PROXYMED, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended March 31, 2006
|
|
|
o |
|
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
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
|
|
1854 Shackleford Court, Suite 200, Norcross, Georgia
|
|
|
30093 |
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(770) 806-9918
(Registrants 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. þ yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
|
|
|
Large
accelerated filer o
|
|
Accelerated filer
þ
|
|
Non-accelerated filer o |
Indicate by check mark whether registrant is a shell company (as defined by Rule 12b-2 of the
Securities Exchange Act of 1934). o Yes þ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as of
the latest practicable date:
Common Stock, $.001 Par Value
13,203,702 Shares as of May 10, 2006
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
TABLE OF CONTENTS
2
PART I
ITEM 1.
PROXYMED, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,849 |
|
|
$ |
5,546 |
|
Accounts receivable trade, net of allowance of $4,615
and $5,525, respectively |
|
|
16,296 |
|
|
|
15,976 |
|
Other receivables |
|
|
90 |
|
|
|
140 |
|
Inventory, net |
|
|
908 |
|
|
|
1,030 |
|
Restricted cash |
|
|
|
|
|
|
75 |
|
Prepaid expenses and other current assets |
|
|
1,407 |
|
|
|
950 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
20,550 |
|
|
|
23,717 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
4,332 |
|
|
|
4,322 |
|
Goodwill |
|
|
26,480 |
|
|
|
26,444 |
|
Purchased technology, capitalized software and
other intangible assets, net |
|
|
17,144 |
|
|
|
17,879 |
|
Other long-term assets |
|
|
3,214 |
|
|
|
3,279 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
71,720 |
|
|
$ |
75,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable and current portion of long-term debt |
|
$ |
8,727 |
|
|
$ |
8,584 |
|
Accounts payable, accrued expenses and other current liabilities |
|
|
11,352 |
|
|
|
14,072 |
|
Current capital leases payable |
|
|
38 |
|
|
|
|
|
Deferred revenue |
|
|
340 |
|
|
|
334 |
|
Income taxes payable |
|
|
725 |
|
|
|
712 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
21,182 |
|
|
|
23,702 |
|
|
|
|
|
|
|
|
|
|
Income taxes payable |
|
|
748 |
|
|
|
911 |
|
Convertible notes |
|
|
13,137 |
|
|
|
13,137 |
|
Other long-term debt |
|
|
3,335 |
|
|
|
3,335 |
|
Long-term capital leases payable |
|
|
175 |
|
|
|
|
|
Long-term deferred revenue and other long-term liabilities |
|
|
1,555 |
|
|
|
1,652 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
40,132 |
|
|
|
42,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $200 |
|
|
|
|
|
|
|
|
Common Stock $.001 par value. Authorized 30,000,000
shares; issued and outstanding 13,203,702 shares |
|
|
14 |
|
|
|
14 |
|
Additional paid-in capital |
|
|
242,513 |
|
|
|
242,297 |
|
Accumulated deficit |
|
|
(210,939 |
) |
|
|
(209,367 |
) |
Unearned compensation |
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
31,588 |
|
|
|
32,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
71,720 |
|
|
$ |
75,641 |
|
|
|
|
|
|
|
|
See notes to the unaudited consolidated financial statements.
3
PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(amounts in thousands except for share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Net revenues: |
|
|
|
|
|
|
|
|
Transaction fees, cost containment
services and license fees |
|
$ |
15,575 |
|
|
$ |
19,198 |
|
Communication devices and other tangible goods |
|
|
2,500 |
|
|
|
2,516 |
|
|
|
|
|
|
|
|
|
|
|
18,075 |
|
|
|
21,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of transaction fees, cost containment
services and license fees, excluding depreciation and amortization |
|
|
4,334 |
|
|
|
6,181 |
|
Cost of laboratory communication devices,
excluding depreciation and amortization |
|
|
1,503 |
|
|
|
1,502 |
|
Selling, general and administrative expenses |
|
|
11,463 |
|
|
|
12,625 |
|
Depreciation and amortization |
|
|
1,662 |
|
|
|
2,596 |
|
|
|
|
|
|
|
|
|
|
|
18,962 |
|
|
|
22,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(887 |
) |
|
|
(1,190 |
) |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
686 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,573 |
) |
|
$ |
(1,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(0.12 |
) |
|
$ |
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding |
|
|
13,203,702 |
|
|
|
12,626,567 |
|
|
|
|
|
|
|
|
See notes to the unaudited consolidated financial statements.
4
PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,573 |
) |
|
$ |
(1,791 |
) |
Adjustments to reconcile net loss to net cash
(used in) provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,662 |
|
|
|
2,596 |
|
Share based compensation |
|
|
257 |
|
|
|
95 |
|
Write-off of fixed assets |
|
|
9 |
|
|
|
|
|
Provision for obsolete inventory |
|
|
7 |
|
|
|
|
|
Changes in assets and liabilities, net of
effect of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts and other receivables |
|
|
(246 |
) |
|
|
1,350 |
|
Inventory |
|
|
115 |
|
|
|
108 |
|
Other assets |
|
|
(172 |
) |
|
|
251 |
|
Accounts payable and accrued expenses |
|
|
(2,664 |
) |
|
|
(1,860 |
) |
Deferred revenue |
|
|
6 |
|
|
|
41 |
|
Income tax |
|
|
(150 |
) |
|
|
(31 |
) |
Other current liabilities |
|
|
(97 |
) |
|
|
390 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(2,846 |
) |
|
|
1,149 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(442 |
) |
|
|
(723 |
) |
Capitalized software |
|
|
(186 |
) |
|
|
(127 |
) |
Acquisition of business |
|
|
(225 |
) |
|
|
|
|
Proceeds from the sale of property and equipment |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(849 |
) |
|
|
(850 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Draws on line of credit |
|
|
14,539 |
|
|
|
|
|
Repayment of line of credit |
|
|
(14,046 |
) |
|
|
|
|
Debt issuance costs |
|
|
(145 |
) |
|
|
|
|
Payment of related party note payable |
|
|
|
|
|
|
(600 |
) |
Payment of notes payable, capital leases and long-term debt |
|
|
(350 |
) |
|
|
(514 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(2 |
) |
|
|
(1,114 |
) |
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(3,697 |
) |
|
|
(815 |
) |
Cash and cash equivalents at beginning of period |
|
|
5,546 |
|
|
|
12,374 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,849 |
|
|
$ |
11,559 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
443 |
|
|
$ |
640 |
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
|
|
Capital lease obligations |
|
$ |
213 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See notes to the unaudited consolidated financial statements.
5
ProxyMed, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Policies
|
(a) |
|
Basis of Presentation The accompanying unaudited consolidated financial
statements of ProxyMed, Inc. d/b/a MedAvant
Healthcare Solutions (MedAvant, our, we, or us) 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. |
|
|
|
|
The results of operations for the three months ended March 31, 2006 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 our Annual Report on
Form 10-K/A for the year ended December 31, 2005 as filed with the SEC on April 11, 2006
(10-K/A). |
|
|
(b) |
|
Reclassification Certain 2005 amounts have been
reclassified in order to conform to the 2006 presentation in the accompanying consolidated
balance sheet. |
|
|
(c) |
|
Revenue Recognition Revenue is derived from our Transaction Services and
Laboratory Communication Solutions segments. |
|
|
|
|
Revenues in our Transaction Services segment are recorded as follows: |
|
|
|
For revenues derived from insurance payers, pharmacies and submitters, such revenues
are recognized on a per transaction basis or flat fee basis in the period the services
are rendered. |
|
|
|
|
Revenue from our medical cost containment business is recognized when the services
are performed and are recorded net of estimated allowances. These revenues are
primarily in the form of fees generated from discounts we secure for payers that access
our provider network. |
|
|
|
|
Revenues associated with revenue sharing agreements are recorded as gross revenue on
a per transaction basis or a percentage of revenue basis and may involve increasing
amounts or percentages based on transaction or revenue volumes achieved. This
treatment is in accordance with Emerging Issues Task Force Consensus No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent. |
6
|
|
|
Revenue from certain up-front fees is recognized ratably over three years, which is
the expected life of the customer. This treatment is in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB No. 104). |
|
|
|
|
Revenue from support and maintenance contracts is recognized ratably over the
contract period. |
Revenues in our Laboratory Communication Solutions segment are recorded as follows:
|
|
|
Revenue from support and maintenance contracts is recognized ratably over the
contract period. |
|
|
|
|
Revenue from the sale of inventory and manufactured goods is recognized when the
product is delivered, price is fixed or determinable, and collectibility is probable.
This treatment is in accordance with SAB No. 104. |
|
|
|
|
Revenue from the rental of laboratory communication devices is recognized ratably
over the period of the rental contract. |
|
(d) |
|
Reserve for Doubtful Accounts/Revenue Allowances/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. Additionally, in our Transaction Services segment, we evaluate
the collectibility of our accounts receivable based on a combination of factors, including
historical collection ratios. |
|
|
|
|
In circumstances where we are aware of a specific customers inability to meet its financial
obligations, we record a specific reserve for bad debts against amounts due to reduce the
net recognized receivable to the amount we reasonably believe will be collected. For all
other customers, we recognize reserves for bad debts based on past write-off history and the
length of time the receivables are past due. To the extent historical credit experience is
not indicative of future performance or other assumptions used by management do not prevail,
loss experience could differ significantly, resulting in either higher or lower future
provision for losses. |
|
|
(e) |
|
Net loss per share Basic net loss per share of Common Stock is computed by
dividing net loss by the weighted average shares of Common Stock outstanding during the
period. Diluted loss per share reflects the potential dilution from the exercise or
conversion of securities into Common Stock; however, the following shares were excluded
from the calculation of net loss per share because their effects would have been
anti-dilutive: |
7
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(unaudited) |
|
2006 |
|
2005 |
Common Stock excluded in the computation of net loss per share: |
|
|
|
|
|
|
|
|
Convertible preferred stock |
|
|
13,333 |
|
|
|
13,333 |
|
Convertible notes payable |
|
|
238,989 |
|
|
|
238,989 |
|
Stock options |
|
|
1,705,643 |
|
|
|
1,851,909 |
|
Warrants |
|
|
857,215 |
|
|
|
900,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,815,180 |
|
|
|
3,004,280 |
|
|
|
|
|
|
|
|
|
|
Share
Based Compensation In December 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123R, Shared-Based Payments (Revised 2004) (SFAS No.
123R). SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation and supersedes Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25) and its related guidance. SFAS No. 123R requires
public entities to measure the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be estimated using option-pricing models adjusted for the unique
characteristics of those instruments and will be recognized and expensed over the period
which an employee is required to provide service in exchange for the award (usually the
vesting period). Fair value is based on market prices (if those prices are publicly
available). If not available, SFAS No. 123R does not specifically require the use of a
particular model; however, the most common models are the Black-Scholes model and lattice
(binomial) models. Additionally, modifications to an equity award after the grant date will
require a compensation cost to be recognized in an amount equal to the excess of the fair
value of the modified award over the fair value of the award immediately before the
modification. The effective date of SFAS No. 123R is for interim and annual reporting
periods beginning after December 15, 2005.
As of March 31, 2006, we had share-based employee compensation plans which are described in
Note 13 of the consolidated financial statements included in our Annual Report on Form
10-K/A for the year ended December 31, 2005. Option awards are generally granted with an
exercise price equal to the market price of our stock at the date of grant. Effective
January 1, 2006, we adopted SFAS No. 123R, which requires the recognition of the fair value
of stock compensation in the Statement of Operations. We recognize stock compensation
expense over the requisite service period of the individual grantees, which generally equals
the vesting period. All of our stock compensation is accounted for as equity instruments.
Prior to January 1, 2006, we accounted for these plans under the measurement and recognition
principles of APB No. 25 and related interpretations.
We are required to use the modified prospective transition method for adopting SFAS No.
123R. Under this method, the provisions of SFAS No. 123R apply to all awards granted or
modified after the date of adoption. Unrecognized expense of awards not yet vested at the
date of adoption shall be recognized in the Statement of Operations in the periods after the
date of adoption using the same valuation methods and
assumptions determined under the original provisions of SFAS No. 123 as disclosed in our
previous filings. Due to the adoption of SFAS No. 123R, we recorded
8
approximately $250,000 of share-based compensation related to vested stock options in the Statement of Operations
during the three months ended March 31, 2006. For the three months ended March 31, 2005, we
recorded approximately $95,000 of share-based compensation related to vested stock options
in the statement of operations under APB No. 25.
The
following table illustrates the effect of net loss and net loss per
share if we had applied the fair value recognition provisions of SFAS
No. 123R to share-based compensation for the prior-year period:
|
|
|
|
|
In thousands except for per share data |
|
Three Months Ended March 31, |
|
(unaudited) |
|
2005 |
|
Net loss, as reported |
|
$ |
(1,791 |
) |
Deduct: Total stock-based employee pro forma
compensation expense determined under fair
value based method for all awards, net of
related tax effects |
|
|
(592 |
) |
|
|
|
|
|
Addback charges already taken for
intrinsic value of options |
|
|
95 |
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(2,288 |
) |
|
|
|
|
|
Loss per common share: |
|
|
|
|
Basic and Diluted as reported |
|
$ |
(0.14 |
) |
Basic and Diluted pro forma |
|
$ |
(0.18 |
) |
We used the Black-Scholes valuation model for options awarded prior to 2005 and a
combination of Black-Scholes and lattice models for options awarded in 2005 and later to
estimate the fair value of each option award on the date of grant. During the three months
ended March 31, 2006, we issued 35,000 stock options and issued no restricted stock awards.
The weighted-average grant-date fair value of the options granted under the stock option
plans during this period was $6.84. The weighted-average assumptions used for the three
months ended March 31, 2006, were: expected dividend yield of 0.0%; risk-free interest rate
of 4.79%; expected life of 6 years; and an expected volatility
of 60.25%. The weighted-average assumptions used for the three months
ended March 31, 2005, were: dividend yield of 0.0%; risk-free
interest rate of 4.1%-4.5%; expected life of 6 years; and an expected
volatility of 75%-76%. We issued 39,000 stock options and no restricted stock awards during the three months ended March 31, 2005.
The dividend yield of zero is based on the fact that we have no present intention to pay
cash dividends. Expected volatility is based on historical volatility of our Common Stock
over the period commensurate with the expected life of the options. The risk-free interest
rate used is derived from the average U.S. Treasury rate for the period, which approximates
the rate in effect at the time of the grant. The expected life calculation is based on the
observed and expected time to post-vesting exercise and forfeitures of options by our
employees.
Based on historical experience of option pre-vesting cancellations, we have assumed an
annualized forfeiture rate of 15% for all options. Under the true-up provisions of SFAS No.
123R, we will record additional expense if the actual forfeiture rate is lower than
estimated and will record a recovery of prior expense if the actual forfeiture is higher
than estimated.
A summary of option activity under the plans as of March 31, 2006, and changes during
the three months ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED- |
|
|
|
|
|
|
|
|
|
|
WEIGHTED- |
|
|
AVERAGE |
|
|
|
|
|
|
|
|
|
|
AVERAGE |
|
|
REMAINING |
|
|
AGGREGATE |
|
|
|
|
|
|
|
EXERCISE |
|
|
CONTRACTUAL |
|
|
INTRINSIC |
|
STOCK OPTIONS |
|
SHARES |
|
|
PRICE |
|
|
TERM |
|
|
VALUE |
|
Outstanding as of January 1, 2006 |
|
|
1,750,167 |
|
|
$ |
9.91 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
35,000 |
|
|
|
6.84 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled (forfeited or expired) |
|
|
(79,523 |
) |
|
|
9.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2006 |
|
|
1,705,644 |
|
|
$ |
9.85 |
|
|
|
5.02 |
|
|
$ |
1,342,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at March
31, 2006 |
|
|
793,112 |
|
|
$ |
13.88 |
|
|
|
3.42 |
|
|
$ |
95,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation cost of options granted but not yet vested as of March 31, 2006, is
$2,598,683, which is expected to be recognized over the weighted average period of 1.6
years.
Prior to adoption of SFAS No. 123R, we recorded a grant of non-vested stock options with an
offsetting contra-equity account, unearned compensation, which was amortized to expense over
the vesting period. Upon adoption of SFAS No. 123R, any such balances of unearned
compensation ($40,000) as of January 1, 2006, were reversed (i.e. netted against additional paid-in
capital). Such costs will continue to be expensed over the vesting
period with the offset against additional paid-in capital.
Under SFAS No. 123R, compensation cost for our stock-based compensation plans would be
determined based on the fair value at the grant dates for awards under those plans. The
following table outlines the effect of SFAS No. 123R on our key financial disclosures for
the three months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of the |
|
Excluding |
|
|
As |
|
Adoption of |
|
the Effect of |
In thousands except per share data (unaudited) |
|
Reported |
|
SFAS 123R |
|
SFAS 123R |
Loss from operations |
|
$ |
(1,573 |
) |
|
$ |
250 |
|
|
$ |
(1,323 |
) |
Loss before income taxes |
|
$ |
(1,573 |
) |
|
$ |
250 |
|
|
$ |
(1,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shareholders |
|
$ |
(1,573 |
) |
|
$ |
250 |
|
|
$ |
(1,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.12 |
) |
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
9
|
(g) |
|
New Accounting Pronouncements In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections (SFAS No. 154), which replaces APB Opinion No.
20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements. SFAS No. 154 applies to all voluntary changes in accounting principles and
requires retrospective application (a term defined by the statement) to prior periods
financial statements, unless it is impracticable to determine the effect of a change. It
also applies to changes required by an accounting pronouncement that does not include
specific transition provisions. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The adoption
of SFAS No. 154 did not have a material impact on our consolidated financial position,
results of operations or cash flows. |
|
|
|
|
In March 2005, the FASB issued FASB Interpretation, or FIN No. 47, Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143,
which requires an entity to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liabilitys fair value can be reasonably
estimated. We were required to adopt the provisions of FIN No. 47 no later than the end of
our 2005 fiscal year. The adoption of FIN No. 47 did not have a material impact on our
consolidated financial position, results of operations or cash flows. |
|
|
|
|
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No.
43, Chapter 4. This Statement clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) and requires that
those items be recognized as current-period charges regardless of whether they meet the
criterion of so abnormal under ARB No. 43. The provisions of this Statement shall be
effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
The adoption of SFAS No. 151 did not have a material impact on our consolidated financial
position, results of operations or cash flows. |
10
(2) Inventory
Inventory consists of the following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
In thousands |
|
2006 |
|
|
2005 |
|
Materials, supplies and component parts |
|
$ |
272 |
|
|
$ |
290 |
|
Work in process |
|
|
73 |
|
|
|
84 |
|
Finished goods |
|
|
570 |
|
|
|
656 |
|
|
|
|
|
|
|
|
|
|
|
915 |
|
|
|
1,030 |
|
Less: Obsolescence reserve |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
908 |
|
|
$ |
1,030 |
|
|
|
|
|
|
|
|
(3) Other Intangible Assets
The estimated useful lives and the carrying amounts of other intangible assets as of March
31, 2006 and December 31, 2005, by category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
|
Estimated |
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
In thousands |
|
Useful lives |
|
Amount |
|
|
Amortization |
|
|
Net |
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
Capitalized software |
|
3 - 5 years |
|
$ |
3,319 |
|
|
$ |
(1,614 |
) |
|
$ |
1,705 |
|
|
$ |
3,133 |
|
|
$ |
(1,429 |
) |
|
$ |
1,704 |
|
Purchased technology |
|
3 - 12 years |
|
|
8,852 |
|
|
|
(5,173 |
) |
|
|
3,679 |
|
|
|
8,852 |
|
|
|
(4,791 |
) |
|
|
4,061 |
|
Customer relationships |
|
7 years |
|
|
13,851 |
|
|
|
(6,734 |
) |
|
|
7,117 |
|
|
|
13,747 |
|
|
|
(6,454 |
) |
|
|
7,293 |
|
Provider network |
|
7 years |
|
|
7,565 |
|
|
|
(2,922 |
) |
|
|
4,643 |
|
|
|
7,565 |
|
|
|
(2,744 |
) |
|
|
4,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,587 |
|
|
$ |
(16,443 |
) |
|
$ |
17,144 |
|
|
$ |
33,297 |
|
|
$ |
(15,418 |
) |
|
$ |
17,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimates of useful lives of other intangible assets are based on historical
experience, the industry in which the entity operates, or on contractual terms. If indications
arise that would materially impact these lives, an impairment charge may be required and the
corresponding useful lives may be reduced. Other intangible assets are being amortized on a
straight-line basis. Amortization expense for the three months ended March 31, 2006 and 2005
was $1.0 million and $1.8 million, respectively.
As of March 31, 2006, estimated future amortization of other intangible assets is as follows:
11
|
|
|
|
|
In thousands (unaudited) |
|
|
|
|
2006 (remainder of year) |
|
$ |
3,096 |
|
2007 |
|
|
3,820 |
|
2008 |
|
|
3,185 |
|
2009 |
|
|
1,835 |
|
2010 |
|
|
1,801 |
|
2011 |
|
|
1,801 |
|
|
|
|
|
|
|
$ |
15,538 |
|
|
|
|
|
(4) Debt Obligations
|
a) |
|
Revolving Credit Facility and Term Debt On December 7, 2005, we and certain
of our wholly-owned subsidiaries, entered into a security and purchase agreement (the Loan
Agreement) with Laurus Master Fund, Ltd. (Laurus) to provide up to $20 million in
financing to us. |
|
|
|
|
Under the terms of the Loan Agreement, Laurus extended financing to us in the form of a $5.0
million secured term loan (the Term Loan) and a $15.0 million secured revolving credit
facility (the Revolving Credit Facility). The Term Loan has a stated term of five (5)
years and will accrue interest at Prime plus 2%, subject to a minimum interest rate of 8%.
The Term Loan is payable in equal monthly principal installments of approximately $89,300
plus interest until the maturity date on December 6, 2010. The Revolving Credit Facility has
a stated term of three (3) years and will accrue interest at the 90 day LIBOR rate plus 5%,
subject to a minimum interest rate of 7%, and a maturity date of December 6, 2008 with two
(2) one-year options at the discretion of Laurus. Additionally, in connection with the Loan
Agreement, we issued 500,000 shares of our Common Stock, par value $0.001 per share (the
Closing Shares) to Laurus that were valued at approximately $2.4 million at the time of
issuance. |
|
|
|
|
We granted Laurus a first priority security interest in substantially all of our present and
future tangible and intangible assets (including all intellectual property) to secure our
obligations under the Loan Agreement. The Loan Agreement contains various customary
representation and warranties of us as well as customary affirmative and negative covenants,
including, without limitation, limitations on liens of property, maintaining specific forms
of accounting and record maintenance, and limiting the incurrence of additional debt. The
Loan Agreement does not contain restrictive covenants regarding minimum earning
requirements, historical earning levels, fixed charge coverage, or working capital
requirements. We can borrow up to three times the trailing 12-months of historical earnings,
as defined in the agreement. |
|
|
|
|
The Loan Agreement also contains certain customary events of default, including, among
others, non-payment of principal and interest, violation of
covenants, and in the event we are involved in certain insolvency proceedings. Upon the occurrence of an event of
default, Laurus is entitled to, among other things, accelerate all obligations. In the event
Laurus accelerates the loans, the amount due will include all accrued interest plus 120% of
the then outstanding principal amount of the loans being accelerated as well as all unpaid
fees and expenses of Laurus. In addition, if the Revolving Credit Facility is terminated for
any reason, whether because of a prepayment or acceleration, there shall |
12
|
|
|
be paid an additional premium of up to 5% of the total amount of the Revolving Credit
Facility. In the event we elect to prepay the Term Loan, the amount due shall be the accrued
interest plus 115% of the then outstanding principal amount of the Term Loan. Due to certain
subjective acceleration clauses contained in the agreement and a lockbox arrangement, the
revolving credit facility is classified as current in the accompanying unaudited
consolidated balance sheet. |
|
|
|
|
We used the proceeds from the Loan Agreement primarily to repay existing senior debt to
Wachovia Bank, National Corporation and for working capital. |
|
|
b) |
|
Convertible Notes The 4% convertible promissory notes are uncollateralized
and mature on December 31, 2008. Interest is payable quarterly in cash in arrears. The
notes were convertible into an aggregate of 731,322 shares of our Common Stock (based on a
conversion price of $18.323 per share which was above the traded fair market value of our
Common Stock at December 31, 2002) if the former shareholders of MedUnite achieve certain
aggregate incremental revenue based targets over a baseline revenue of $16.1 million with
us over the next three and one-half year period as follows: (i) one-third of the principal
if incremental revenues during the measurement period from January 1, 2003 through June 30,
2004 are in excess of $5.0 million; (ii) one-third of the principal if incremental revenues
during the measurement period from July 1, 2004 through June 30, 2005 are in excess of
$12.5 million; and (iii) one-third of the principal if incremental revenues during the
measurement period from July 1, 2005 through June 30, 2006 are in excess of $21.0 million.
Amounts in excess of any measurement period will
be credited towards the next measurement period; however, if the revenue trigger is not met
for any period, the ability to convert that portion of the principal is lost. In the fourth
quarter of 2003, the first revenue target was met. No other triggers have been met through
March 31, 2006. |
|
|
|
|
Of the original $13.4 million in principal amount, $4.0 million was held in escrow until
December 31, 2003 as a source for limited indemnification conditions of the acquisition. In
the fourth quarter of 2003, the escrow agent accepted a claim of $0.4 million from us. This
claim was settled with us via a cash payment of $0.1 million (paid out of undistributed
interest received) and an offset against the escrow of $0.3 million. As such, we recorded an
adjustment to goodwill. The escrow was released on December 31, 2003 and convertible notes
totaling $3.7 million were distributed to the former shareholders of MedUnite. The total
amount of convertible notes as of March 31, 2006, and December 31, 2005, is $13.1 million.
Additionally, as a result of the reduction in principal, the notes are now convertible into
716,968 shares of our Common Stock subject to achieving the revenue triggers. |
(5) Equity Transactions
During the three months ended March 31, 2006 and 2005, we granted 35,000 and 39,000 stock
options at exercise prices between $6.17 and $10.35 per share to officers and employees. Such
options are for a ten-year term and generally vest equally over three or four years following
the date of the grant.
13
(6) Segment Information
We operate in two reportable segments that are separately managed: Transaction Services and
Laboratory Communication Solutions. Transaction Services includes transaction, cost containment
and other value-added services principally between physicians and insurance companies (Payer
Services and Submitter Services), and providers and pharmacies. Laboratory Communication
Solutions includes the sale, lease and service of communication devices principally to
laboratories. We report corporate overhead expenses and assets as part of our Transaction
Services segment.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
In thousands (unaudited) |
|
2006 |
|
|
2005 |
|
Net revenues by operating segment: |
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
15,132 |
|
|
$ |
18,607 |
|
Laboratory Communication Solutions |
|
|
2,943 |
|
|
|
3,107 |
|
|
|
|
|
|
|
|
|
|
$ |
18,075 |
|
|
$ |
21,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss by operating segment: |
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
(1,473 |
) |
|
$ |
(1,776 |
) |
Laboratory Communication Solutions |
|
|
586 |
|
|
|
586 |
|
|
|
|
|
|
|
|
|
|
$ |
(887 |
) |
|
$ |
(1,190 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
Total assets by operating segment: |
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
59,012 |
|
|
$ |
63,186 |
|
Laboratory Communication Solutions |
|
|
12,708 |
|
|
|
12,455 |
|
|
|
|
|
|
|
|
|
|
$ |
71,720 |
|
|
$ |
75,641 |
|
|
|
|
|
|
|
|
(7) Income Taxes
As of March 31, 2006, we had a net deferred tax asset of approximately $96.3 million, which was
fully offset by a valuation allowance due to cumulative losses in recent years. Realization of
the net deferred tax asset is dependent upon us generating sufficient taxable income prior to
the expiration of the federal net operating loss carryforwards. We will adjust this valuation
reserve if, during future periods, management believes we will generate sufficient taxable
income to realize the net deferred tax asset.
14
(8) Commitments and Contingencies
|
(a) |
|
Litigation In December of 2001, Insurdata Marketing Services, Inc., referred
to as IMS, filed a lawsuit against HealthPlan Services, Inc., referred to as HPS, a former
subsidiary of PlanVista, for unspecified damages in excess of $75,000. The complaint
alleges that HPS failed to pay commissions to IMS pursuant to an arbitration award rendered
in 1996. On January 10, 2005, the court granted summary judgment to IMS on the issue of
liability for the arbitration award. We filed an appeal on the issue of liability. On
September 26, 2005, we entered into a settlement to pay a total of $775,000 in exchange for
a release from the entire claim, with an initial payment of $225,000 and the rest due in
equal installments over five subsequent months. We paid the last installment in March 2006
in accordance with the settlement agreement. |
|
|
|
|
In early 2000, four named plaintiffs filed a class action against Fidelity Group, Inc.,
referred to as Fidelity, HPS, Third Party Claims Management, and others, for unspecified
damages, and the action is currently pending in the United States District Court for the
District of South Carolina, Charleston division. The complaint stems from the failure of a
Fidelity insurance plan, and alleges unfair and deceptive trade practices; negligent
undertaking; fraud; negligent misrepresentation; breach of contract; civil conspiracy; and
RICO violations against Fidelity and its contracted administrator, HPS. Two principals of
the Fidelity plan have been convicted of insurance fraud and sentenced to prison in a
separate proceeding. The class was certified and such certification was eventually upheld on
appeal. Shortly after the case was remanded to the trial judge as a certified class for
further discovery, we filed a motion to de-certify the matter based upon evidence not
available to the trial judge when he first certified the class. While that motion was
pending, the parties agreed to mediate the case before the trial judge. The mediation was
successful and the parties agreed orally to settle the matter. We believe that our
obligations under the settlement will be paid by our insurance carrier. Although we are
currently working to finalize a formal settlement agreement, notice of class settlement, and
preliminary order approving the settlement, there can be no assurance that the settlement
will be approved or that objections will not be raised. |
|
|
|
|
In 2004, we filed a tax appeal in the State of New York contesting a Notice of Deficiency
issued by the State of New York to PlanVista Solutions, Inc. The notice involved taxes
claimed to be due for the tax years ending December 31, 1999, through December 31, 2001. The
amount due, including interest and penalties through September 30, 2005, is $3.1 million. We
withdrew the tax appeal and entered into an installment payment agreement with the State of
New York. Payment on the tax liability was repaid in a lump sum of $500,000 before October
30, 2005, and the remainder in equal installments that began in November 2005 with the State
of New York. We entered into an agreement with a third party tax service provider to be
reimbursed for 70% of the liability ultimately agreed to with the State of New York, but not
to exceed $2 million. We received the $2.0 million payment from the third party in September
2005. |
|
|
|
|
In December 2004, Honolulu Disposal Service, Inc. et al, referred to as HDSI, sued American
Benefit Plan Administrators, Inc., referred to as ABPA, a former subsidiary of PlanVista
Corporation, in the Circuit Court of the First Circuit of the State of Hawaii, alleging
damages of $5,700,000 for failure to properly conduct payroll audits during the period of
1982 through 1996. The case was removed to the U.S. District Court for the District of
Hawaii. Substantial discovery has taken place. ABPA filed a motion for summary |
15
|
|
|
judgment, which was granted on April 20, 2006. The plaintiff has thirty days from this date
to appeal. |
|
|
|
|
We have been named as a defendant in an action filed in December 2005 in the Eastern
District of Wisconsin by Metavante Corporation. Metavante claims that our use of the name
MedAvant and the logo in connection with healthcare transaction processing infringes
trademark rights allegedly held by Metavante. Metavante has sought unspecified compensatory
damages and injunctive relief. The Court recently issued a Decision and Order denying
Metavantes motion for a preliminary injunction. We believe that this action is without
merit, and we are vigorously defending our use of the name MedAvant and the logo. We do not
believe the proceeding will have a material adverse effect on our business, financial
condition, results of operations or cash flows. |
|
|
|
|
From time to time, we are a party to other legal proceedings in the course of its business.
We, however, do not expect such other legal proceedings to have a material adverse effect on
its business or financial condition. |
|
|
(b) |
|
Other In connection with our June 1997 acquisition of the PreScribe
technology used in our Prescription Services business, we would be obligated to pay up to
$10 million to the former owner of PreScribe in the event of a divestiture of a majority
interest in ProxyMed, or all or part of the PreScribe technology. |
|
|
(c) |
|
Capital Leases In March 2006, we entered into a capital lease arrangement for
our corporate telephone equipment valued at approximately $0.2 million. |
|
|
|
|
The following is a schedule by years of future lease payments under this capital lease
together with the present value of the net minimum lease payments as of March 31, 2006: |
|
|
|
|
|
In thousands (unaudited) |
|
|
|
|
2006 (remainder of year) |
|
$ |
42 |
|
2007 |
|
|
56 |
|
2008 |
|
|
56 |
|
2009 |
|
|
56 |
|
2010 |
|
|
55 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
265 |
|
Less amounts representing interest |
|
|
(52 |
) |
|
|
|
|
|
Present value of minimum lease payments |
|
$ |
213 |
|
(d) |
|
Employment Agreements We entered into employment agreements with certain
executives and other members of management that provide for cash severance payments if
these employees are terminated without cause. Our aggregate commitment under these
agreements is $0.7 million at March 31, 2006. |
16
(9) Acquisitions
On February 14, 2006, we acquired substantially all the assets and operations of Zeneks,
Inc., a privately held bill negotiation services company based in Tampa, Florida for
$225,000 cash plus certain assumed liabilities. Zeneks was incorporated in 1998 and was
established as a medical cost containment company. They have relationships with numerous
providers throughout the country. The operations of Zeneks are included in our results of
operation and cash flows since February 14, 2006. The allocation of the purchase price is
as follows:
|
|
|
|
|
In thousands (unaudited) |
|
|
|
|
Cash paid |
|
$ |
225 |
|
Liabilities assumed |
|
|
78 |
|
|
|
|
|
Total purchase price |
|
|
303 |
|
|
|
|
|
|
Allocation of purchase price: |
|
|
|
|
Accounts receivable |
|
|
(159 |
) |
Property and equipment |
|
|
(5 |
) |
Customer relationships |
|
|
(104 |
) |
|
|
|
|
Goodwill |
|
$ |
35 |
|
The excess of the consideration paid over the estimated fair value of net assets acquired in
the amount of $35,000 was recorded as goodwill. The value of the customer relationships was
estimated based on a discounted cash flow model and will be amortized over 7 years.
The impact of the acquisition of Zeneks was not significant to our results of operations for
the quarter ended March 31, 2006. Therefore, no pro-forma information has been presented
herein.
17
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Managements discussion and analysis of financial condition and results of operations (MD&A)
is provided as a supplement to ProxyMed, Inc.s (ProxyMed, MedAvant, our, us, or we)
unaudited consolidated financial statements in this Form 10-Q and notes thereto and to the audited
consolidated financial statements and the notes thereto including our Annual Report on Form 10-K/A
for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (SEC)
on April 11, 2006.
Introduction
We were incorporated in Florida in 1989. In December 2005, we began doing business under a new
operating name, MedAvant Healthcare Solutions. Our newly launched corporate identity unites all
business units and employees under one brand identity (MedAvant) and is one of several outcomes
resulting from a strategic analysis we completed in the third quarter of 2005 following the
acquisition of seven companies between 1997 and 2004.
Since May 2005, we have experienced a number of changes in our senior management, including
changes in our Chief Executive Officer, Chief Financial Officer, and President and Chief Operating
Officer. John G. Lettko assumed the position of Chief Executive Officer effective May 10, 2005.
Douglas ODowd became our interim Chief Financial Officer effective August 16, 2005, and was
subsequently appointed as Chief Financial Officer in October 2005. Mr. Lettko has also been
appointed President and Mr. ODowd was appointed Treasurer, each as of October 27, 2005. On June 9,
2005, we announced the resignation of Nancy J. Ham as President and Chief Operating Officer. On
January 7, 2006, we entered into an agreement with David Edward Oles pursuant to which Mr. Oles
would resign as General Counsel of the Company effective January 31, 2006, and terminate his
employment agreement.
We are a healthcare transaction services company providing healthcare transaction processing,
medical cost containment services, business process outsourcing solutions and related value-added
products to physicians, payers, pharmacies, medical laboratories, and other healthcare suppliers.
Our broad existing connectivity to payers and providers positions us as the second largest
independent medical claims clearinghouse in the industry, serving more than 150,000 providers. Our
cost containment business has the second largest Preferred Provider Organization in terms of reach
with more than 450,000 providers contracted, and currently is sixth in terms of managed care lives
accessed through us.
Our business strategy is to leverage our leadership position in transaction services to
establish ourselves as the premier provider of automated financial, clinical, cost containment,
business outsourcing and administrative transaction services primarily between healthcare providers
and payers, clinical laboratories and pharmacies.
Our electronic transaction processing services support a broad range of financial, clinical,
and administrative transactions. To facilitate these services, we are completing the conversion of
all of our non-clinical Electronic Data Interchange clients to Phoenix SM.
18
Our cost containment and business outsourcing solutions businesses are included in the
Transaction Services segment and are directed toward the medical insurance and managed care
industries. Specifically, we provide integrated national Preferred Provider Organization, also
known as PPO, network access, electronic claims repricing, and network and data management to
healthcare payers, including self-insured employers, medical insurance carriers, PPOs and third
party administrators.
We believe we are uniquely positioned in the marketplace to make a contribution that our
competitors do not. The differentiators include our open electronic network for electronic
transactions with no equity ownership in businesses engaged in the front-end (i.e., physician
practice management software system vendors and other physician desk top vendors) or in the
back-end (i.e., payers, laboratories and pharmacies). With our neutral position, we believe that we
can better attract both front-end and back-end partners who may be more comfortable doing business
with a non-competitive partner.
Another competitive differentiator is our presence in the clinical market. With the nations
largest clinical laboratories as long-time customers, we have worked in partnership with them to
develop customized laboratory communication tools and services that are unparalleled in the
industry.
We also have the oldest and most established e-prescribing network in the nation, offering
connectivity to over 30,000 pharmacies nationwide. Our e-prescribing solutions improve efficiency
by eliminating the need to process prescriptions and refill authorizations via paper. We offer both
a front-end desktop solution, PreScribeTM, and online refill authorization via
www.medavanthealth.com. Combined, we process more than 400,000 prescriptions or refills per month.
Operating Segments
We operate in two reportable segments that are separately managed: Transaction Services and
Laboratory Communication Solutions. Transaction Services includes EDI, cost containment and other
value-added services principally between submitters (physicians, billing companies, hospitals,
laboratories, and others) and payers (insurance companies, TPAs, Medicare, Medicaid, and others).
Laboratory Communication Solutions includes the sale, lease and service of communication devices
principally to laboratories. We report corporate overhead expenses (i.e., executives, finance,
legal, human resources, facilities and insurance) and assets as part of our Transaction Services
segment.
Our corporate headquarters is located in Norcross, Georgia, and our products and services are
provided from various operational facilities located throughout the United States. We also operate
our clinical computer network and portions of our financial and real-time production computer
networks from a secure, third-party co-location site located in Atlanta, Georgia.
19
Results of Operations
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands (unaudited) |
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
|
|
|
2006 |
|
|
Revenues |
|
|
2005 |
|
|
Revenues |
|
|
Change $ |
|
|
Change % |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
15,132 |
|
|
|
83.7 |
% |
|
$ |
18,607 |
|
|
|
85.7 |
% |
|
$ |
(3,475 |
) |
|
|
-18.7 |
% |
Laboratory Communication Solutions |
|
|
2,943 |
|
|
|
16.3 |
% |
|
|
3,107 |
|
|
|
14.3 |
% |
|
|
(164 |
) |
|
|
-5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,075 |
|
|
|
100.0 |
% |
|
$ |
21,714 |
|
|
|
100.0 |
% |
|
$ |
(3,639 |
) |
|
|
-16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
4,272 |
|
|
|
23.6 |
% |
|
$ |
5,999 |
|
|
|
27.6 |
% |
|
$ |
(1,727 |
) |
|
|
-28.8 |
% |
Laboratory Communication Solutions |
|
|
1,565 |
|
|
|
8.7 |
% |
|
|
1,684 |
|
|
|
7.8 |
% |
|
|
(119 |
) |
|
|
-7.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,837 |
|
|
|
32.3 |
% |
|
$ |
7,683 |
|
|
|
35.4 |
% |
|
$ |
(1,846 |
) |
|
|
-24.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
10,749 |
|
|
|
59.5 |
% |
|
$ |
11,971 |
|
|
|
55.1 |
% |
|
$ |
(1,222 |
) |
|
|
-10.2 |
% |
Laboratory Communication Solutions |
|
|
714 |
|
|
|
4.0 |
% |
|
|
654 |
|
|
|
3.0 |
% |
|
|
60 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,463 |
|
|
|
63.4 |
% |
|
$ |
12,625 |
|
|
|
58.1 |
% |
|
$ |
(1,162 |
) |
|
|
-9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
1,584 |
|
|
|
8.8 |
% |
|
$ |
2,413 |
|
|
|
11.1 |
% |
|
$ |
(829 |
) |
|
|
-34.4 |
% |
Laboratory Communication Solutions |
|
|
78 |
|
|
|
0.4 |
% |
|
|
183 |
|
|
|
0.8 |
% |
|
|
(105 |
) |
|
|
-57.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,662 |
|
|
|
9.2 |
% |
|
$ |
2,596 |
|
|
|
12.0 |
% |
|
$ |
(934 |
) |
|
|
-36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
16,605 |
|
|
|
91.9 |
% |
|
$ |
20,383 |
|
|
|
93.9 |
% |
|
$ |
(3,778 |
) |
|
|
-18.5 |
% |
Laboratory Communication Solutions |
|
|
2,357 |
|
|
|
13.0 |
% |
|
|
2,521 |
|
|
|
11.6 |
% |
|
|
(164 |
) |
|
|
-6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,962 |
|
|
|
104.9 |
% |
|
$ |
22,904 |
|
|
|
105.5 |
% |
|
$ |
(3,942 |
) |
|
|
-17.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
|
(1,473 |
) |
|
|
-8.1 |
% |
|
|
(1,776 |
) |
|
|
-8.2 |
% |
|
|
303 |
|
|
|
17.1 |
% |
Laboratory Communication Solutions |
|
|
586 |
|
|
|
3.2 |
% |
|
|
586 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(887 |
) |
|
|
-4.9 |
% |
|
$ |
(1,190 |
) |
|
|
-5.5 |
% |
|
$ |
303 |
|
|
|
25.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
686 |
|
|
|
3.8 |
% |
|
|
601 |
|
|
|
2.8 |
% |
|
|
85 |
|
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,573 |
) |
|
|
-8.7 |
% |
|
$ |
(1,791 |
) |
|
|
-8.2 |
% |
|
|
218 |
|
|
|
12.2 |
% |
20
Net Revenues. Consolidated net revenues for the three months ended March 31, 2006
decreased by $3.6 million, or 16.8%, to $18.1 million from $21.7 million for the three months ended
March 31, 2005.
Net revenues in our Transaction Services segment decreased by $3.5 million, or 18.7%, for the
three months ended March 31, 2006 compared to the same period in 2005. This decrease is primarily
due to declines in volumes of electronic claims, statements and other real-time transactions
processed from certain payers (decrease of $2.3 million). This decrease in transactions,
coupled with competitive pressures in the marketplace, negatively impacted our Transaction Services
revenue from our EDI business. Additionally, our cost containment business has also seen a drop in revenue as competitive pressures have impacted pricing (decrease of $1.3 million).
As our business continues to shift away from
transaction based pricing to subscription based pricing, transaction volume will decrease in
importance as an indicator.
For the three months ended March 31, 2006, approximately 83.7% of our consolidated revenues
came from our Transaction Services segment compared to 85.7% from this segment for the same period
last year. For the remainder of 2006 and beyond, it is anticipated that our greatest growth will
come from the Transaction Services segment.
Laboratory Communication Solutions segment net revenues decreased by $0.2 million, or 5.3%,
for the three months ended March 31, 2006, compared to the same period last year. This decrease is
primarily due to a drop in orders from our largest customer. We do not anticipate significant
growth from this segment during 2006.
Cost of Sales. Consolidated cost of sales decreased by $1.8 million and as a percentage of
net revenues to 32.3% for the three months ended March 31, 2006 from 35.4% for the three months
ended March 31, 2005.
Cost of sales in our Transaction Services segment consists of transaction fees, provider
network outsourcing 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, and third-party database licenses. Cost of sales for the three months ended
March 31, 2006, decreased $1.7 million, or 28.8%, from the same period last year. This decrease is
primarily due to the 18.7% decrease in net revenues for this segment. As a percentage of net
revenues, cost of sales in this segment decreased to 23.6% for the three months ended March 31,
2006, compared to 27.6% in the same period last year. This decrease in cost of sales as a
percentage of net revenues resulted from a 4.3% decrease in EDI partner rebates ($0.7 million) over
the prior year along with a 1.1% decrease in cost containment network access fees ($0.2 million).
Additionally, we experienced reduced bill negotiation cost of sales expenses as a result of the
Zeneks, Inc., acquisition in February 2006, where we historically paid Zeneks at least 50% of
revenues collected.
Cost of sales in the Laboratory Communication Solutions segment includes hardware, third party
software, consumable materials, direct manufacturing labor and indirect manufacturing overhead.
Cost of sales in the three months ended March 31, 2006 decreased $0.1 million, or 7.1%, from the
period ended March 31, 2005. This decrease is primarily due to the above mentioned decrease in
revenue. As a percentage of net revenues, cost of sales in this
21
segment increased to 8.7% for the
three months ended March 31, 2006 from 7.8% for the same period in 2005.
Selling, General and Administrative Expenses (SG&A). SG&A decreased for the three months
ended March 31, 2006 by $1.1 million, or 9.2%, to $11.5 million from $12.6 million for the three
months ended March 31, 2005. SG&A expenses as a percentage of total net revenues increased to
63.4% for the three months ended March 31, 2006 from 58.1% in the same period last year.
Transaction Services segment SG&A expenses for the three months ending March 31, 2006
decreased $1.2 million, or 10.2%, over the same period last year due to lower payroll costs
(decrease of $1.5 million) resulting from a reduction in work force in the third quarter of 2005,
decreased accounting fees related to our compliance with the Sarbanes-Oxley Act of 2002 in
2006 compared with 2005, partially offset by the expensing of stock options under SFAS No.
123R in 2006 ($0.3 million) and the accrual of 2006 bonuses ($0.9 million). As a result, segment
SG&A expenses as a percentage of segment net revenues increased to 71.0% for the three months ended
March 31, 2006, compared to 64.3% for the same period last year.
Laboratory Communication Solutions segment SG&A expenses for the three months ended March 31,
2006 increased by $0.1 million, or 9.2%, over the three months ended March 31, 2005, and segment
SG&A expenses as a percentage of segment net revenues increased to 24.3% for the three months ended
March 31, 2006, compared to 21.0% for the same period last year. These increases are primarily due
to Lab-related corporate expenses, including rent, utilities, and financial personnel, being
accounted for in the Laboratory segment in 2006 but not in 2005 (increase of $0.2 million).
Depreciation and Amortization. Depreciation and amortization decreased by $0.9 million to
$1.7 million for the three months ended March 31, 2006 from $2.6 million for the same period last
year. This decrease resulted from our impairment analysis and subsequent write-down of intangible
assets during the third quarter of 2005, which lowered the future amortization of such items.
Operating Loss. As a result of the foregoing, the operating loss for the three months ended
March 31, 2006 was $0.9 million compared to an operating loss of $1.2 million for the same period
last year.
Interest Expense. Net interest expense for the three months ended March 31, 2006 was $0.7
million compared to $0.6 million for the same period last year. This increase in expense is
primarily due to higher effective interest charges on our Laurus debt facility. Interest expense
for the future is expected to be at levels above those in 2005.
Net Loss. As a result of the foregoing, net loss for the three months ended March 31, 2006
and 2005 was $1.6 million and $1.8 million, respectively.
Liquidity and Capital Resources
During the three months ended March 31, 2006, net cash used in operating activities totaled
$2.8 million, primarily related to our effort to pay down
outstanding payables and accrued expenses during the quarter,
including $0.3 million of settled litigation, $0.2 million
for severance, and $0.4 million of accrued bonuses.
Cash used in investing activities totaled $0.8 million for the funding of capital
22
expenditures related to our technical infrastructure and administrative systems, capitalized development of
internal systems, and our purchase of Zeneks, Inc. Cash used in financing activities totaled $2,000, consisting of drawings on our Laurus credit facility for the repayments of notes payable,
other long-term debt, and payments related to capital leases.
On December 7, 2005, we entered into a loan transaction with Laurus pursuant to which Laurus
extended $20 million in financing to us in the form of a $5.0 million secured term loan and a $15.0
million secured revolving credit facility. The term loan has a stated term of five (5) years and
will accrue interest at Prime plus 2%, subject to a minimum interest rate of 8%. The term loan is
payable in equal monthly principal installments of approximately $89,300 plus interest until the
maturity date on December 6, 2010. The revolving credit facility has a stated term of three (3)
years, with two one-year options, and will accrue interest at the 90 day LIBOR rate plus 5%,
subject to a minimum interest rate of 7%, and a maturity date of December 6, 2008. In connection
with the
loan agreement, we issued 500,000 shares of our Common Stock to Laurus. We also granted
Laurus a first priority security interest in substantially all of our present and future tangible
and intangible assets (including all intellectual property) to secure our obligations under the loan
agreement.
We believe that we have sufficient cash and cash equivalents on hand or available to us under
our credit facility through March 31, 2007, and we anticipate sufficient cash from operations to
fund our future operational requirements and capital expenditures, and to provide a sufficient
level of capital in order to fund specific research and development projects or to pursue smaller
additional strategic acquisitions. If we require additional funding in the future to satisfy any
of our outstanding future obligations or 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 consolidated
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
23
Notes to Consolidated Financial Statements of our Form 10-K/A for the year ended December 31, 2005.
Revenue Recognition Revenue is derived from our Transaction Services and Laboratory
Communication Solutions segments.
Revenues in our Transaction Services segment are recorded as follows:
|
|
|
For revenues derived from insurance payers, pharmacies, and submitters, such
revenues are recognized on a per transaction basis or flat fee basis in the period the
services are rendered. |
|
|
|
|
Revenue from our medical cost containment business is recognized when the services
are performed and are recorded net of estimated allowances. These revenues are
primarily in the form of fees generated from discounts we secure for payers that access
our provider network. |
|
|
|
|
Revenues associated with revenue sharing agreements are recorded on a per
transaction basis or a percentage of revenue basis and may involve increasing amounts
or percentages based on transaction or revenue volumes achieved. This treatment is in
accordance with Emerging Issues Task Force No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent. |
|
|
|
|
Revenue from certain up-front fees is recognized ratably over three years, which is
the expected life of the customer. This treatment is in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB No. 104). |
|
|
|
|
Revenue from support and maintenance contracts is recognized ratably over the
contract period. |
Revenues in our Laboratory Communication Solutions segment are recorded as follows:
|
|
|
Revenue from support and maintenance contracts is recognized ratably over the
contract period. |
|
|
|
|
Revenue from the sale of inventory and manufactured goods is recognized when the
product is delivered, price is fixed or determinable, and collectibility is probable.
This treatment is in accordance with SAB No. 104. |
|
|
|
|
Revenue from the rental of laboratory communication devices is recognized ratably
over the period of the rental contract. |
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,
24
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.
Reserve for Revenue Adjustments/Doubtful Accounts/Bad Debt Estimates We rely on
estimates to determine the revenue adjustments, bad debt expense and the adequacy of the reserve
for doubtful accounts receivable. These estimates are based on our historical experience,
including historical collection ratios, and the industry in which the customer operates. If the
financial condition of a customer were to deteriorate, resulting in an impairment of its ability to
make payments, additional allowances are made.
New Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154,
Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No.
154 applies to all voluntary changes in accounting principles and requires retrospective
application (a term defined by the statement) to prior periods financial statements, unless it is
impracticable to determine the effect of a change. It also applies to changes required by an
accounting pronouncement that does not include specific transition provisions. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005. We adopted SFAS No. 154 as of the beginning of fiscal 2006. The adoption of SFAS
No. 154 did not have a material impact on our consolidated financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123R, Shared-Based Payments (Revised 2004). SFAS
No. 123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and its
related guidance. SFAS No. 123R requires public entities to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be estimated using option-pricing models adjusted
for the unique characteristics of those instruments and will be recognized and expensed over the
period which an employee is required to provide service in exchange for the award (usually the
vesting period). Fair value is based on market prices (if those prices are publicly available). If
not available, SFAS 123R does not specifically require the use of a particular model; however, the
most common models are the Black-Scholes model and lattice (binomial) models. Additionally,
modifications to an equity award after the grant date will require a compensation cost to be
recognized in an amount equal to the excess of the fair value of the modified award over the fair
value of the award immediately before the modification. The effective date of SFAS No. 123R is for
interim and annual reporting periods beginning after December 15, 2005. We adopted SFAS No. 123R
beginning in fiscal 2006. We will record a charge to income of approximately $0.3 million per
fiscal quarter for all options and warrants outstanding as of March 31, 2006.
25
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform
Act of 1995
Statements contained in Managements 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 any 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.
All statements other than statements of historical fact are statements that could be deemed
forward-looking statements, including any projections of earnings, revenues, synergies, accretion,
margins or other financial items; any statements of the plans, strategies and objectives of
management for future operations, including the execution of integration and restructuring plans
and the anticipated timing of filings, approvals and closings relating to the merger or other
planned acquisitions; any statements concerning proposed new products, services, developments or
industry rankings; any statements regarding future economic conditions or performance; any
statements of belief; and any statements of assumptions underlying any of the foregoing.
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 industrys 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.
Forward-looking statements are not guarantees of performance. They involve risks,
uncertainties and assumptions. Our future results and shareholder values may differ materially from
those expressed in the forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Shareholders are cautioned not to
put undue reliance on any forward-looking statements. For those statements, we claim the protection
of the safe harbor for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. We expressly disclaim any intent or obligation to update any forward-looking
statements.
Available Information
MedAvants
Internet address is www.medavanthealth.com. MedAvant makes 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
26
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.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MedAvant owns no derivative financial instruments or derivative commodity instruments.
We have no international sales and therefore, MedAvant
does not believe that it is exposed to material risks related to foreign currency exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)), under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based upon such evaluation, management has
concluded that our disclosure controls and procedures are effective to ensure that the information
we are required to disclose in reports that we file or submit under the Exchange Act is
communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure, and is recorded, processed,
summarized and reported within the time periods specified in the Commission rules and forms.
There have not been any changes in our internal control over financial reporting during this
quarter that have materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
28
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In December of 2001, Insurdata Marketing Services, Inc., referred to as IMS, filed a lawsuit
against HealthPlan Services, Inc., referred to as HPS, a former subsidiary of PlanVista, for
unspecified damages in excess of $75,000. The complaint alleges that HPS failed to pay commissions
to IMS pursuant to an arbitration award rendered in 1996. On January 10, 2005, the court granted
summary judgment to IMS on the issue of liability for the arbitration award. We filed an appeal on
the issue of liability. On September 26, 2005, we entered into a settlement to pay a total of
$775,000 in exchange for a release from the entire claim, with an initial payment of $225,000 and
the rest due in equal installments over five subsequent months. We paid the last installment in
March 2006 in accordance with the settlement agreement.
In early 2000, four named plaintiffs filed a class action against Fidelity Group, Inc.,
referred to as Fidelity, HPS, Third Party Claims Management, and others, for unspecified damages,
and the action is currently pending in the United States District Court for the District of South
Carolina, Charleston division. The complaint stems from the failure of a Fidelity insurance plan,
and alleges unfair and deceptive trade practices; negligent undertaking; fraud; negligent
misrepresentation; breach of contract; civil conspiracy; and RICO violations against Fidelity and
its contracted administrator, HPS. Two principals of the Fidelity plan have been convicted of
insurance fraud and sentenced to prison in a separate proceeding. The class was certified and such
certification was eventually upheld on appeal. Shortly after the case was remanded to the trial
judge as a certified class for further discovery, we filed a motion to de-certify the matter based
upon evidence not available to the trial judge when he first certified the class. While that motion
was pending, the parties agreed to mediate the case before the trial judge. The mediation was
successful and the parties agreed orally to settle the matter. We believe that our obligations
under the settlement will be paid by our insurance carrier. Although we are currently working to
finalize a formal settlement agreement, notice of class settlement, and preliminary order approving
the settlement, there can be no assurance that the settlement will be approved or that objections
will not be raised.
In 2004, we filed a tax appeal in the State of New York contesting a Notice of Deficiency
issued by the State of New York to PlanVista Solutions, Inc. The notice involved taxes claimed to
be due for the tax years ending December 31, 1999, through December 31, 2001. The amount due,
including interest and penalties through September 30, 2005, is $3.1 million. We withdrew the tax
appeal and entered into an installment payment agreement with the State of New York. Payment on the
tax liability was repaid in a lump sum of $500,000 before October 30, 2005, and the remainder in
equal installments that began in November 2005 with the State of New York. We entered into an
agreement with a third party tax service provider to be reimbursed for 70% of the liability
ultimately agreed to with the State of New York, but not to exceed $2 million. We received the $2.0
million payment from the third party in September 2005.
In December 2004, Honolulu Disposal Service, Inc. et al, referred to as HDSI, sued American
Benefit Plan Administrators, Inc., referred to as ABPA, a former subsidiary of PlanVista
Corporation, in the Circuit Court of the First Circuit of the State of Hawaii, alleging damages of
$5,700,000 for failure to properly conduct payroll audits during the period of 1982
29
through 1996. The case was removed to the U.S. District Court for the District of Hawaii.
Substantial discovery has taken place. ABPA filed a motion for summary judgment, which was granted
on April 20, 2006. The plaintiff has thirty days from this date to appeal.
We have been named as a defendant in an action filed in December 2005 in the Eastern District
of Wisconsin by Metavante Corporation. Metavante claims that our use of the name MedAvant and the
logo in connection with healthcare transaction processing infringes trademark rights allegedly held
by Metavante. The Court recently issued a Decision and Order denying Metavantes motion for a
preliminary injunction. Metavante has sought unspecified compensatory damages and injunctive
relief. We believe that this action is without merit, and are vigorously defending our use of the
name MedAvant and the logo. We do not believe the proceeding will have a material adverse effect on
our business, financial condition, results of operations or cash flows.
Item 1A.
Risk Factors
None
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None
Item 3.
Defaults Upon Senior Securities
None
Item 4.
Submission of Matters to a Vote of Security Holders
None
Item 5.
Other Information
None
30
Item 6. Exhibits
The following exhibits are furnished or filed as part of this Report on Form 10-Q:
31.1 |
|
Certification by John G. Lettko, Chief Executive Officer, pursuant to Exchange Act Rules
13a-14 and 15d-14.31.2 |
|
31.2 |
|
Certification by Douglas J. ODowd, Chief Financial Officer, pursuant to Exchange Act Rules
13a-14 and 15d-14. |
|
32.1 |
|
Certification by John G. Lettko, 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 by Douglas J. ODowd, Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: May 10, 2006 |
By: |
/s/ John G. Lettko
|
|
|
|
John G. Lettko |
|
|
|
Chief Executive Officer |
|
|
|
|
|
Date: May 10, 2006 |
By: |
/s/ Douglas J. ODowd
|
|
|
|
Douglas J. ODowd |
|
|
|
Chief Financial Officer |
|
32