third-party database licenses, and certain labor and travel expenses. Cost of
sales as a percentage of revenues increased to 40% in the 2002 period compared
to 34% in the same period last year primarily due to increased revenue sharing
and rebates paid to our business partners as a result of increased transaction
volumes.
Cost of sales in the Laboratory communication solutions segment
includes hardware, third-party software, and consumable materials. Cost of sales
as a percentage of revenues increased to 52% for the 2002 period compared to 49%
for the same period last year primarily due to a shift in the revenue mix from
lower cost leases to higher cost contract manufacturing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated SG&A for the
six months ended June 30, 2002 increased by $746,500, or 7%, to $11,434,200 from
consolidated SG&A of $10,687,700 for the six months ended June 30, 2001.
Consolidated SG&A expenses as a percentage of consolidated revenues decreased to
47% in the 2002 period compared to 57% in the same period last year. SG&A
expenses classified by our reportable segments are as follows:
Six Months Ended June 30,
---------------------------
2002 2001
----------- -----------
Electronic healthcare transaction processing $ 5,633,900 $ 4,884,500
Laboratory communication solutions 4,514,600 3,891,800
Corporate 1,285,700 1,911,400
----------- -----------
$11,434,200 $10,687,700
=========== ===========
Electronic healthcare transaction processing segment SG&A expenses for
the 2002 period increased 15% over the same period last year primarily due to
adding associates in our Payer Services transaction business sales and marketing
teams to drive our core revenue growth and adding personnel in our technical and
development areas as it relates to our HIPAA compliance efforts and expenses
incurred at our Atlanta operations as a result of our acquisition of MDP in May
2001. These increases were offset by decreases in Prescription Services payroll
and related expenses due to personnel reductions in the first quarter of 2001
and the capitalization of payroll and other costs for HIPAA and private label
software projects in the second quarter of 2002. We anticipate that SG&A
expenses in this segment will grow for the remainder of 2002 as we add
additional sales staff to drive revenues and staff to ready our networks,
processing platforms, customers and partners for HIPAA.
20
Laboratory communication solutions segment SG&A expenses in the 2002
period increased by 16% over the same period last year primarily due to expenses
incurred for the May 2002 acquisition and operations of KenCom plus increases in
contract manufacturing personnel.
Corporate SG&A expenses decreased 33% in 2002 over the same period last
year primarily due to the non-cash compensatory warrants and the additional
accrual recorded for our software licensing contingency in the 2001 period.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization decreased by $4,149,700 to $1,152,500 for the six months ended June
30, 2002 from $5,302,200 for the six months ended June 30, 2001 primarily from a
reduction in amortization expense due to the conclusion of amortization of
certain intangible assets in 2001 related to prior acquisitions in our
Electronic healthcare transaction processing segment and the adoption of SFAS
No. 142 on January 1, 2002. Depreciation and amortization classified by our
reportable segments is as follows:
Six Months Ended June 30,
-------------------------
2002 2001
---------- ----------
Electronic healthcare transaction processing $ 727,700 $4,830,800
Laboratory communication solutions 323,700 265,900
Corporate 101,100 205,500
---------- ----------
$1,152,500 $5,302,200
========== ==========
OPERATING INCOME (LOSS). As a result of the foregoing, consolidated
operating income for the six months ended June 30, 2002 was $379,600 compared to
a loss of $5,431,100 for the six months ended June 30, 2001. Operating income
classified by our reportable segments is as follows:
Six Months Ended June 30,
----------------------------
2002 2001
----------- -----------
Electronic healthcare transaction processing $ 48,800 $(5,193,700)
Laboratory communication solutions 1,717,600 1,879,500
Corporate (1,386,800) (2,116,900)
----------- -----------
$ 379,600 $(5,431,100)
=========== ===========
INTEREST, NET. Consolidated net interest income for the six months
ended June 30, 2002 was $114,800 compared to $70,500 for the six months ended
June 30, 2001. This net increase is primarily due to the payoff in January 2002
of our note payable for our acquisition of MDP and higher cash balances as a
result of our investment from GAP in April 2002, although effective interest
rates are lower in the 2002 period compared to the 2001 period on the cash
invested.
NET INCOME (LOSS). As a result of the foregoing, consolidated net
income for the six months ended June 30, 2002 was $494,400 compared to a net
loss of $5,360,600 for the six months ended June 30, 2001.
21
DEEMED DIVIDENDS AND OTHER CHARGES. We incurred deemed dividends and
other charges of $611,700 for the six months ended June 30, 2002 as a result of
non-cash accounting charges for the conversion of 31,650 preferred shares into
242,510 shares of common stock by our Series C preferred stockholders in 2002
pursuant to our offer to convert their shares commencing in December 2001. For
the six months ended June 30, 2001, we incurred total deemed dividend and other
charges of $4,656,400 primarily as a result of non-cash accounting charges from
the anti-dilution reset in number and price of certain warrants issued to our
Series B preferred stockholders in February 2001, non-cash accounting charges
from the exchange of 271,700 warrants into 218,828 shares of common stock by our
Series B preferred stockholders in April 2001; and dividends paid to our Series
C preferred shareholders through the issuance of 58,496 shares of common stock
in 2001.
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS. As a result of the
foregoing, we reported a net loss applicable to common shareholders of $117,300
for the six months ended June 30, 2002 compared to a net loss applicable to
common shareholders of $10,017,000 for the six months ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
In the six month period ended June 30, 2002 cash provided by operating
activities totaled $224,200. During this period, we paid $2,870,600 ($3,275,000
cash price less $100,000 withheld and $304,400 cash acquired) for our
acquisition of KenCom, paid in full our $7,000,000 promissory note for our
acquisition of MDP, and paid $890,300 for fixed assets and capitalized software.
These activities were principally financed through the private placement in
April 2002 of $25,025,000 in common stock (resulting in net proceeds to us of
$24,886,100) and available cash resources. After these activities, we had cash
and cash equivalents totaling $26,812,600 as of June 30, 2002. These available
funds will be used for operations, strategic acquisitions (including $2.4
million paid for our July 2002 acquisition of MDIP), the further development of
our products and services, and other general corporate purposes. We continue to
evaluate other acquisition opportunities and strategic alternatives that may add
synergies to our product offerings and business strategy.
In our July 23, 2002 press release, we included approximately $326,000
as cash flows provided by operating activities that we have now included as
cash flows from certain investment activities related to our acquisition of
KenCom. This amount is reflected as such in the financial statements included
in this report.
At the current time, we do not have any material commitments for
capital expenditures except for approximately $500,000 that is committed evenly
over the next three years related to the licensing of software for use in our
internal systems. In April 2002, we paid $166,700 towards this commitment.
Additionally, we have forecasted approximately $2.6 million for other capital
expenditures and capitalized software for 2002 as it relates to the continuation
of our HIPAA compliance, co-location of our production networks to a third-party
site, and other infrastructure requirements. We may adjust our expenditure
spending levels up or down accordingly.
As we continue to improve our operating performance and achieve
increased market acceptance of our products and services, we are confident in
our ability to grow our business, both internally and externally. With our
additional equity financing from GAP, we believe that we have sufficient cash
and cash equivalents on hand to fund our
22
future operational capital requirements and expenditures, and a sufficient level
of capital in order to fund specific research and development projects or to
pursue additional strategic acquisitions. However, if we need additional capital
funding in the future to further our strategic plans, there can be no assurance
that any additional funding will be available to us, or if available, that it
will be available on acceptable terms. If we are successful in obtaining
additional financing, the terms of the financing may have the effect of
significantly diluting or adversely affecting the holdings or the rights of the
holders of our common stock. We believe that if we are not successful in
obtaining additional financing for further product development or strategic
acquisitions, such inability may adversely impact our ability to successfully
execute our business plan and may put us at a competitive disadvantage.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of our financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions, but we believe that any variation in results would
not have a material effect on our financial condition. On an ongoing basis, we
evaluate our estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements beginning on Page F-7 in our Form 10-K for the year ended December
31, 2001.
Revenue Recognition - Electronic transaction processing fee and monthly
service revenues are recorded in the period the service is rendered. Certain
transaction revenues generated from our resellers, vendors and gateway partners
are subject to revenue sharing and rebate arrangements and are recorded as gross
revenues. Revenue from certain up-front development and connectivity fees is
amortized ratably over the expected life of the customer. Revenue from hardware
leases, network access and maintenance fees is recognized ratably over the
applicable period. 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 are 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. Because we
rely primarily on customer purchase orders in our Laboratory communication
solutions business, revenues may fluctuate from period to period compared to
revenues generated in our Electronic Healthcare Transaction business which is
primarily based on recurring revenue streams.
23
Goodwill - Goodwill is generated from the excess of the cost of a
business acquired over the fair market value of its identifiable assets. In
accordance with SFAS No. 142 (see New Accounting Pronouncements below), goodwill
will no longer be amortized, but instead be subject to periodic impairment
tests. We adopted the provisions of SFAS No. 142 on January 1, 2002, and we will
no longer record approximately $808,000 of amortization relating to our existing
goodwill each quarter, which would have been recorded through the first quarter
of 2004. SFAS No. 142 also requires that goodwill be tested at least annually
for impairment using a two-step process. The first step is to identify a
potential impairment and, in transition, this step must be measured as of the
beginning of the fiscal year. We completed that first step of the goodwill
impairment test during the first quarter of 2002. The second step of the
goodwill impairment test measures the amount of the impairment loss (measured as
of the beginning of the year of adoption), if any, and must be completed by the
end of our fiscal year. We completed the first step of the transitional goodwill
impairment test and did not record an impairment charge as a result of applying
SFAS No. 142 during the first quarter of 2002.
Capitalized Software Development and Research and Development - Costs
incurred internally and fees paid to outside contractors and consultants in the
development of our externally and internally used software products are expensed
as incurred as research and development expenses (which are included in selling,
general and administrative expenses) until reaching technological feasibility.
At that time, any future costs are properly capitalized and ultimately amortized
over the remaining estimated economic life of the product on a
product-by-product basis. Our judgment is used in determining whether costs meet
the criteria for immediate expensing or capitalization. We periodically review
projected cash flows and other criteria in assessing the impairment of any
capitalized software and take impairment charges as needed.
Equity Transactions - Over the past two years we have engaged in
various equity transactions. These transactions were first aimed at providing
capital to continue to operate and grow our business and then became a critical
step aimed at simplifying our capital structure. These transactions were complex
and required the application of various accounting rules and standards that have
resulted in significant cash and non-cash charges reflected primarily as deemed
dividend charges included in those periods reflecting a net loss applicable to
common shareholders.
Bad Debt Estimates - We rely on estimates to determine the bad debt
expense and the adequacy of the reserve for doubtful accounts receivable. These
estimates are based on our historical experience and the industry in which we
operate. If the financial condition of our customers was to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
24
NEW ACCOUNTING PRONOUNCEMENTS
In May 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 rescinds the
automatic treatment of gains or losses from extinguishments of debt as
extraordinary unless they meet the criteria for extraordinary items as outlined
in APB Opinion No. 30, "Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". In addition, SFAS No. 145 also
requires sale-leaseback accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions and makes
various technical corrections to existing pronouncements. The provisions of SFAS
No. 145 related to the rescission of FASB Statement No. 4 are effective for
fiscal years beginning after May 15, 2002, with early adoption encouraged. All
other provisions of SFAS No. 145 are effective for transactions occurring after
May 15, 2002, with early adoption encouraged. We do not anticipate that SFAS No.
145 will have a material effect on our financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". The
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Previous accounting guidance was provided by EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring)". SFAS No. 146 replaces Issue 94-3. The provisions of SFAS No.
146 are to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. We do not anticipate that SFAS No. 146 will have a
material effect on our financial statements.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document contains forward-looking statements that reflect our
current assumptions and expectations regarding future events. While these
statements reflect our current judgment, they are subject to risks and
uncertainties. Actual results may differ significantly from projected results
due to a number of factors, including, but not limited to, the soundness of our
business strategies relative to the perceived market opportunities; our ability
to identify suitable acquisition candidates; our ability to integrate any future
acquisitions into our existing operations; our ability to successfully develop,
market, sell, cross-sell, install and upgrade our clinical and financial
transaction services and applications to new and current physicians, payers,
medical laboratories and pharmacies; our ability to compete effectively on price
and support services; our interpretation of HIPAA and our ability to comply with
the associated rules and regulations; our assessment of the healthcare
industry's need, desire and ability to become technology efficient; and our
ability and that of our business associates to comply with various government
rules regarding healthcare information and patient privacy. These and other risk
factors are more fully discussed in the Risk Factors disclosure in our Form 10-K
for
25
the year ended December 31, 2001 and our other filings with the Securities and
Exchange Commission, which we strongly urge you to read. We expressly disclaim
any intent or obligation to update any forward-looking statements. When used in
this document, the words "believes", "estimated", "expects", "anticipates",
"may" and similar expressions are intended to identify forward-looking
statements.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
26
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 5, 2002, ProxyMed, Inc. (the "Company") sold 1,569,366 shares
of unregistered common stock at $15.93 per share in a private placement to
General Atlantic Partners 74, L.P., GAP Coinvestment Partners II, L.P., Gapstar,
LLC, GAPCO GmbH & Co. KG. (the "General Atlantic Purchasers"), four companies
affiliated with General Atlantic Partners, LLC ("GAP"), a private equity
investment fund resulting in net proceeds to the Company of $24.9 million. In
addition, the Company issued a two-year warrant for the purchase of 549,279
shares of common stock also at $15.93 per share. All shares sold are subject to
a one-year lock-up agreement from the date of closing. The Company has agreed to
grant the General Atlantic Purchasers certain demand and "piggy back"
registration rights starting one year from closing. No placement agent was used
in the transaction. Proceeds will be used for operations, strategic
acquisitions, the further development of our products and services, and other
general corporate purposes. Additionally, in connection with the transaction, a
general partner of GAP was appointed as a director to fill a vacancy on the
Company's Board of Directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended June 30, 2002, at the Company's annual meeting
held on May 22, 2002, 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: Michael K.
Hoover, Edwin M. Cooperman, Gerald B. Cramer, Michael S. Falk, Thomas E. Hodapp,
Braden R. Kelly, and Eugene R. Terry. The total number of votes cast for
directors was 3,085,357, and each director received between 3,080,588 and
3,080,721 votes in favor and between 4,636 and 4,769 votes withheld (including
broker non-votes).
- ADOPTION OF THE 2002 STOCK OPTION PLAN. The total number of votes cast
for this proposal, which provides for the issuance of up to 600,000 shares of
common stock upon the exercise of options by our employees, officers and
directors effective May 22, 2002, was 1,972,487. Of these votes, 1,773,452 were
in favor, 194,834 were against and 4,201 abstained.
- RATIFICATION AND ADOPTION OF THE ISSUANCE OF SHARES OF COMMON STOCK
UPON THE EXERCISE OF WARRANTS ISSUED IN CONNECTION WITH A PRIVATE PLACEMENT OF
THE COMPANY'S COMMON STOCK. The total number of votes cast for this proposal,
which allows General Atlantic Partners to own greater than 23.4% of the
Company's outstanding stock as a result of the exercise, was 1,975,486. Of these
votes, 1,936,675 were in favor, 34,482 were against and 4,329 abstained.
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ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
- 99.1 - Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- 99.2 - Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
- April 5, 2002 - Report on closing on the sale of 1,569,366
shares of unregistered common stock of ProxyMed, Inc. and a
warrant to purchase 549,279 shares of common stock of ProxyMed,
Inc. to four companies affiliated with General Atlantic
Partners, LLC, a private equity investment fund, previously
disclosed in Form 8-K filed on March 29, 2002, including stock
and warrant purchase agreement, form of common stock purchase
warrant, form of registration rights agreement, and press
release dated April 5, 2002 announcing the closing of the
transaction.
- April 24, 2002 - Report on first quarter and three months ended
March 31, 2002 teleconference call held on April 24, 2002,
including transcript thereon and press release dated April 24,
2002, pursuant to Regulation FD.
- May 6, 2002 - Report on acquisition of all of the capital stock
of KenCom Communications & Services, Inc. ("KenCom").
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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 14, 2002 /s/ Judson E. Schmid
--------------- -----------------------------------------
(Date) Judson E. Schmid
Executive Vice President and
Chief Financial Officer
29