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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended SEPTEMBER 30, 2003
[ ] 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 65-0202059
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2555 DAVIE ROAD, SUITE 110, FT. LAUDERDALE, FLORIDA 33317
- ---------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(954) 473-1001
-------------------------------
(Registrant's telephone number)
-------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether registrant is an accelerated filer (as defined by
Rule 12b-2 of the Securities Exchange Act of 1934). [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
6,783,493 SHARES AS OF NOVEMBER 12, 2003
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,933 $ 16,378
Investment in warrant 5,289 --
Accounts receivable - trade, net 9,865 10,060
Notes and other receivables 333 503
Inventory 3,580 2,774
Other current assets 1,181 1,022
--------- ---------
Total current assets 27,181 30,737
Property and equipment, net 5,345 5,719
Goodwill, net 31,456 32,797
Purchased technology, capitalized software and
other intangible assets, net 17,216 18,220
Restricted cash 403 825
Other assets 209 406
--------- ---------
Total assets $ 81,810 $ 88,704
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 1,724 $ --
Accounts payable, accrued expenses and other current liabilities 10,153 21,472
Deferred revenue 590 516
--------- ---------
Total current liabilities 12,467 21,988
Convertible notes 13,400 13,400
Other long-term debt 2,313 --
Long-term deferred revenue and other long-term liabilities 1,688 2,581
--------- ---------
Total liabilities 29,868 37,969
--------- ---------
Stockholders' equity:
Series C 7% Convertible preferred stock - $.01 par value -- --
Authorized 300,000 shares; issued 253,265 shares;
outstanding 2,000 shares; liquidation preference $13,333
Common stock - $.001 par value. Authorized 13,333,333 shares;
issued and outstanding 6,783,493 and 6,782,938 shares, respectively 7 7
Additional paid-in capital 146,195 146,187
Accumulated deficit (94,074) (95,273)
Note receivable from stockholder (186) (186)
--------- ---------
Total stockholders' equity 51,942 50,735
--------- ---------
Total liabilities and stockholders' equity $ 81,810 $ $88,704
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
2
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
------------- ------------- ------------- ----------
Revenues:
Transaction fees, services and license fees $ 13,134 $ 7,397 $ 39,002 $ 20,864
Communication devices and other tangible goods 4,928 5,461 14,192 16,124
----------- ---------- ----------- ----------
18,062 12,858 53,194 36,988
----------- ---------- ----------- ----------
Costs and expenses:
Cost of transaction fees, services and license fees 3,808 2,267 12,342 6,466
Cost of tangible goods 3,462 3,630 9,846 10,595
Selling, general and administrative expenses 9,135 5,893 29,755 17,327
Depreciation and amortization 1,478 745 4,153 1,897
Loss on disposal of assets 9 -- 119 --
----------- ---------- ----------- ----------
17,892 12,535 56,215 36,285
----------- ---------- ----------- ----------
Operating income (loss) 170 323 (3,021) 703
Interest income (expense), net (203) 136 (572) 251
Other income 4,041 265 4,793 265
----------- ---------- ----------- ----------
Net income 4,008 724 1,200 1,219
Deemed dividends -- -- -- 612
----------- ---------- ----------- ----------
Net income applicable to common shareholders $ 4,008 $ 724 $ 1,200 $ 607
=========== ========== =========== ==========
Basic earnings per share $ 0.59 $ 0.11 $ 0.18 $ 0.10
=========== ========== =========== ==========
Basic weighted average shares outstanding 6,783,095 6,741,772 6,782,991 6,178,441
=========== ========== =========== ==========
Diluted earnings per share $ 0.58 $ 0.11 $ 0.18 $ 0.10
=========== ========== =========== ==========
Diluted weighted average shares outstanding 6,867,725 6,785,096 6,815,247 6,282,258
=========== ========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 1,200 $ 1,219
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 4,153 1,897
Provision for doubtful accounts 155 7
Provision for obsolete inventory 29 112
Change in value of investment (4,793) --
Loss on disposal of fixed assets 119 --
Changes in assets and liabilities, net of
effect of acquisitions and dispositions:
Accounts and other receivables 23 (1,880)
Inventory (836) 413
Other current assets 304 (168)
Accounts payable and accrued expenses (389) (236)
Deferred revenue 94 84
Other, net 420 (48)
-------- --------
Net cash provided by operating activities 479 1,400
-------- --------
Cash flows from investing activities:
Acquisition, net of cash acquired -- (5,271)
Acquisition of assets -- (700)
Purchase of short term investments -- (15,000)
Redemption of short term investments -- 15,000
Capital expenditures (2,115) (1,395)
Capitalized software (1,173) (277)
Collection of notes receivable 304 18
Proceeds from sale of fixed assets 107 --
Decrease in restricted cash 422 --
Payments for acquisition-related costs (5,653) (23)
-------- --------
Net cash used in investing activities (8,108) (7,648)
-------- --------
Cash flows from financing activities:
Preceeds from stock offering, net -- 24,886
Proceeds from the exercise of stock options and warrants 8 --
Payment of note payable related to acquisition of business -- (7,000)
Payment of notes payable, capital leases and long-term debt (1,824) (187)
-------- --------
Net cash provided by (used in) financing activities (1,816) 17,699
-------- --------
Net increase (decrease) in cash and cash equivalents (9,445) 11,451
Cash and cash equivalents at beginning of period 16,378 12,601
-------- --------
Cash and cash equivalents at end of period $ 6,933 $ 24,052
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION - The accompanying unaudited consolidated
financial statements of ProxyMed, Inc. ("ProxyMed") and subsidiaries
(collectively with ProxyMed, the "Company") and the notes thereto have
been prepared in accordance with the instructions of Form 10-Q and Rule
10-01 of Regulation S-X of the Securities and Exchange Commission (the
"SEC") 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 of normal recurring adjustments), which are, in the opinion
of management, necessary for a fair statement of results for the
interim periods.
On December 31, 2002, ProxyMed acquired all of the capital stock of
MedUnite, Inc. ("MedUnite"), a privately-held company providing
healthcare claims processing services founded by seven of the nation's
largest health insurers, for $10 million in cash and $13.4 million in
4% convertible debt. The operations of MedUnite are reflected with
those of the Company for the three and nine months ended September 30,
2003.
The results of operations for the nine months ended September 30, 2003
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
Annual Report on Form 10-K for the year ended December 31, 2002 as
filed with the SEC on April 15, 2003.
(b) REVENUE RECOGNITION - Electronic transaction processing fee revenue
is recorded in the period the service is rendered. Certain transaction
fee revenue is subject to revenue sharing pursuant to agreements with
resellers, vendors or gateway partners and are recorded as gross
revenues. Revenue from sales of inventory 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. Revenue from certain up-front fees is amortized ratably over
the expected life of the customer. Revenue from hardware leases 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 PER SHARE - Basic net income per share of common stock is
computed by dividing net income applicable to common shareholders by
the weighted average shares of common stock outstanding during the
period. Diluted income per share reflects the potential dilution from
the exercise or conversion of securities into common stock; however,
2,426,184 and 956,786 stock options and warrants outstanding for the
three months ended September 30, 2003 and 2002, respectively, and
1,958,557 and 709,206 stock options and warrants outstanding for the
nine months ended September 30, 2003 and 2002, respectively, were
excluded from the calculation of diluted net income per share because
the exercise price of these options and warrants was greater than the
average market price of the Company's common stock during the periods.
The following sets forth the computation of basic and diluted net
income per share for the three and nine months ended September 30, 2003
and 2002:
(in thousands except for share and per share data) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income applicable to common shareholders $ 4,008 $ 724 $ 1,200 $ 607
========== ========== ========== ==========
Common shares outstanding:
Weighted average common shares used in computing
basic net income per share 6,783,095 6,741,772 6,782,991 6,178,441
Plus incremental shares from assumed conversions:
Convertible preferred stock 13,333 20,000 13,333 20,000
Stock options 71,297 6,857 18,923 19,297
Warrants -- 16,467 -- 64,520
---------- ---------- ---------- ----------
84,630 43,324 32,256 103,817
---------- ---------- ---------- ----------
Weighted average common shares used in computing
diluted net income per share 6,867,725 6,785,096 6,815,247 6,282,258
========== ========== ========== ==========
Net income per common share:
Basic $ 0.59 $ 0.11 $ 0.18 $ 0.10
========== ========== ========== ==========
Diluted $ 0.58 $ 0.11 $ 0.18 $ 0.10
========== ========== ========== ==========
6
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(d) STOCK-BASED COMPENSATION - In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The disclosure
provisions of SFAS No. 148 are effective for fiscal years ending after
December 15, 2002.
ProxyMed continues to apply Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock option plans and has not
adopted the recognition provisions of SFAS No. 123, as amended by SFAS
No. 148. The Company measures compensation expense related to the grant
of stock options and stock-based awards to employees (including
independent directors) whereby compensation expense, if any, is
generally based on the difference between the exercise price of an
option, or the amount paid for an award, and the market price or fair
value of the underlying common stock at the date of the award or at the
measurement date for variable awards. Stock-based compensation
arrangements involving non-employees are accounted for based on the
fair value of the option or award pursuant to SFAS No. 123.
7
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Under SFAS No. 123, compensation cost for the Company's stock-based
compensation plans would be determined based on the fair value at the
grant dates for awards under those plans. Had the Company adopted SFAS
No. 123 in accounting for its stock option plans, the Company's
consolidated net income and net income per share for the three and nine
months ended September 30, 2003 and 2002 would have been adjusted to
the pro forma amounts indicated as follows:
(in thousands except for per share data) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income applicable to
common shareholders, as reported $ 4,008 $ 724 $ 1,200 $ 607
Total stock-based employee pro forma
compensation expense determined under fair
value based method for all awards,
net of related tax effect (3,334) (3,445) (4,041) (4,711)
--------- --------- --------- ---------
Pro forma net income (loss) applicable
to common shareholders $ 674 $ (2,721) $ (2,841) $ (4,104)
========= ========= ========= =========
Basic net income (loss) per common share:
As reported $ 0.59 $ 0.11 $ 0.18 $ 0.10
Pro forma $ 0.10 $ (0.40) $ (0.42) $ (0.66)
Diluted net income (loss) per common share:
As reported $ 0.58 $ 0.11 $ 0.18 $ 0.10
Pro forma $ 0.10 $ (0.40) $ (0.42) $ (0.65)
(e) NEW ACCOUNTING PRONOUNCEMENTS - In April 2003, the FASB issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities". SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003, except for certain provisions that relate to SFAS No.
133 implementation issues that have been effective for fiscal quarters
that began prior to June 15, 2003 and for hedging relationships
designated after June 30, 2003. The Company does not believe that the
implementation SFAS No. 149 will have a material effect on the
Company's consolidated financial statements and related disclosures.
8
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity". SFAS No. 150 specifies that
instruments within its scope embody obligations of the issuer and that,
therefore, the issuer must classify them as liabilities. SFAS No. 150
requires issuers to classify as liabilities the following three types
of freestanding financial instruments: (1) mandatory redeemable
financial instruments; (2) obligations to repurchase the issuer's
equity shares by transferring assets; and (3) certain obligations to
issue a variable number of shares. SFAS No. 150 defines a freestanding
financial instrument as a financial instrument that (1) is entered into
separately and apart from any of the entity's other financial
instruments or equity transactions; or (2) is entered into in
conjunction with some other transaction and can be legally detached and
exercised on a separate basis. For all financial instruments entered
into or modified after May 31, 2003, SFAS No. 150 is effective
immediately. For all other instruments of public companies, SFAS No.
150 goes into effect at the beginning of the first interim period
beginning after June 15, 2003. For contracts that were created or
modified before May 31, 2003 and still exist at the beginning of the
first interim period beginning after June 15, 2003, entities should
record the transition to SFAS No. 150 by reporting the cumulative
effect of a change in an accounting principle. SFAS No. 150 prohibits
entities from restating financial statements for earlier years
presented. The Company does not expect the adoption of SFAS No. 150 to
have a material impact on its financial statements.
(2) INVESTMENT IN WARRANT
In June 2003, the Company entered into a joint marketing and distribution
agreement with PlanVista Corporation ("PlanVista"), a provider of medical cost
containment and business process outsourcing solutions to the medical insurance
and managed care industries, to provide the Company's electronic healthcare
transaction processing services and PlanVista's network access and repricing
service product as an integrated package to existing and prospective payer
customers. As part of the agreement, PlanVista granted the Company a warrant to
purchase 15% of the number of outstanding shares of PlanVista common stock on a
fully-diluted basis as of the time of exercise for $1.95 per share. Any shares
acquired upon exercise are not registered. The warrant is exercisable
immediately and expires in December 2003 (the "Initial Warrant Term"); however,
the exercise period for the warrant may be extended for up to two additional
ninety-day periods (respectively, the "First Renewal Term" and the "Second
Renewal Term" and collectively with the "Initial Warrant Term", the "Warrant
Term"), if certain revenue-based thresholds are met.
9
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
The initial value of the warrant of $0.5 million (calculated using a Black
Scholes model) along with additional amounts already paid to and amounts still
to be received by the Company under the agreement are being amortized as a
reduction of cost of sales over 36 months. As long as the warrant is still
outstanding, the value of the warrant is evaluated at the end of each calendar
quarter (each a "Measurement Date"). On September 30, 2003, the value of the
warrant increased to approximately $5.3 million primarily as a result of an
increase in the market value of PlanVista stock. The warrant value increases of
$4.0 million and $4.8 million for the three and nine months ended September 30,
2003, respectively, are reflected as other income in the statement of
operations. The warrant is stated at its fair value and any shares of common
stock that may be acquired by exercising this warrant will be accounted for as
"available for sale" securities.
At any future Measurement Date, there may be additional income or expense
depending on the value of the warrant at that time. Should the Initial Warrant
Term renew in accordance with its terms, the Company will have to amortize, at
the time the threshold is met, any additional value of the warrant as a
reduction of cost of sales over the remaining original amortization period.
However, if during the Warrant Term the warrant is never exercised, then the
Company will have to record an impairment charge equal to the warrant's
remaining value, if any, carried on the books during the Warrant Term. At the
present time, management has no intention of exercising this warrant.
(3) INVENTORY
Inventory consists of the following at September 30, 2003 (in
thousands):
Materials, supplies and component parts $2,394
Work in process 330
Finished goods 856
------
$3,580
======
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
(a) GOODWILL - The changes in the carrying amounts of goodwill for the nine
months ended September 30, 2003 by operating segment are as follows:
Laboratory
Transaction Communication
(in thousands) Services Solutions Total
-------- -------------- --------
Balance as of December 31, 2002 $ 30,695 $2,102 $ 32,797
Purchase price adjustments (1,341) -- (1,341)
-------- ------ --------
Balance as of September 30, 2003 $ 29,354 $2,102 $ 31,456
======== ====== ========
10
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(b) OTHER INTANGIBLE ASSETS - The carrying amounts of other intangible
assets as of September 30, 2003 and December 31, 2002, by category, are
as follows:
(in thousands) SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------- --------------------------------------
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
-------- -------- ------- -------- ------------ -------
Capitalized software $ 1,700 $ (135) $ 1,565 $ 527 $ (58) $ 469
Purchased technology 9,127 (2,564) 6,563 9,127 (1,315) 7,812
Customer relationships 10,251 (1,163) 9,088 10,251 (312) 9,939
-------- -------- ------- -------- -------- -------
$ 21,078 $ (3,862) $17,216 $ 19,905 $ (1,685) $18,220
======== ======== ======= ======== ======== =======
Amortization expense of other intangible assets was $0.8 million and
$0.3 million and $2.2 million and $0.5 million for the three months and
nine months ended September 30, 2003 and 2002, respectively.
As of September 30, 2003, estimated future amortization expense of
other intangible assets is as follows: $1.0 million for the remaining
quarter of 2003, $2.9 million in 2004, $2.8 million in 2005, $2.6
million in 2006, $2.3 million in 2007, and $2.0 million in 2008.
(4) DEBT OBLIGATIONS
In February 2003, the Company financed $0.4 million and $0.3 million for
certain liability insurance policies over 7 months at 4.76% and 24 months at
5.25% to third-parties, respectively. The note for $0.4 million is unsecured
while the note for $0.3 million is collateralized by a letter of credit in the
amount of $0.3 million (supported with restricted cash) at September 30, 2003.
In March 2003, the Company restructured $3.4 million in accounts payable
and accrued expenses acquired from MedUnite and outstanding at December 31, 2002
to one vendor by paying $0.8 million in cash and financing the balance of $2.6
million with an unsecured note payable over 36 months at 8% commencing March
2003.
In April 2003, the Company financed a net total of $2.0 million ($2.8
million in accounts payable and accrued expenses offset by $0.8 million in
accounts receivable) existing at December 31, 2002 from MedUnite to a former
owner of MedUnite by issuing an unsecured note payable over 24 months at 6%.
In June 2003, the Company financed $0.1 million of liability insurance
policy premium with another unsecured note, payable over 9 months at 5.4% to a
third-party.
11
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(5) 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. 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 $612,000 was recorded in the first quarter of
2002 for conversions consummated after the 2001 year end.
(b) STOCK OPTIONS- During the nine months ended September 30, 2003, the
Company granted a total of 59,250 stock options at exercise prices
between $7.50 and $12.65 per share to employees. Such options were
granted pursuant to the Company's approved stock option plans and are
for a ten-year term and vest equally over three years from the date of
grant.
In April 2003, the six outside directors of ProxyMed were each granted
10,000 stock options at an exercise price of $7.28 per share. Such
options were granted pursuant to the Company's approved stock option
plans and are for a ten-year term and vest equally over three years
from the date of grant. Additionally, in May 2003, the Company's
outside directors were granted a total of 30,000 and 15,000 options at
an exercise price of $10.63 to compensate the directors upon
re-election to the board and participation in sub-committees,
respectively, pursuant to guidelines adopted by the Company's Board of
Directors in May 2002. Option grants for the re-election to the board
are for a ten-year term and vest equally over a three-year period.
Options for participation in sub-committees are for a ten year term and
vest in full after five years but a portion may be accelerated to vest
after each sub-committee meeting attended.
In October 2003, the Compensation Committee approved grants of 125,000
and 50,000 stock options at an exercise price of $15.90 per share to
the Company's chairman/chief executive officer and president/chief
operating officer, respectively. Such options are for a ten-year term
and vest equally over three years from the date of grant.
12
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(c) WARRANTS - In conjunction with a joint marketing agreement entered into
between the Company and a subsidiary of First Data Corporation ("FDC"),
an electronic commerce and payment services company, in July 2003, the
Company issued to FDC a warrant agreement under which FDC may be
entitled to purchase up to 600,000 of the Company's common stock at
$16.50 per share. The ability of FDC to exercise under the warrant
agreement is dependent upon the Company achieving certain revenue-based
thresholds under such joint marketing agreement over a three and
one-half year period. Additionally, in connection with this agreement,
four entities affiliated with General Atlantic Partners ("GAP"),
current investors in the Company, received an aggregate of 243,882
warrants, as a result of pre-emptive rights relating to their
investment in the Company in April 2002. The GAP warrant agreements are
subject to the same terms and conditions as those issued to FDC and are
exercisable only if FDC's right to exercise under its warrant agreement
is perfected. At the time any of the revenue thresholds is met, the
Company may have to record a charge in its statement of operations for
the value of those warrants.
(6) SEGMENT INFORMATION
ProxyMed operates in two reportable segments that are separately managed:
Transaction Services (formerly known as Electronic healthcare transaction
processing) and Laboratory Communication Solutions. Transaction Services
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). Inter-segment
sales are not material, and there were no foreign sales for any periods
presented.
(in thousands) Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- --------------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net revenues:
Transaction Services $ 11,829 $ 5,735 $ 35,102 $ 16,345
Laboratory Communication Solutions 6,233 7,123 18,092 20,643
-------- -------- -------- --------
$ 18,062 $ 12,858 $ 53,194 $ 36,988
======== ======== ======== ========
Operating income (loss):
Transaction Services $ 784 $ 203 $ (1,382) $ 254
Laboratory Communication Solutions 366 799 1,168 2,515
Corporate and consolidating (980) (679) (2,807) (2,066)
-------- -------- -------- --------
$ 170 $ 323 $ (3,021) $ 703
======== ======== ======== ========
September 30,
--------------------------------
Total assets: 2003 2002
-------- --------
Transaction Services $ 56,005 $ 17,783
Laboratory Communication Solutions 12,404 13,646
Corporate and consolidating 13,401 24,708
-------- --------
$ 81,810 $ 56,137
======== ========
13
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(7) INCOME TAXES
As of September 30, 2003, the Company had a net deferred tax asset of
approximately $66.1 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 if,
during future periods, management believes the Company will generate sufficient
taxable income to realize the net deferred tax asset.
(8) LEASES
In June 2003, the Company paid $0.8 million to the leasing company as a
result of terminating MedUnite's facility lease in San Diego, California
effective June 30, 2003. As part of the consideration, the landlord was given
the furniture at the facility with a value of approximately $0.2 million. The
Company incurred other costs in connection with the termination of the lease. As
a replacement for this facility, the Company subleased office space in the same
geographic area at a lower monthly rent per month through September 2004.
(9) RELATED PARTY TRANSACTIONS
In June 2003, the Company amended the promissory note executed in June 2000
by Mr. Blue, the Company's former chairman of the board and chief executive
officer. The amendment extended the maturity date of the promissory for an
additional twelve months to December 31, 2004 and also allowed Mr. Blue to
offset any principal owed with certain amounts payable to Mr. Blue by the
Company as a result of a finder's fee arrangement with the Company.
As discussed in Note 2, the Company entered into a joint distribution and
marketing agreement with PlanVista in June 2003. PlanVista is a publicly-held
company and is controlled by an affiliate of Commonwealth Associates, whose
principal, Michael Falk, is a director of both the Company and PlanVista.
Additionally, one senior executive of the Company has an immaterial ownership
interest in PlanVista.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
ProxyMed is the nation's second largest provider-based electronic
healthcare transaction services company. ProxyMed provides connectivity services
and related value-added products to physicians, payers, pharmacies, medical
laboratories, and other healthcare providers and suppliers. Our services support
a broad range of both financial and clinical transactions, and are
HIPAA-certified through Claredi (an independent certification and testing
services company specializing in HIPAA compliance). To facilitate these
services, we operate Phoenix, our secure national electronic information
platform, which provides physicians and other healthcare providers with direct
connectivity to one of the industry's largest list of payers, the industry's
largest list of chain and independent pharmacies and the largest list of
clinical laboratories. Our products and services are currently provided from our
main operating facilities located in Fort Lauderdale, Florida; New Albany,
Indiana; Santa Ana, California; Norcross, Georgia; and Sioux Falls, South
Dakota. We also operate our clinical network and portions of our financial and
real-time production computer networks from a secure co-location site in
Atlanta, Georgia.
Our primary strategy is focused on leveraging our leading position as
an independent back-end connectivity provider to small physician offices.
Through strategic relationships and partnerships with front-end solution
providers, our goal is to drive more healthcare transactions through Phoenix
while remaining neutral in the battle for the physician's desktop. Additionally,
since we have an existing customer base of physicians and other healthcare
providers, we expect that there will be 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. We remain
committed to developing additional capabilities and value-added products and
services, and to expanding our back-end connectivity network. In conjunction
with this philosophy, we have recently introduced ProxyMed.net, our new web
portal for providers, and "Phoenix", our new transaction processing platform
which has been HIPAA-certified through Claredi. We have also added new services
offerings for our payer customers through agreements with PlanVista Corporation
("PlanVista") for claims re-pricing services and First Data Corporation ("FDC")
for a jointly marketed suite of services being offered under the brand name
"FirstProxy".
15
On December 31, 2002, we acquired all of the outstanding stock of
MedUnite, Inc. ("MedUnite") for $10 million in cash and an aggregate of $13.4
million principal amount of 4% convertible promissory notes. In addition, we
estimated approximately $8.3 million in transaction and exit related costs.
Interest on the convertible notes is payable in cash on a quarterly basis. The
convertible promissory notes are payable in full on December 31, 2008 and are
convertible into an aggregate of 731,322 shares of our common stock if the
founders of MedUnite achieve certain revenue-based triggers over the next three
and one-half year period. The shares of our common stock issuable upon
conversion of the convertible notes will be registered by us promptly after a
stockholder achieves a conversion trigger event. The operations of MedUnite are
reflected with those of the Company for the three and nine months ended
September 30, 2003. Additionally, although the integration of MedUnite into our
existing operations will continue throughout 2003, currently the organizations
are run and managed as one operating unit. As a result, meaningful separate
results and statistics are no longer available.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2002.
NET REVENUES. Consolidated net revenues for the three months ended
September 30, 2003 increased by $5.2 million, or 40%, to $18.1 million from
consolidated net revenues of $12.9 million for the three months ended September
30, 2002. Net revenues classified by our reportable segments are as follows:
(in thousands) THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2003 2002
------- -------
Transaction Services $11,829 $ 5,735
Laboratory Communication Solutions 6,233 7,123
------- -------
$18,062 $12,858
======= =======
Net revenues in our Transaction Services segment (formerly known as
"Electronic Healthcare Transaction Processing") increased by 106% over the 2002
period. This increase was driven by strong internal growth and more
significantly by transactions generated at MedUnite.
Total healthcare transactions processed during the three months ended
September 30, 2003 were 56.1 million, up 92% from the 29.2 million transactions
processed in the three months ended September 30, 2002. Core transaction growth
between the periods was 114%. While our encounter volume increased 9% between
the periods, the net increases were generally the result of transactions
acquired from MedUnite and new sales including transactions generated by newer
vendor partners that resulted in greater claim and patient statement processing
transactions offset by the loss of transactions from a gateway partner who
redirected a portion of its volume away from us. A summary of the number of
transactions we processed for the periods presented is as follows:
16
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2003 2002
---------- ----------
Core transactions 49,573,400 23,211,800
Encounters 6,509,900 5,977,400
---------- ----------
Total transactions 56,083,300 29,189,200
========== ==========
"Core" transactions represent all transactions except for encounters.
"Encounters" are an administrative reporting transaction for payers but do not
generate revenue for the provider who must submit them. Accordingly, rather than
submitting on a routine basis, most providers choose to periodically "catch up"
on their submissions, creating monthly and quarterly swings in both the number
of encounters we process and what percentage of our transaction mix they
represent. Since encounters are at a significantly lower price point than
claims, these swings make it difficult to easily analyze our
quarter-over-quarter growth in our core business. In addition, we do not expect
our encounter volume to grow on an annual basis, as payers are not expanding the
capitated service model that is the foundation of encounters. Therefore, we
believe that breaking out encounters shows more clearly our growth in core
transactions, which is the growth engine for our Transaction Services segment.
For the three months ended September 30, 2003, approximately 65% of our
revenues came from our Transaction Services segment compared to 45% from this
segment for the same 2002 period. For the remainder of 2003 and beyond, it is
anticipated that our greatest growth will come from this segment.
The Laboratory Communication Solutions segment's net revenues decreased
by 12% from the 2002 period. In addition to lower contract manufacturing
revenues from a sluggish economy, we have seen a slowdown in sale of our
communication devices at our smaller labs and hospital labs in 2003.
COST OF SALES. Consolidated cost of sales decreased as a percentage of
net revenues to 40% for the three months ended September 30, 2003 from 46% for
the three months ended September 30, 2002. Cost of sales classified by our
reportable segments is as follows:
(in thousands) THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2003 2002
------ ------
Transaction Services $3,804 $2,250
Laboratory Communication Solutions 3,466 3,647
------ ------
$7,270 $5,897
====== ======
Cost of sales in our Transaction Services segment consists of
transaction fees, services and license fees, third-party electronic transaction
processing costs, certain telecommunication and co-location center costs,
revenue sharing arrangements with our business partners, third-party database
licenses, and certain travel expenses. Cost of sales as a percentage of revenues
decreased to 32% in the 2003 period compared to 39% in the same period last year
primarily due to a change in the mix of transaction types from higher cost
patient statements to lower cost claims and real-time transactions (such as
eligibility verification) through the additional transactions acquired from
MedUnite.
17
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 56% in the 2003 period compared to 51%
in the same period last year primarily due to a change in the mix from lower
cost leases to higher cost contract manufacturing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated SG&A
increased for the three months ended September 30, 2003 by $3.2 million, or 55%,
to $9.1 million from consolidated SG&A of $5.9 million for the three months
ended September 30, 2002. Consolidated SG&A expenses as a percentage of
consolidated revenues increased to 51% for the 2003 period compared to 46% in
the same period last year. SG&A expenses classified by our reportable segments
are as follows:
(in thousands) THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2003 2002
------ ------
Transaction Services $6,068 $2,865
Laboratory Communication Solutions 2,149 2,400
Corporate 918 628
------ ------
$9,135 $5,893
====== ======
Transaction Services' SG&A expenses for the three months September 30,
2003 increased 112% over the same period last year primarily due to the
incremental expenses incurred in the operations of MedUnite, costs related to
our HIPAA compliance efforts, implementation staffing and sales/marketing
programs implemented since last year.
While we incurred significant SG&A costs related to the MedUnite
operations in the first quarter of 2003, we have been successful at
significantly reducing the monthly operating expenses in the second and third
quarters of 2003 and thus achieving positive cash flow in our MedUnite
operations in the third quarter of 2003. We have been successful in eliminating
or renegotiating substantial telecommunication expenses and duplicative contact
management, human resources and customer relationship management systems.
However, we expect SG&A costs to increase in the fourth quarter of 2003 as the
development projects related to the integration of MedUnite are moved into
production resulting in a decrease in the amount of capitalized development
related to our real-time and Phoenix platforms.
Laboratory Communication Solutions' SG&A expenses for the three months
ended September 30, 2003 decreased by 10% over the same period last year
primarily due to cost cutting measures implemented in the third quarter of 2002.
Segment SG&A expenses as a percentage of segment net revenues remained constant
at 34% between the 2003 and 2002 period.
Corporate SG&A expenses increased 46% for the three months ended
September 30, 2003 compared to the same period last year primarily due to
increased insurance premiums, professional fees and personnel costs.
18
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization increased by $0.8 million to $1.5 million for the three months
ended September 30, 2003 from $0.7 million for the same period last year. This
increase was primarily due to $0.5 million for the amortization of intangible
assets acquired in the MedUnite acquisition and includes the amortization of
ProxyMed.net, our real-time network based on the technology platform acquired
from MedUnite. Amortization of intangible assets related to additional
capitalized software development will increase in the fourth quarter by
approximately $0.3 million over the third quarter as we place the Phoenix
platform into production and commence the amortization of this asset.
Depreciation and amortization classified by our reportable segments is as
follows:
(in thousands) THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2003 2002
------ ----
Transaction Services $1,175 $417
Laboratory Communication Solutions 251 277
Corporate 52 51
------ ----
$1,478 $745
====== ====
OPERATING INCOME. As a result of the foregoing, consolidated operating
income for the three months ended September 30, 2003 was $0.2 million compared
to operating income of $0.3 million for the same period last year. Operating
income classified by our reportable segments is as follows:
(in thousands) THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2003 2002
----- -----
Transaction Services $ 784 $ 203
Laboratory Communication Solutions 366 799
Corporate (980) (679)
----- -----
$ 170 $ 323
===== =====
INTEREST, NET. Consolidated net interest expense for the three months
ended September 30, 2003 was $0.2 million compared to net interest income of
$0.1 million for the same period last year. This increase in expense is
primarily due to interest related to our convertible debt issued to the former
owners of MedUnite and the financing of certain liabilities of MedUnite during
the 2003 period and lower interest income earned on a smaller investment base at
lower interest rates.
OTHER INCOME. In conjunction with our distribution and marketing agreement
with PlanVista for claims re-pricing services signed in June 2003, we received a
warrant to purchase up to 15% of PlanVista. For the quarter ended September
2003, the value of this warrant increased by $4.0 million to $5.3 million.
However, if the warrant is never exercised, then we will have to record an
impairment charge equal to the warrant's remaining value, if any, carried on the
books. At the present time, we have no intention of exercising this warrant and
we will record an impairment charge in the fourth quarter of 2003.
19
NET INCOME. As a result of the foregoing, consolidated net income for
the three months ended September 30, 2003 was $4.0 million compared to net
income of $0.7 million for the same period last year.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002.
NET REVENUES. Consolidated net revenues for the nine months ended
September 30, 2003 increased by $16.2 million, or 44%, to $53.2 million from
consolidated net revenues of $37.0 million for the nine months ended September
30, 2002. Net revenues classified by our reportable segments are as follows:
(in thousands) NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
------- -------
Transaction Services $35,102 $16,345
Laboratory Communication Solutions 18,092 20,643
------- -------
$53,194 $36,988
======= =======
Net revenues in our Transaction Services segment increased by 115% over
the 2002 period. This increase was driven by strong internal growth and more
significantly by transactions generated at MedUnite.
Total healthcare transactions processed during the nine months ended
September 30, 2003 were 168.5 million equating to an annualized run rate of
almost 225 million transactions processed. Core transaction growth between the
nine-month period ending September 30, 2002 and the same period in 2003 was
132%. While our encounter volume dropped between the periods, the net increases
were generally the result of transactions acquired from MedUnite and new sales,
including transactions generated by newer vendor partners that resulted in
greater claim and patient statement processing transactions. A summary of the
number of transactions we processed for the periods presented is as follows:
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2003 2002
----------- ----------
Core transactions 150,052,000 64,588,000
Encounters 18,494,000 19,473,000
----------- ----------
Total transactions 168,546,000 84,061,000
=========== ==========
20
"Core" transactions represent all transactions except for encounters.
"Encounters" are an administrative reporting transaction for payers but do not
generate revenue for the provider who must submit them. Accordingly, rather than
submitting on a routine basis, most providers choose to periodically "catch up"
on their submissions, creating monthly and quarterly swings in both the number
of encounters we process and what percentage of our transaction mix they
represent. Since encounters are at a significantly lower price point than
claims, these swings make it difficult to easily analyze our
quarter-over-quarter growth in our core business. In addition, we do not expect
our encounter volume to grow on an annual basis, as payers are not expanding the
capitated service model that is the foundation of encounters. Therefore, we
believe that breaking out encounters shows more clearly our growth in core
transactions, which is the growth engine for our Transaction Services segment.
For the 2003 period, approximately 66% of our revenues came from our
Transaction Services segment compared to 44% from this segment for the 2002
period. For the remainder of 2003 and beyond, it is anticipated that our
greatest growth will come from this segment.
Laboratory Communication Solutions' net revenues decreased by 12% from
the 2002 period. As the sluggish economy continued for the first half of 2003,
we have seen a slowdown in our contract manufacturing sales and sales of our
communication devices at our smaller labs and hospital labs. We expect this
slowdown to continue for the remainder of 2003. Our future goals for this
business include creating new opportunities with our existing customers and
capitalizing on our relationships for transaction-based solutions.
COST OF SALES. Consolidated cost of sales decreased as a percentage of
net revenues to 42% for the nine months ended September 30, 2003 from 46% for
the nine months ended September 30, 2002. Cost of sales classified by our
reportable segments is as follows:
(in thousands) NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2003 2002
----------- ----------
Transaction Services $ 12,327 $ 6,449
Laboratory Communication Solutions 9,861 10,612
----------- ----------
$ 22,188 $ 17,061
=========== ==========
Cost of sales in our Transaction Services segment consists of
transaction fees, services and license fees, third-party electronic transaction
processing costs, certain telecommunication and co-location center costs,
revenue sharing arrangements with our business partners, third-party database
licenses, and certain travel expenses. Cost of sales as a percentage of revenues
decreased to 35% in the 2003 period compared to 39% in the same period last year
primarily due to a change in the mix of transaction types from higher cost
patient statements to lower cost claims and real-time transactions (such as
eligibility verification) through the additional transactions acquired from
MedUnite.
21
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 55% in the 2003 period compared to 51%
in the same period last year primarily due to a change in the mix from lower
cost leases to higher cost contract manufacturing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated SG&A
increased for the nine months ended September 30, 2003 by $12.5 million, or 72%,
to $29.8 million from consolidated SG&A of $17.3 million for the nine months
ended September 30, 2002. Consolidated SG&A expenses as a percentage of
consolidated revenues increased to 56% for the 2003 period compared to 47% in
the same period last year. SG&A expenses classified by our reportable segments
are as follows:
(in thousands) NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
------- -------
Transaction Services $20,763 $ 8,498
Laboratory Communication Solutions 6,339 6,915
Corporate 2,653 1,914
------- -------
$29,755 $17,327
======= =======
SG&A expenses in Transaction Services increased 144% for the nine
months September 30, 2003 over the same period last year, primarily due to the
incremental expenses incurred in the operations of MedUnite, costs related to
our HIPAA compliance efforts, implementation staffing and sales/marketing
programs implemented since last year.
While we expected to incur significant SG&A costs related to the
MedUnite operations in the first half of 2003, we also expected to reduce them
at a higher rate than we achieved during the first quarter of 2003. Despite
these challenges, we exited the first quarter on an expense run rate in line
with our initial expectations, and in the second quarter of 2003, we were
successful in eliminating or renegotiating substantial telecommunication
expenses and duplicative contact management, human resources and customer
relationship management systems. As a result of these cost cutting measures, we
achieved positive cash flow in our MedUnite operations in the third quarter of
2003. However, we do expect SG&A costs to increase in the fourth quarter of 2003
as the development projects related to the integration of MedUnite are moved
into production resulting in a decrease in the amount of capitalized development
related to our real-time and Phoenix platforms.
SG&A expenses in our Laboratory Communications Solutions segment
decreased by 8% for the nine months ended September 30, 2003 from the same
period last year primarily due to cost cutting measures implemented last year.
Segment SG&A expenses as a percentage of segment net revenues increased to 35%
for the 2003 period compared to 33% for the same period last year due to lower
revenues in the 2003 period.
22
Corporate SG&A expenses increased 39% for the nine months ended
September 30, 2003 compared to the same period last year primarily due to
increased insurance premiums, professional fees and personnel costs.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization increased by $2.3 million to $4.2 million for the nine months ended
September 30, 2003 from $1.9 million for the same period last year. This
increase was primarily due to $1.5 million for the amortization of intangible
assets acquired in the MedUnite acquisition, which includes amortization of
ProxyMed.net, our real-time network based on the technology platform acquired
from MedUnite. Amortization of intangible assets related to additional
capitalized software development will increase in the fourth quarter as we place
the Phoenix platform into production and commence the amortization of this
asset. Depreciation and amortization classified by our reportable segments is as
follows:
(in thousands) NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
------ ------
Transaction Services $3,287 $1,144
Laboratory Communication Solutions 722 601
Corporate 144 152
------ ------
$4,153 $1,897
====== ======
LOSS ON DISPOSAL OF ASSETS. As a result of the consolidation of the
ProxyMed and MedUnite offices in Atlanta during the quarter ended March 31,
2003, we recorded $0.1 million in net losses primarily related to the
disposition of certain assets owned and leased that were acquired in our
acquisition of MDP Corporation in 2001. The consolidation of our Atlanta offices
is expected to save us over $0.3 million on an annual basis going forward in
rents and other occupancy costs.
OPERATING INCOME (LOSS). As a result of the foregoing, consolidated
operating loss for the nine months ended September 30, 2003 was $3.0 million
compared to operating income of $0.7 million for the same period last year.
Operating income (loss) classified by our reportable segments is as follows:
(in thousands) NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
------- -------
Transaction Services $(1,382) $ 254
Laboratory Communication Solutions 1,168 2,515
Corporate (2,807) (2,066)
------- -------
$(3,021) $ 703
======= =======
INTEREST, NET. Consolidated net interest expense for the nine months
ended September 30, 2003 was $0.6 million compared to net interest income of
$0.3 million for the same period last year. This increase in expense is
primarily due to interest related to our convertible debt issued to the former
owners of MedUnite and the financing of certain liabilities of MedUnite during
the 2003 period and lower interest income earned on a smaller investment base at
lower interest rates.
23
OTHER INCOME. In conjunction with our distribution and marketing
agreement with PlanVista for claims re-pricing services signed in June 2003, we
received a warrant to purchase up to 15% of PlanVista. At the end of September
2003, the value of this warrant increased by $4.8 million to $5.3 million.
However, if the warrant is never exercised, then we will have to record an
impairment charge equal to the warrant's remaining value, if any, carried on the
books. At the present time, we have no intention of exercising this warrant and
we will record an impairment charge in the fourth quarter of 2003.
NET INCOME. As a result of the foregoing, consolidated net income was
$1.2 million for both the nine months ended September 30, 2003 and 2002.
DEEMED DIVIDENDS. We incurred deemed dividends of $0.6 million during
the nine months ended September 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 shareholders in 2002 pursuant to our
offer to convert their shares commencing in December 2001.
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS. As a result of the
foregoing, we reported net income applicable to common shareholders of $1.2
million for the nine months ended September 30, 2003 compared to $0.6 million
for the nine months ended September 30, 2002.
24
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 30, 2003, cash provided by operating
activities totaled $0.5 million. During this period, we paid $5.7 million in
acquisition-related costs for MedUnite; paid $3.3 million for fixed assets and
capitalized software; paid $1.8 million against our notes payable and certain
long term debt; and transferred $0.3 million as support for a letter of credit
used to collateralize the financing of a certain liability insurance policy.
These activities were principally financed through available cash resources.
After these activities, we had cash and cash equivalents totaling $6.9 million
as of September 30, 2003. These available funds will be used for operations,
strategic acquisitions, 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.
At the current time, we do not have any material commitments for capital
expenditures other than the final payment of three equal installments of
approximately $0.2 million related to the licensing of software for use in our
internal systems. In February 2003, we paid the second $0.2 million towards this
commitment.
At the beginning of 2003, before considering any capital spending needs at
MedUnite, we anticipated spending approximately $2.6 million in capital
expenditures (including the licensing fees above) plus an additional $0.6
million for various development projects scheduled to be undertaken by us in
2003. Through September 30, 2003, with assets available at MedUnite, we have
been able to limit our capital spending to $1.7 million (excluding $0.4 million
spent for capital expenditures at MedUnite) with approximately $0.3 million to
be spent for the balance of the year on network improvements, our new accounting
system and other projects. Additionally, we expected to incur significant
additional development and related hardware/software costs over time related to
the completion of enhancements for the real-time network platform acquired from
MedUnite. Through September 30, 2003, we have spent approximately $1.2 million
in capitalized software development projects related to both the development of
Phoenix and PROXYMED.NET and expect to incur another $0.2 million in the
remainder of 2003 to complete the Phoenix project and start on others. By the
end of the year, our total capital spending (including MedUnite) is expected to
be above our originally anticipated amounts.
During the 2002 year, we consistently improved our operating results as a
result of both internal and external growth, successful cross selling of our
transaction services, and our ability to monitor expenses. With our additional
equity financing at the end of the first quarter of 2002, we were able to
consummate four acquisitions during the year, culminating with our acquisition
of MedUnite at the end of the year. Unfortunately, MedUnite had incurred
significant losses since its inception and was utilizing cash significantly in
excess of amounts it was generating primarily due to technical and research and
development activities related to its various processing platforms. As a result,
at the time we acquired MedUnite, there were substantial liabilities and
obligations as well as future commitments (both recorded and unrecorded at
December 31, 2002) associated with the business in addition to the transaction
and exit costs associated with the acquisition.
25
In an effort to immediately curtail and reduce the expenditure levels,
MedUnite's senior management team was terminated along with approximately 20% of
the general workforce and in February 2003, we moved our Atlanta facility into
MedUnite's Norcross facility. While we did not achieve the expected reductions
in MedUnite's costs early in the first quarter, we did exit the first quarter on
an expense run rate in line with our expectations. Furthermore, during the
second and third quarters of 2003, we continued our expense reductions by
successfully eliminating or renegotiating substantial telecommunication expenses
and eliminating duplicative contact management, human resources and customer
relationship management systems. Additionally, in April 2003, we terminated our
San Diego facility lease effective July 1, 2003 in return for a $0.8 million
letter of credit held by the current landlord and furniture at that facility.
By June 30, 2003, we had paid all of the significant transaction and exit
costs associated with the MedUnite acquisition. All remaining costs are expected
to be paid by the end of 2003. As a result of our negotiations, the original
$8.3 million in transaction and exit costs will ultimately be settled for
approximately $6.8 million, representing a savings of $1.5 million.
Additionally, other MedUnite contractual obligations have been cancelled
or renegotiated with the respective vendors. We have entered into financing
agreements with certain major vendors as a means of settling liabilities that
existed at December 31, 2002, and to date have financed $3.4 million of
liabilities to one vendor; $2.0 million in net liabilities to a former owner of
MedUnite; and $0.4 million for a required insurance policy as part of the
acquisition. Between these financing agreements, existing capital leases, and
the convertible notes issued in the acquisition, we will incur significant
interest expense charges in 2003. With our continued efforts during the third
quarter of 2003, we were able to drive positive cash flow in this business
earlier than expected.
With our distribution and marketing agreement with PlanVista for our new
claims re-pricing services, we were granted a warrant to purchase 15% of the
number of outstanding shares of PlanVista common stock on a fully-diluted basis
as of the time of exercise for $1.95 per share. If exercised for cash, this
would currently amount to approximately $13.3 million. Alternatively, we have
the option of exercising the warrant in exchange for our common stock in which
case we would be required to pursue an acquisition of PlanVista according to the
terms of the warrant. If the warrant is never exercised, we will have to record
an impairment charge for the then carrying value of the warrant. At the present
time, we have no intention of exercising this warrant and we will record an
impairment charge in the fourth quarter of 2003.
26
We believe that we have sufficient cash and cash equivalents on hand to
fund our future operational capital requirements and expenditures, and a
sufficient level of capital in order to fund specific research and development
projects or to pursue smaller 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. 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. We evaluate our estimates on an
ongoing basis.
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, 2002.
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 per agreements with resellers, vendors or
gateway partners and are recorded as gross revenues. Revenue from sales of
inventory 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. Revenue from certain up-front fees is amortized
ratably over the expected life of the customer or contract. Revenue from
hardware leases, network access and maintenance fees is recognized ratably over
the applicable period.
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GOODWILL - We adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets" effective January 1, 2002. Under SFAS No. 142, goodwill is
reviewed at least annually for impairment. This adoption resulted in the
reduction of approximately $.8 million of amortization relating to its existing
goodwill each quarter, which would have otherwise been recorded through the
first quarter of 2004. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level at adoption and at least annually
thereafter, utilizing a "fair value" methodology versus an undiscounted cash
flow method required under previous accounting rules. In accordance with its
adoption of FAS No. 142, we completed its initial impairment test of goodwill
during the first quarter of 2002 and our annual test at December 31, 2002
utilizing various valuation techniques including a market value analysis. No
impairment charges were recorded as a result of these tests.
CAPITALIZED SOFTWARE DEVELOPMENT AND RESEARCH AND DEVELOPMENT - Costs
incurred internally and fees paid to outside contractors and consultants during
the application development stage of our internally used software products are
capitalized. Costs of upgrades and major enhancements that result in additional
functionality are also capitalized. Costs incurred for maintenance and minor
upgrades are expensed as incurred. All other costs are expensed as incurred as
research and development expenses (which are included in "Selling, General and
Administrative Expenses"). Application development stage costs generally include
software configuration, coding, installation to hardware and testing. Once the
project is completed, capitalized costs are amortized over their remaining
estimated economic life. Our judgment is used in determining whether costs meet
the criteria for immediate expense or capitalization. We periodically review
projected cash flows and other criteria in assessing the impairment of any
internal-use 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 aimed initially at providing
capital to continue to operate and grow our business and later at simplifying
our capital structure. These transactions are complex and require 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 our net loss applicable to common shareholders.
Additionally, the valuation of the PlanVista warrant is based on a series of
assumptions that are used in a complex financial model. Any change in these
assumptions may have a material effect on the valuation of the warrant, which
may affect our reported operating results.
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 were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
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NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, except for certain
provision that relate to SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003 and for hedging
relationships designated after June 30, 2003. We do not believe that the
implementation SFAS No. 149 will have a material effect our consolidated
financial statements and related disclosures.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". SFAS No. 150 specifies that instruments within its
scope embody obligations of the issuer and that, therefore, the issuer must
classify them as liabilities. SFAS No. 150 requires issuers to classify as
liabilities the following three types of freestanding financial instruments: (1)
mandatory redeemable financial instruments; (2) obligations to repurchase the
issuer s equity shares by transferring assets; and (3) certain obligations to
issue a variable number of shares. SFAS No. 150 defines a freestanding financial
instrument as a financial instrument that (1) is entered into separately and
apart from any of the entity's other financial instruments or equity
transactions; or (2) is entered into in conjunction with some other transaction
and can be legally detached and exercised on a separate basis. For all financial
instruments entered into or modified after May 31, 2003, SFAS No. 150 is
effective immediately. For all other instruments of public companies, SFAS No.
150 goes into effect at the beginning of the first interim period beginning
after June 15, 2003. For contracts that were created or modified before May 31,
2003 and still exist at the beginning of the first interim period beginning
after June 15, 2003, entities should record the transition to SFAS No. 150 by
reporting the cumulative effect of a change in an accounting principle. SFAS No.
150 prohibits entities from restating financial statements for earlier years
presented. We do not expect the adoption of SFAS No. 150 to have a material
impact on our financial statements.
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this report may
contain information that includes or is based upon FORWARD-LOOKING STATEMENTS
within the meaning of the Securities Litigation Reform Act of 1995.
Forward-looking statements present our expectations or forecasts of future
events. These statements can be identified by the fact that they do not relate
strictly to historical or current facts. They frequently are accompanied by
words such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning. In particular, these
include statements relating to: our ability to identify suitable acquisition
candidates; our successful integration of MedUnite and any other future
acquisitions; 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 ability to increase revenues and revenue opportunities; and our ability to
meet expectations regarding future capital needs and the availability of credit
and other financing sources. 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 perceived market opportunities;
our assessment of the healthcare industry's need, desire and ability to become
technology efficient; market acceptance of our products and services; 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 starting on page 15 in our Form 10-K for the
year ended December 31, 2002, which we strongly urge you to read. We expressly
disclaim any intent or obligation to update any forward-looking statements.
AVAILABLE INFORMATION
Our Internet address is www.proxymed.com. We make available free of charge on or
through our Internet website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after such material was electronically filed with, or
furnished to, the SEC.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the value of our PlanVista Corporation
warrant from changes in the fair market value of the underlying common stock.
Our ability to limit our exposure to market risk is restricted as a result of
our inability to control the market value of the underlying common stock of the
warrant.
We derive no revenues from international operations and do not believe
that we are exposed to material risks related to foreign currency exchange
rates.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2003, the Company evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")), under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer. Based on such evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that there was no
reasonably apparent deficiency in the Company's disclosure controls and
procedures such that the controls and procedures should not be expected to
operate effectively. The Company is not aware of any significant changes in the
Company's internal control over financial reporting or other factors that could
significantly affect the Company's internal control over financial reporting
subsequent to the date of the most recent evaluation of the Company's internal
control over financial reporting by the Company.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
- 3.1 Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
SB-2, File No. 333-2678).
- 3.2 Bylaws, as amended (incorporated by reference to Exhibit 3.1
of the Registration Statement on Form SB-2, File No.
333-2678).
- 3.3 Articles of Amendment to Articles of Incorporation dated July
25, 2001 (incorporated by reference to Exhibit 2.1 of Form
8-K, File No. 000-22052, reporting an event dated August 17,
2001).
- 3.4 Articles of Amendment to Articles of Incorporation dated
August 21, 2001 (incorporated by reference to Exhibit 2.2 of
Form 8-K, File No. 000-22052, reporting an event dated August
17, 2001).
- 3.5 Articles of Amendment to Articles of Incorporation of
ProxyMed, Inc. dated December 21, 2001 (incorporated by
reference to Exhibit 3.1 of Form 8-K File No. 000-22052,
reporting an event dated December 13, 2001).
- 4.1 Form of Warrant to Purchase Common Stock of ProxyMed dated
December 23, 1999, issued to certain investors (incorporated
by reference to Exhibit 4.1 of Form 8-K, File No. 000-22052,
reporting an event dated December 23, 1999).
- 4.2 Registration Rights Agreement by and among ProxyMed and the
investors named therein dated as of December 23, 1999
(incorporated by reference to Exhibit 4.2 of Form 8-K, File
No. 000-22052, reporting an event dated December 23, 1999).
- 4.3 Form of Exchanged Warrant to Purchase Common Stock of ProxyMed
dated May 4, 2000, issued to certain investors (incorporated
by reference to Exhibit 4.1 of Form 8-K, File No. 000-22052,
reporting an event dated May 4, 2000).
- 4.4 Form of New Warrant to Purchase Common Stock of ProxyMed dated
May 4, 2000, issued to certain investors (incorporated by
reference to Exhibit 4.2 of Form 8-K, File No. 000-22052,
reporting an event dated May 4, 2000).
- 4.5 Registration Rights Agreement by and among ProxyMed and the
investors named therein dated as of May 4, 2000 (incorporated
by reference to Exhibit 4.3 of Form 8-K, File No. 000-22052,
reporting an event dated May 4, 2000).
- 4.6 Registration Rights Agreement between ProxyMed and Fisher
Capital Ltd. and Wingate Capital Ltd. dated as of April 24,
2001 (incorporated by reference to Exhibit 4.1 of Form 8-K,
File No. 000-22052, reporting an event dated April 24, 2001).
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- 4.7 Registration Rights Agreement between ProxyMed and Royal Bank
of Canada and Leonardo, L.P. dated as of April 24, 2001
(incorporated by reference to Exhibit 4.2 of Form 8-K, File
No. 000-22052, reporting an event dated April 24, 2001).
- 4.8 Warrant to purchase up to 200,000 shares of common stock of
ProxyMed, Inc. dated July 3, 2003 issued to First Data
Corporation.
- 4.9 Form of Warrant to purchase an aggregate of up to 243,882
shares of common stock of ProxyMed, Inc. dated July 8, 2003
issued to four entities affiliated with General Atlantic
Partners.
- 10.1 Employment Agreement between ProxyMed and Thomas C. Wohlford,
III dated May 13, 2003.
- 10.2 Warrant to purchase shares of common stock of PlanVista
Corporation dated June 10, 2003 issued to ProxyMed, Inc.
- 31.1 Certification of Chief Executive Officer pursuant Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
- 31.2 Certification of Chief Financial Officer pursuant Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
- 32.1 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.
- 32.2 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:
- October 27, 2003 - Pursuant to Regulation FD, the Company
reported in Item 9 on the Company's third quarter 2003
teleconference call held on October 27, 2003, including
transcript thereon and press release dated October 28, 2003.
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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.
Date: NOVEMBER 14, 2003 By: /s/ MICHAEL K. HOOVER
----------------- --------------------------------
Michael K. Hoover
Chief Executive Officer
Date: NOVEMBER 14, 2003 By: /s/ JUDSON E. SCHMID
----------------- --------------------------------
Judson E. Schmid
Chief Financial Officer
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