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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 000-22052
PROXYMED, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0202059
- ------------------------------ -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2555 DAVIE ROAD, SUITE 110, FORT LAUDERDALE, FLORIDA 33317-7424
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 473-1001
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
-----------------------------
(TITLE OF CLASS)
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 if disclosure of delinquent filers in response
to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed using $l6.76 per share, the closing price of the
registrant's common stock on the Nasdaq National Market on March 27, 2002, was
$69,349,922.
As of March 27, 2002, 5,141,818 shares of the registrant's common stock
were issued and outstanding.
Documents Incorporated by Reference: Definitive Proxy Statement for the
registrant's 2002 Annual Meeting of Shareholders (incorporated in Part III to
the extent provided in Items 10, 11, 12 and 13 hereof).
PART I
ITEM 1. OUR BUSINESS
ProxyMed, Inc. is an electronic healthcare transaction processing
services company providing connectivity services and related value-add products
to physician offices, payers, medical laboratories, pharmacies and other
healthcare institutions. Unlike our competitors, we maintain an 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). Our business strategy is to leverage our
leadership position in connectivity services in order to establish ProxyMed as
the premier provider of automated financial, clinical, and administrative
transaction services primarily between small physician offices (offices with one
to nine physicians) and payers, clinical laboratories and pharmacies. 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.
Our electronic transaction processing services support a broad range of
financial, clinical, and administrative transactions. To facilitate these
services, we operate PROXYNET, our secure, proprietary national electronic
information network, which provides physicians and other healthcare providers
with connectivity to one of the industry's largest group of insurance companies
and managed care payers, the largest group of clinical laboratories, and the
largest group of chain and independent pharmacies. Our products and services are
provided from our four operational facilities located in Fort Lauderdale,
Florida; New Albany, Indiana; Santa Ana, California, and Atlanta, Georgia. We
also operate our clinical and real-time production computer network from a
secure, third-party co-location site in Atlanta, Georgia.
According to industry analysts, the healthcare marketplace was over a
$1.3 trillion industry in 2000, with 600,000 physicians controlling 80% of the
spending. The healthcare industry is one of the most transaction oriented
industries in the country and generates over 30 billion financial and clinical
transactions each year, including new prescription orders, refill
authorizations, laboratory orders and results, medical insurance claims,
insurance eligibility inquiries, encounter notifications, and referral requests
and authorizations. Even with healthcare information technology spending at $22
billion per year and growing at rates of 10% to 20% annually, we believe that
the healthcare industry's use of technology lags behind many other
transaction-intensive industries, with the vast majority of these healthcare
transactions being performed manually and on paper. For physician offices,
payers, laboratories and pharmacies to meet the financial, clinical, and
administrative demands of an evolving managed care system, we believe that
participants in the healthcare system will need to process many of these types
of transactions electronically. Due to the number of participants, variety of
standards and complexity of establishing reliable and secure communication
networks, the healthcare industry needs companies such as ProxyMed with its
secure, proprietary systems to facilitate the processing of these transactions,
its extensive connectivity to back-end healthcare institutions, and its ability
to market to the underserved niche of small physician office practices.
ACQUISITION OF MDP CORPORATION:
In May 2001, we acquired substantially all of the assets of MDP
Corporation, a privately-owned electronic claims clearinghouse and patient
statement processor based in Atlanta, Georgia, for $10 million. We paid $3
million at closing and executed a $7 million promissory note, payable in May
2002. Interest on this note was payable monthly at 7% simple interest. In
January 2002, we paid this note in full.
2
REVERSE STOCK SPLIT:
In August 2001, our Board of Directors effected a 1-for-15 reverse
stock split of the our common stock, par value $.001 per share. All share and
per share amounts have been restated to reflect this transaction.
SUBSEQUENT EVENT:
On March 26, 2002, we agreed to sell 1,569,366 shares of unregistered
common stock at $15.93 per share in a private placement to four entities
affiliated with General Atlantic Partners, LLC ("GAP"), a private equity
investment fund. The transaction, which is expected to close on April 5, 2002,
will result in net proceeds to us of $25 million. No placement agent was used in
this transaction. In addition, we also agreed to issue a two-year warrant for
the purchase of 549,279 shares of common stock at $15.93 per share. All shares
sold are subject to a one year lock-up agreement from the date of closing. We
have agreed to grant GAP certain demand and "piggy back" registration rights
starting one year from closing. Additionally, in connection with the
transaction, our board of directors appointed a general partner of GAP to fill a
vacancy on our board.
* * *
Our corporate offices are located at 2555 Davie Road, Suite 110, Fort
Lauderdale, Florida 33317-7424, and our telephone number is (954) 473-1001.
As used in this report, unless the context requires otherwise, "we",
"us", "our", "ProxyMed" or the "Company", means ProxyMed, Inc. and its
consolidated subsidiaries. Italicized terms in this document indicate trademarks
or other protected intellectual property that we own or license.
OVERVIEW OF PROXYMED. WHERE HEALTHCARE CONNECTS(TM)
Our mission statement is as follows: "ProxyMed solves the business
problems of physician offices every day by automating their financial,
administrative and clinical transactions with their healthcare institution
partners. We exceed customer expectations through our expertise, proven
methodologies and dedication to service excellence."
Our focus is connecting small physician offices with their contracted
financial and clinical partners so that they can conduct transactions
electronically. We are organized into two business segments: Electronic
Healthcare Transaction Processing and Laboratory Communication Solutions.
Electronic Healthcare Transaction Processing includes transaction and
value-added services principally between physician offices and insurance
companies (Payer Services) and physician offices and pharmacies/pharmacy benefit
managers (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).
We are well positioned today in each of our business units. We believe
we are the second largest medical claims clearinghouse for physician offices,
the largest provider of intelligent laboratory results reporting devices, and
the largest provider of retail pharmacy to physician connectivity. In 2001, we
processed approximately 88 million electronic transactions among physician
offices, payers, laboratories and pharmacies. We leverage the connectivity of
our back-end transaction network, PROXYNET, and continue to add partners by
developing new value-added products and services, by adding additional payer
transaction types such as improved eligibility and claim status reports, and by
expanding our Internet-based transaction offerings such as claims, lab orders,
lab results reporting and prescription refills through our Internet website,
PROXYMED.COM. We are an attractive, neutral partner to front-end electronic
healthcare companies who are focused on physician office services, as we remain
the only national and independent transaction center that does not compete with
them for the physician's desktop and who can connect their physician offices on
the back-end to carry on electronic transactions between them and their payers,
laboratories and pharmacies.
3
OUR BUSINESS IS DRIVEN BY THE HEALTHCARE COMMUNITY'S NEED TO PROCESS INFORMATION
MORE EFFICIENTLY
With 30 billion financial and clinical transactions being generated
each year, the major drivers of our business are those physicians who wish to
adopt secure electronic solutions that improve the quality of their patient care
while reducing costs and administration time. We believe that it is just a
matter of time before the majority of physicians, payers, laboratories and
pharmacies embrace the electronic transmission and processing of virtually all
of a patient's clinical and financial transactions. Our efforts concentrate on
the innovative design of our products and services that make these electronic
transactions easy to use, fast, reliable and secure. PROXYNET, our secure,
proprietary national healthcare information network, is the key enabler that
makes this possible. We are a leader in providing these back-end connections and
offer a host of transaction services to smaller physician offices which we
believe reduce costs by increasing efficiency, minimizing transcription errors,
and enabling physicians to make more informed decisions at the point of care.
CONNECTIVITY TO INSTITUTIONS AND TO PHYSICIANS ARE KEY STRENGTHS
Our advantage lies in two critical areas. First, we offer the
industry's broadest range of financial, clinical and administrative connectivity
available from a single company. Our existing connectivity to payers positions
us as the second largest medical claims clearinghouse in the industry with 92%
of our annual transaction volume sent directly to the designated payer rather
than being routed through other transaction centers. Our claims clearinghouse
is also one of only nine in the country to currently be certified by the
Electronic Healthcare Network Accreditation Commission (EHNAC). In addition,
we are the largest provider of intelligent laboratory results reporting devices
and the largest provider of retail pharmacy connectivity. Our electronic
transaction processing services support a broad range of financial transactions
(such as claims, patient statements, claims status reports, eligibility
verification, explanations of benefits and electronic remittance advices);
clinical transactions (such as laboratory results, new prescription orders and
prescription refills); and administrative transactions (such as patient
notifications). These connections allow information to reliably move back and
forth from the physician's office to the appropriate healthcare institution
(payer, laboratory and pharmacy) facilitating diagnosis, treatment and payment.
Our second advantage is our extensive physician relationships. We have
approximately 60,000 physicians directly using at least one of our existing
solutions and approximately 40,000 more using our services through other
intermediaries. To reach these direct and partnered physicians, we have
licensing and connectivity agreements with many national and regional companies,
such as practice management system vendors, billing services, and electronic
healthcare companies, and with physician offices directly. These relationships
offer us an opportunity to cross-sell our products and services to our existing
physician office customer base.
WE HAVE BUILT A COMPREHENSIVE BACK-END MODEL WHICH WOULD BE DIFFICULT AND
TIME-CONSUMING TO REPLICATE
We were an early entrant into the healthcare electronic transaction
industry, having developed, as a result of our own efforts and through
acquisitions, our back-end connectivity for both financial and clinical
transactions. We believe that the development and maintenance of our connections
from both a technical and relationship perspective were costly, complex and
time-consuming, and represent a barrier to entry for would-be competitors.
Having accomplished much of this task, there is an opportunity for us to
leverage our existing connectivity and existing relationships, especially since
we believe we are the only connectivity company that is, in fact, processing new
prescriptions, refill prescriptions, laboratory test results reports and
financial transactions over a single network.
4
CURRENT PRODUCTS AND SERVICES
We offer a variety of financial and clinical electronic processing
services through our suite of Windows(R)-based(1) products, PROXYMED.COM and
several direct network connection programs. Each of these entry points connects
physician offices to PROXYNET and then route transactions to their contracted
payer, laboratory and pharmacy partners.
Laboratory test results reporting, claims submission, insurance
eligibility verification and prescription refills are all available today
through PROXYMED.COM, our Internet website.
In our Payer Services business unit, we offer claims submission through
our EZ-CLAIMS software product and claims tracking through our EZ-RESPONSE
product. Other services include patient statement processing, Explanation of
Benefits (EOB) scanning, and Electronic Remittance Advice (ERA) management. Our
Payer Services products and services currently reach over 60,000 physicians
directly and another 40,000 through our strategic partner relationships.
In our Prescription Services business unit, we offer both new
prescription ordering and refill management through our PRESCRIBE family of
products. There are currently over 1,600 physician clients using PRESCRIBE.
PRESCRIBE and PROXYNET support the largest and oldest electronic and fax gateway
infrastructure with connectivity to over 30,000 pharmacies nationwide.
Our Laboratory Services business unit, offers lab order entry and
results reporting through our recently announced PROXYLAB product that can be
deployed using a Windows(1) or web-based interface. We believe the PROXYLAB
Advantage, an enterprise solution combining PROXYLAB'S engine with ProxyMed's
implementation service offerings, makes PROXYLAB the only true enterprise
solution on the market today. We also offer several remote intelligent reporting
devices for communicating lab results to physicians. These devices are used
today in over 100,000 physician offices.
PRODUCT AND SERVICES DEVELOPMENT
In the immediate future, we will expand our offerings through
PROXYMED.COM to include new financial and clinical transactions such as claims
response management, ERAs, encounters and new prescriptions. All of our existing
web-based applications can be private-labeled and are being marketed through our
channel partners to increase distribution opportunities.
In Payer Services, several initiatives are underway to convert all
current transactions to their respective HIPAA-compliant formats (see
"Healthcare and Privacy Related Legislation" below). HIPAA affords us many
opportunities to increase both the number and type of transactions we offer to
both physicians and payers. These new value-add services will position ProxyMed
as a revenue cycle manager for physician offices.
In Laboratory Services, we are pursuing opportunities to convert our
business from the traditional sale, lease and service of intelligent laboratory
reporting devices to recurring transaction-based revenue streams. Our PROXYLAB
product will play a major role in this initiative, as well as our new FLEETWATCH
service. FLEETWATCH monitors and reports the status of individual remote
reporting devices within a fleet. This service is valuable to laboratories in
its ability to detect and proactively resolve problems, many times before
clients ever notice a disruption in service.
The total amount capitalized for purchased technology, capitalized
software and other intangible assets as of December 31, 2001, was approximately
$2,075,900, net of amortization. Research and development expense was
approximately $1,960,700 in 2001, $3,130,000 in 2000, and $2,898,000 in 1999.
- ----------------
(1) Windows is a registered trademark of Microsoft Corporation.
5
MARKETING
We have a direct sales force and customer support staff which serves
physician offices, payers, laboratories and pharmacies. In addition, since we do
not compete for the physician desktop and allow for private branding of our
value-added products and services, we are able to leverage the marketing and
sales efforts of our partners by giving them even greater added value to drive
our revenues and transactions.
Our marketing efforts are focused on providing connectivity solutions
for the 250,000 small physician offices (one-to-nine physicians) in the United
States, a niche that is underserved by our competitors. Of the physician offices
that currently use our products and services directly, approximately 92% fall
within this category.
We utilize a unique sales and marketing methodology called "FOCUS" (an
acronym for Find, Obtain, Capture, Utilize and Service) for targeting,
acquiring, retaining and maximizing the utilization of our services at the small
physician office. The results of our FOCUS program indicate quick
contract-to-implementation time frames, low attrition rates and high
post-implementation satisfaction levels.
We utilize the following distribution channels for our products and
services to maximize connectivity between physician offices, payers,
laboratories, pharmacies and other healthcare providers:
CHANNEL FOCUS
- ------- -----
Direct We have a direct sales force of account executives, inside
telemarketers, account managers and customer care
representatives who serve our physician offices, payers,
laboratories and pharmacies. We license access to our
proprietary network, PROXYNET, and provide intelligent
laboratory results reporting devices for communications between
physicians and laboratories.
Partners We work with the vendors of physician and pharmacy office
management systems so that they may enable their existing
applications to process transactions through PROXYNET between
physicians and payers, laboratories and pharmacies. We also
license these customers to offer our products and services under
their own private label. We also connect other electronic
transaction processing networks to PROXYNET so that the
participants on both networks can communicate with each other in
National Council of Pharmacy Drug Program (NCPDP) standard,
HIPAA approved formats, and the HL-7 standard format for
laboratories.
Internet We are a provider of financial, clinical, and administrative
electronic transaction processing services through our website,
PROXYMED.COM, which may be easily accessed by any physician
office with an Internet connection.
COMPETITION
We face competition from many healthcare information systems companies
and other technology companies. Many of our competitors are significantly larger
and have greater financial resources than we do and have established reputations
for success in implementing healthcare electronic transaction processing
systems. Other companies, including WebMD Corporation, National Data
6
Corporation, Per-Se Technologies, and other healthcare related entities such as
MedUnite and RxHub LLC, have targeted this industry for growth, including the
development of new technologies utilizing Internet-based systems. We cannot
assure that we will be able to compete successfully with these companies or that
these or other competitors will not commercialize products, services or
technologies that render our products, services or technologies obsolete or less
marketable.
HEALTHCARE AND PRIVACY RELATED LEGISLATION
Our customers are subject to extensive and frequently changing federal
and state healthcare laws and regulations. Political, economic and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. Potential reform legislation may include:
o mandated basic healthcare benefits,
o controls on healthcare spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid
reimbursement,
o the creation of large insurance purchasing groups,
o fundamental changes to the healthcare delivery system,
o FTC enforcement actions of existing privacy laws relating to the
Internet, or
o federal and state privacy and confidentiality statutes, regulations
rules and guidelines covering medical records and patient
information.
The federal Health Insurance Portability and Accountability Act of
1996, known as HIPAA, mandates the use of standard transactions, standard
identifiers, security and other provisions for electronic claims transactions.
HIPAA specifically designates clearinghouses (including us and other financial
network operators) as the compliance facilitators for healthcare providers and
payers. On August 17, 2000, the U.S. Department of Health and Human Services
published final regulations to govern eight of the most common electronic
transactions involving health information. Under a recently revised bill passed
by the U.S. Congress, the deadline for the transaction code set aspects of HIPAA
was extended to October 16, 2003, provided that a formal request for extension
and plan for compliance is submitted by October 16, 2002. We believe that we
will be able to submit the required plan to extend the deadline, and we believe
that we will be in compliance by the 2003 deadline. In addition, the deadline
for compliance with the privacy aspects of HIPAA is April 2003. We believe that
we will be in compliance by this deadline.
We also expect, but have no assurances, that our business partners or
customers, especially the smaller physician offices, who may also be covered by
these regulations will also be in compliance by that date. In certain cases of
non-compliance by our smaller physician office customers, we believe that we can
extend services to assist them with compliance, and retain our existing
relationships.
We anticipate that Congress and state legislatures will continue to
review and assess alternative healthcare delivery systems and payment methods,
as well as Internet and healthcare privacy legislation, and that public debate
of these issues will likely continue in the future. Due to uncertainties as to
these reform initiatives and their enactment and implementation, we cannot
predict which, if any, of such reform proposals will be adopted, when they may
be adopted or what impact they may have on us.
INTELLECTUAL PROPERTY
In large part, our success is dependent on our proprietary information
and technology. We rely on a combination of contract, copyright, trademark and
trade secret laws and other measures to protect our proprietary information and
7
technology. We have no patents. We have twelve (12) copyright registrations
covering our various software and proprietary products. As part of our
confidentiality procedures, we generally enter into nondisclosure agreements
with our employees, distributors and customers, and limit access to and
distribution of our software, databases, documentation and other proprietary
information. We cannot assure that the steps taken by us will be adequate to
deter misappropriation of our proprietary rights or that third parties will not
independently develop substantially similar products, services and technology.
Although we believe our products, services and technology do not infringe on any
proprietary rights of others, as the number of software products available in
the market increases and the functions of those products further overlap, we and
other software and Internet developers may become increasingly subject to
infringement claims. These claims, with or without merit, could result in costly
litigation or might require us to enter into royalty or licensing agreements,
which may not be available on terms acceptable to us.
EMPLOYEES
As of March 19, 2002, we employed 269 full-time employees, and 8
part-time employees. We are not and never have been a party to a collective
bargaining agreement. We consider our relationship with our employees to be
good.
ITEM 2. PROPERTIES
Our offices are in Fort Lauderdale, Florida, where our Prescription
Services business unit and Corporate Headquarters are located; in New Albany,
Indiana, where our Laboratory Services business unit is located; in Santa Ana
California and Atlanta, Georgia, the sites of our Payer Services business unit.
Our leases generally contain renewal options and require us to pay base rent,
plus property taxes, maintenance and insurance. We consider our present
facilities adequate for our operations.
ITEM 3. LEGAL PROCEEDINGS
We do not have any legal proceedings pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 2001.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCK MATTERS
Our common stock trades on the National Market tier of The Nasdaq Stock
Market under the symbol "PILL". The following table sets forth the high and low
sale prices of the common stock for the periods indicated.
HIGH LOW
---- ---
2000:
First Quarter .......... $168.74 $119.99
Second Quarter ......... 126.56 17.82
Third Quarter .......... 29.07 15.46
Fourth Quarter ......... 25.32 11.25
2001:
First Quarter .......... $ 23.44 $ 14.07
Second Quarter ......... 17.55 10.05
Third Quarter .......... 17.00 10.80
Fourth Quarter ......... 22.35 11.25
2002:
First Quarter .......... $ 22.35 $ 15.00
(through March 27, 2002)
On March 27, 2002, the last reported sale price of the common stock was
$16.76 per share. As of March 27, 2002, there were 415 registered holders of
record of the common stock. We believe that many of ProxyMed's holders of record
are in "street name" and that the number of individual shareholders is greater
than 5,000.
We have not paid any dividends on our common stock; however, we have
paid dividends on our Series B and Series C Preferred Stock in cash and/or in
shares of our common stock pursuant to the terms of the Articles of
Incorporation, as amended. We intend to retain any earnings for use in our
operations and the expansion of our business, and do not anticipate paying any
dividends on the common stock in the foreseeable future. The payment of
dividends on our common stock is within the discretion of our Board of
Directors, subject to our Articles of Incorporation, as amended. Any future
decision with respect to dividends on common stock will depend on future
earnings, future capital needs and our operating and financial condition, among
other factors.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial
information for ProxyMed as of and for each of the five years in the period
ended December 31, 2001, and has been derived from our audited consolidated
financial statements. In March 1995, our business focus changed from primarily
the sale of prescription drugs to providing connectivity services and related
value-add products to physicians, payers, medical laboratories, pharmacies and
other healthcare providers. Accordingly, financial information relating to our
prescription drug dispensing and network integration businesses has been
reclassified as discontinued operations. The data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements and related
notes.
9
YEAR ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues .................. $ 43,230,300 $ 33,441,100 $ 29,023,100 $ 22,249,300 $ 1,817,100
Operating loss ............ $ (6,712,100) $(23,460,100) $(20,018,900) $(11,087,000) $(14,860,200)
Loss from continuing
operations .............. $ (6,797,900) $(26,926,500) $(20,119,800) $(11,193,700) $(14,593,000)
Income (loss) from
discontinued operations . $ -- $ 241,400 $ (1,714,400) $ (594,500) $ (3,924,100)
Net loss applicable to
common shareholders ..... $(19,059,900) $(48,051,700) $(21,856,400) $(11,788,200) $(18,517,100)
PER SHARE DATA:
Basic and diluted net loss per
share of common stock:
Loss from continuing
operations .............. $ (8.81) $ (37.03) $ (16.75) $ (10.73) $ (20.67)
Income (loss) from
discontinued operations . $ -- $ 0.19 $ (1.43) $ (0.57) $ (5.56)
Net loss .................. $ (8.81) $ (36.84) $ (18.18) $ (11.30) $ (26.23)
Weighted average common shares
outstanding ................ 2,162,352 1,304,342 1,202,136 1,043,558 705,956
DIVIDEND DATA:
Dividends on common
stock ................... $ -- $ -- $ -- $ -- $ --
Dividends on cumulative
preferred stock ......... $ 1,664,900 $ 1,274,500 $ 22,200 $ -- $ --
DECEMBER 31,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital .............. $ 9,393,400 $ 12,155,500 $ 12,579,700 $ 7,564,500 $ 1,966,400
Long-term obligations ........ $ 442,100 $ 729,100 $ 583,100 $ 1,367,200 $ 1,049,600
Total assets ................. $ 35,881,500 $ 27,666,400 $ 44,772,900 $ 46,902,700 $ 18,348,500
Net assets of discontinued
operations ................ $ -- $ -- $ 3,022,100 $ 4,039,700 $ 2,477,800
Stockholders' equity ......... $ 22,872,500 $ 22,377,100 $ 37,755,600 $ 40,279,100 $ 13,151,800
10
THE FOLLOWING ARE ADDITIONAL FACTORS TO THOSE APPEARING IN THIS DOCUMENT
AFFECTING OUR BUSINESS AND OPERATIONS.
WE HAVE IMPORTANT BUSINESS RELATIONSHIPS WITH OTHER COMPANIES TO MARKET AND SELL
SOME OF OUR CLINICAL PRODUCTS AND SERVICES WHICH HAVE NOT RESULTED IN
SIGNIFICANT SALES. IF THESE COMPANIES ARE UNSUCCESSFUL, WE WILL NEED TO ADD THIS
EMPHASIS INTERNALLY, WHICH MAY DIVERT OUR EFFORTS AND RESOURCES FROM OTHERS
PROJECTS.
For the marketing and sale of some of our clinical products and
services, we entered into important business relationships with physician office
management information system vendors, with electronic medical record vendors,
and with other distribution partners. These important business relationships,
which have required and may continue to require significant commitments of
effort and resources, have yet to generate substantial recurring revenue, and we
cannot assure that they will ever generate substantial recurring revenue. Most
of these relationships are on a non-exclusive basis, and we cannot assure that
our electronic commerce partners and other strategic partners, most of whom have
significantly greater financial and marketing resources than we do, will not
develop and market products and services in competition with us in the future or
will not otherwise discontinue their relationship with us. Also, our
arrangements with some of our partners involve negotiated payments to the
partners based on percentages of revenues generated by the partners. If the
payments prove to be too high, we may be unable to realize acceptable margins,
but if the payments prove to be too low, the partners may not be motivated to
produce a sufficient volume of revenues. The success of our important business
relationships will depend in part upon our partners' own competitive, marketing
and strategic considerations, including the relative advantages of alternative
products being developed and marketed by such partners. If any such partners are
unsuccessful in marketing our products, we will need to place added emphasis on
these aspects of our business internally, which may divert our planned efforts
and resources from other projects.
THE ACCEPTANCE OF ELECTRONIC TRANSACTION PROCESSING IN THE HEALTHCARE INDUSTRY
IS STILL IN ITS EARLY STAGES; THUS, THE FUTURE OF OUR BUSINESS IS UNCERTAIN.
Our strategy anticipates that electronic processing of healthcare
transactions, including transactions involving clinical as well as financial
information, will become more widespread and that providers and third-party
payers increasingly will use electronic transaction processing networks for the
11
processing and transmission of data. Electronic transmission of healthcare
transactions (and, in particular, the use of the Internet to transmit them) is
still developing, and complexities in the nature and types of transactions which
must be processed have hindered, to some degree, the development and acceptance
of electronic transaction processing in this industry. We cannot assure that
continued conversion from paper-based transaction processing to electronic
transaction processing in the healthcare industry, using proprietary physician
management systems or the Internet, will occur.
OUR CLINICAL TRANSACTION PRODUCTS AND SERVICES HAVE YET TO BE TESTED ON A LARGE
SCALE AND COULD FAIL UNDER A HEAVY CUSTOMER LOAD.
The quality of our clinical transaction products and services is
important to our business. Although we have completed the development of most of
our electronic transaction processing network, which we believe efficiently
performs the principal functions for which it has been designed, our clinical
transaction products and services and the network are currently being utilized
only by a limited number of customers for these transactions. We cannot assure
that, upon widespread commercial use of our clinical transaction products and
services, they will satisfactorily perform all of the functions for which we
have designed them or that unanticipated technical or other errors will not
occur which would result in increased costs or material delays. Any of these
errors could delay our plans, result in harmful publicity or cause us to incur
substantial remedial costs.
SINCE AN ERROR BY ANY PARTY IN THE PROCESS OF PROVIDING CLINICAL CONNECTIVITY,
SUCH AS PRESCRIBING DRUGS, FILLING PRESCRIPTIONS, AND TRANSMITTING LABORATORY
ORDERS AND RESULTS COULD RESULT IN SUBSTANTIAL INJURY TO A PATIENT, OUR
LIABILITY INSURANCE MAY NOT BE ADEQUATE IN A CATASTROPHIC SITUATION.
Our business exposes us to potential liability risks that are
unavoidably part of being in the healthcare electronic transaction processing
industry. Since many of our products and services relate to the prescribing and
refilling of drugs and the transmission of medical laboratory orders and
results, an error by any party in the process could result in substantial injury
to a patient. As a result, our liability risks are significant.
We cannot assure that our insurance will be sufficient to cover
potential claims arising out of our current or proposed operations, or that our
present level of coverage will be available in the future at a reasonable cost.
A partially or completely uninsured claim against us, if successful and of
sufficient magnitude, would have significant adverse financial consequences. Our
inability to obtain insurance of the type and in the amounts we require could
generally impair our ability to market our products and services.
WE DEPEND ON CONNECTIONS TO INSURANCE COMPANIES AND OTHER PAYERS, AND IF WE LOSE
THESE CONNECTIONS, OUR SERVICE OFFERINGS WOULD BE LIMITED AND LESS DESIRABLE TO
HEALTHCARE PARTICIPANTS.
Our business is enhanced by the substantial number of payers, such as
insurance companies, Medicare and Medicaid agencies, to which we have electronic
connections. These connections may either be made directly or through a
clearinghouse. We have attempted to enter into suitable contractual
relationships to ensure long-term payer connectivity; however, we cannot assure
that we will be able to maintain our links with all these payers. In addition,
we cannot assure that we will be able to develop new connections, either
directly or through clearinghouses, on satisfactory terms. Lastly, some
third-party payers provide systems directly to healthcare providers, bypassing
us and other third-party processors. Our failure to maintain existing
connections with payers and clearinghouses or to develop new connections as
12
circumstances warrant, or to increase the utilization of direct links between
providers and payers, could cause our electronic transaction processing system
to be less desirable to healthcare participants, which would slow down or reduce
the number of transactions that we process and for which we are paid.
OUR LABORATORY COMMUNICATION DEVICES MAY BE REPLACED WITH WEB-BASED TECHNOLOGY
FOR LAB RESULTS DELIVERY, AND WE MAY NOT BE SUCCESSFUL IN CONVERTING OUR
CUSTOMERS TO PROXYNET AND TO OUR OWN INTERNET SITE AT PROXYMED.COM, WHICH WOULD
ADVERSELY IMPACT OUR REVENUES.
A key element of our longer-term Laboratory Services business strategy
is to market our intelligent laboratory results reporting devices and related
services, and our web-based solutions directly to independent and hospital-based
medical laboratories. As the Internet becomes a more acceptable method of
transmitting laboratory orders and reporting results because of the efficiencies
and savings believed to be available, we are leveraging our 25-plus years of
goodwill (through our Key Communications Service subsidiary) and reputation for
quality of products and superior service to migrate our customers over to
PROXYNET, more specifically to our Internet site at PROXYMED.COM. We expect
others to develop similar web-based solutions and compete aggressively in an
attempt to capture our large customer base. We have no assurances that we will
be able to retain or continue to grow our customer base. Further, even as to the
continuing sales of our laboratory communication devices, we are unable to
control many of the factors that influence our customers' buying decisions,
including our customers' budgets and procedures for approving expenditures, and
the changing political, economic and regulatory influences which affect the
purchasing practices and operation of healthcare organizations.
EVOLVING INDUSTRY STANDARDS AND RAPID TECHNOLOGICAL CHANGES COULD RESULT IN OUR
PRODUCTS BECOMING OBSOLETE OR NO LONGER IN DEMAND.
Rapidly changing technology, evolving industry standards and the
frequent introduction of new and enhanced Internet-based services characterize
the market for our products and services. Our success will depend upon our
ability to enhance our existing services, introduce new products and services on
a timely and cost-effective basis to meet evolving customer requirements,
achieve market acceptance for new products or services and respond to emerging
industry standards and other technological changes. We cannot assure that we
will be able to respond effectively to technological changes or new industry
standards. Moreover, we cannot assure that other companies will not develop
competitive products or services, or that any such competitive products or
services will not cause our products and services to become obsolete or no
longer in demand.
IF ELECTRONIC TRANSACTION PROCESSING PENETRATES THE HEALTHCARE INDUSTRY, WE MAY
FACE PRESSURE TO REDUCE OUR PRICES WHICH POTENTIALLY MAY CAUSE US TO NO LONGER
BE COMPETITIVE.
If electronic transaction processing extensively penetrates the
healthcare market or becomes highly standardized, it is possible that
competition among electronic transaction processors will focus increasingly on
pricing. This competition may put intense pressure on us to reduce our pricing
in order to retain market share. If we are unable to reduce our costs
sufficiently to offset declines in our prices, or if we are unable to introduce
new, innovative service offerings with higher prices, we may not be competitive.
COMPUTER NETWORK SYSTEMS LIKE OURS COULD SUFFER SECURITY AND PRIVACY BREACHES
THAT COULD HARM OUR CUSTOMERS AND US.
We currently operate servers and maintain connectivity from multiple
facilities. Despite our implementation of standard network security measures,
our infrastructure may be vulnerable to computer viruses, break-ins and similar
disruptive problems caused by customers or other users. Computer viruses,
break-ins or other security problems could lead to interruption, delays or
cessation in service to our customers. These problems could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers, which may deter potential customers from doing
business with us and give rise to possible liability to users whose security or
privacy has been infringed. The security and privacy concerns of existing and
potential customers may inhibit the growth of the healthcare information
services industry in general, and our customer base and business in particular.
A significant security breach could result in loss of customers, damage to our
reputation, direct damages, costs of repair and detection and other unplanned
expenses.
13
WE DEPEND ON UNINTERRUPTED COMPUTER ACCESS FOR OUR CUSTOMERS; ANY PROLONGED
INTERRUPTIONS IN OUR OPERATIONS COULD CAUSE OUR CUSTOMERS TO SEEK ALTERNATIVE
PROVIDERS OF OUR SERVICES.
Our success is dependent on our ability to deliver high-quality,
uninterrupted computer networking and hosting, requiring us to protect our
computer equipment and the information stored in servers against damage by fire,
natural disaster, power loss, telecommunications failures, unauthorized
intrusion and other catastrophic events. To mitigate this risk, we have
commenced the movement of our production computer networks to a secure,
third-party co-location site located in Atlanta, Georgia. This site has back-up
site capability and a program to manage technology to reduce risks in the event
of a disaster, including periodic "back-ups" of our computer programs and data.
While we still continue to operate production networks in our
California and Georgia facilities, any damage or failure resulting in prolonged
interruptions in our operations, such as the recent California rolling
blackouts, could cause our customers to seek alternative providers of our
services. In particular, a system failure, if prolonged, could result in reduced
revenues, loss of customers and damage to our reputation, any of which could
cause our business to suffer. While we carry property and business interruption
insurance to cover operations, the coverage may not be adequate to compensate us
for losses that may occur.
WE MAY NOT BE ABLE TO RETAIN KEY PERSONNEL OR REPLACE THEM IF THEY LEAVE.
Our success is largely dependent on the personal efforts of Michael K.
Hoover, our Chairman of the Board and Chief Executive Officer and Nancy J. Ham,
our President and Chief Operating Officer. Although we have entered into
employment agreements with Mr. Hoover, Ms. Ham and other senior executives, the
loss of any of their services could cause our business to suffer. Our success is
also dependent upon our ability to hire and retain qualified operations,
development and other personnel. Competition for qualified personnel in the
healthcare information services industry is intense, and we cannot assure that
we will be able to hire or retain the personnel necessary for our planned
operations.
WE MAY ISSUE ADDITIONAL SHARES WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF
OUR COMMON STOCK.
Certain events over which you have no control could result in the
issuance of additional shares of our common stock or preferred stock, which
would dilute your ownership percentage in ProxyMed and could adversely affect
the market price of our common stock. We may issue additional shares of common
stock or preferred stock for many reasons including:
o to raise additional capital or finance acquisitions;
o upon the exercise or conversion or an exchange of outstanding
options, warrants and shares of convertible preferred stock; or
o in lieu of cash payment of dividends.
In addition, the number of shares of common stock that we are required
to issue in connection with our outstanding warrants may increase if certain
anti-dilution events occur (such as, certain issuances of common stock, options
and convertible securities).
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IN GENERAL
ProxyMed is an electronic healthcare transaction processing services
company providing connectivity services and related value-added products to
physician offices, payers, medical laboratories, pharmacies, and other
healthcare providers. Our electronic transaction processing services support a
broad range of both financial and clinical transactions. To facilitate these
services, we operate PROXYNET, our secure, proprietary national electronic
information network, which provides physicians and other healthcare providers
with direct connectivity to one of the industry's largest group of payers, the
largest group of clinical laboratories, and the largest group of chain and
independent pharmacies. Our products and services are currently provided from
our operating facilities located in Fort Lauderdale, Florida; New Albany,
Indiana; Santa Ana, California; and Atlanta, Georgia.
We remain committed to our strategy 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
solutions providers, our goal is to drive more healthcare transactions through
PROXYNET while remaining neutral in the battle for the physician's desktop.
Additionally, since we do 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, and
from opportunities afforded by HIPAA as it relates to privacy, security and
education. We remain committed to developing additional capabilities and
value-added products and services to our back-end connectivity network.
In March 2000, we sold our non-core network integration and
prescription drug dispensing businesses. The results of these businesses are
shown as discontinued operations in the consolidated financial statements.
In May 2001, we acquired substantially all of the assets and the
business of MDP Corporation ("MDP"), a privately-owned electronic claims
clearinghouse and patient statement processor based in Atlanta, Georgia, for $10
million. We paid $3 million at closing and executed a $7 million promissory note
payable in May 2002. Interest on this note was payable monthly at 7% simple
interest. In January 2002, we paid this note in full.
On August 21, 2001, our Board of Directors effected a 1-for-15 reverse
stock split of the Company's common stock, par value $.001 per share. All share
and per share amounts have been restated to reflect this transaction.
2001 was a turnaround year for us as we were able to increase our
growth through internal and external means and to generate our first year of
positive cash flow from operations. We were also able to simplify our capital
structure by exchanging most of the warrants issued in connection with our two
previous preferred stock financings and converting almost all of our outstanding
shares of preferred stock into common stock. We also raised $7.2 million (net of
expenses) through a private placement of common stock at the end of the year. We
believe that our accomplishments during 2001 position us to take advantage of
the opportunities in the healthcare connectivity industry and become the premier
provider of electronic connectivity solutions for the small physician office.
On March 26, 2002, we agreed to sell 1,569,366 shares of unregistered
common stock at $15.93 per share in a private placement to four entities
affiliated with General Atlantic Partners, LLC ("GAP"), a private equity
investment fund. The transaction, which is expected to close on April 5, 2002,
will result in net proceeds to us of $25 million. No placement agent was used in
this transaction. In addition, we also agreed to issue a two-year warrant for
the purchase of 549,279 shares of common stock at $15.93 per share. All shares
sold are subject to a one year lock-up agreement from the date of closing. We
have agreed to grant GAP certain demand and "piggy back" registration rights
starting one year from closing. Additionally, in connection with the
transaction, our board of directors appointed a general partner of GAP to fill a
vacancy on our board.
15
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET REVENUES. Consolidated net revenues for 2001 increased by
$9,789,200, or 29%, to $43,230,300 from consolidated net revenues of $33,441,100
for 2000. This net increase is primarily due to (i) a 48% increase in the volume
of electronic clinical and financial healthcare transactions processed through
PROXYNET in our Electronic Healthcare Transaction Processing segment from 59.2
million transactions processed in 2000 to 87.9 million transactions processed in
2001 (including 13.5 million patient statement and electronic claims
transactions from our acquisition of MDP (increase of $7,885,400), offset by
decreases in implementation and other fees received (decrease of $1,050,400);
and (ii) a 13% revenue increase in our Laboratory Communication Solutions
segment primarily as a result of increased sales in communication device units
and contract manufacturing (increase of $4,874,800) offset by decreases in
other laboratory services such as communication device leases and field service
events (decrease of $1,920,600).
COST OF SALES. Cost of transaction fees, services and license fees
includes third-party electronic transaction processing costs, postage and
printed materials used in patient statement processing, certain
telecommunication costs, revenue sharing and rebate arrangements with our
business partners, third-party database licenses and certain labor and travel
expenses. Cost of sales for communication devices, computer systems and other
tangible goods includes hardware, third-party software, and consumable
materials. Consolidated cost of sales for the year ended 2001 increased as a
percentage of revenues primarily due to (i) an increase in patient statement
processing services (which have a higher direct cost than our other payer
services transactions) as a result of our MDP acquisition; (ii) increased
revenue sharing and rebates paid to our business partners as a result of
increased transaction volumes; and (iii) a shift in the revenue mix in our
Laboratory Communication Solutions segment from lower cost leases to higher cost
communication device units and contract manufacturing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for 2001 decreased by $5,830,300, or 22%, to
$21,266,900 from consolidated SG&A expenses of $27,097,200 for 2000. This
decrease is primarily due to (i) decreases in net payroll, outside labor and
related expenses due to the effect of our restructuring plan which commenced in
May 2000 and additional personnel reductions enacted at the end of 2000 and in
the first quarter of 2001 (decrease of $3,298,500); (ii) a decrease in selling
and marketing expenses for our products and services (decrease of $707,200);
(iii) decreases in telecommunication expenses resulting from renegotiating
contracts with carriers, the elimination of certain telecommunication services
and lower usage (decrease of $372,200); (iv) a decrease in bad debt expense due
to improved collection efforts (decrease of $350,800); (v) a decrease in charges
for the issuance of compensatory options and warrants to outside consultants as
fees related to our financial advisory agreement with Commonwealth Associates
ceased to be amortized after April 2001 (decrease of $924,800); (vi) a decrease
in consulting fees (decrease of $309,700); and (vii) net decreases in other
selling, general and administrative expenses (decrease of $94,100); offset by
(viii) an increase in D&O liability insurance premiums (increase of $227,000).
We have continued to monitor our expenses closely and continue to look for
operational synergies, especially as it relates to our acquisition of MDP, in
order to improve our profitability beyond 2001. As a result of these factors,
consolidated SG&A expenses as a percentage of consolidated net sales decreased
to 49% in 2001 from 81% in 2000.
16
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense decreased $5,198,400, or 39%, to $8,176,400 for 2001 from
$13,374,900 for 2000. This net decrease was primarily due to (i) the conclusion
in May 2001 of the amortization of goodwill, purchased technology and other
intangibles associated with the 1997 and 1998 acquisitions of IMS and USHDI in
May 2001 (decrease of $6,047,300); (ii) the write-off of obsolete and impaired
assets and previously capitalized software in December 2000 (decrease of
$861,600); (iii) the termination of the exclusivity period related to our 1997
acquisition of PRESCRIBE (decrease of $250,000); (iv) the conclusion during 2001
of the amortization of certain previously capitalized software and other
intangibles that became fully amortized during the year (decrease $364,600); (v)
concluding the amortization of a non-compete agreement with our former
president/chief operating officer (decrease of $33,300); offset by (vi) the
commencement of goodwill amortization from our May 2001 acquisition of MDP
(increase of $2,127,800) and (vii) a net increase in the depreciation of fixed
assets primarily due to new asset additions in 2001 (increase of $230,600). In
January 2002, we adopted SFAS No. 142 (see New Accounting Pronouncements below).
As a result, our depreciation and amortization will be reduced approximately
$808,000 per quarter through the first quarter of 2004.
WRITE-OFF OF OBSOLETE AND IMPAIRED ASSETS. As a result of our periodic
review of fixed assets and co-location of our clinical production network, in
December 2001 we wrote off $91,100 in obsolete fixed assets, primarily computer
hardware and software. These write-offs are expected to lower our depreciation
and amortization charges by approximately $65,500 in 2002.
INTEREST, NET. Net interest expense decreased by $4,007,400 to $125,600
in 2001 from $4,133,000 in 2000. This decrease is primarily due to (i) charges
of $1,269,800 in 2000 related to the amortization of costs from our private
placement of convertible debt securities completed in June 2000; (ii) $3,202,900
for a beneficial conversion charge resulting from the conversion price of the
convertible debt being less than the market price of our stock on the dates of
issuance in 2000; (iii) interest expense of $133,000 in 2000 related to our line
of credit terminated in June 2000; offset by (iv) interest expense of $328,900
in 2001 related to the note payable for our acquisition of MDP in May 2001; and
(v) lower interest income earned (by $281,500) due to lower cash balances
invested and lower interest rates in 2001 compared to 2000.
LOSS FROM CONTINUING OPERATIONS. As a result of the foregoing, the loss
from continuing operations was $6,797,900 for 2001 compared to a loss from
continuing operations of $26,926,500 for 2000.
DEEMED DIVIDENDS AND OTHER CHARGES. We incurred total deemed dividend
and other charges of $12,262,000 in 2001 primarily as a result of (i) non-cash
accounting charges from the anti-dilution reset in number and price of certain
warrants issued to our Series B preferred stockholders in February 2001
($1,968,000); (ii) non-cash accounting charges from the exchange of 271,700
warrants into 218,828 shares of common stock by certain of our Series B
preferred stockholders in April 2001 ($1,854,600); (iii) non-cash accounting
charges from the exchange of 1,412,033 warrants into 1,050,691 shares of common
stock by certain of our Series C preferred stockholders in August 2001
($3,201,300); (iv) non-cash accounting charges related to the conversion of
169,149 shares of our Series C preferred into 1,296,126 shares of common stock
pursuant to our Conversion Offer through December 31, 2001 ($3,365,400); (v)
non-cash accounting charges from the anti-dilution reset in number and price of
certain warrants issued to our remaining Series B preferred warrantholder in
December 2001 as a result of the reduced conversion price pursuant to our
Conversion Offer to Series C preferred stockholders ($207,800); (vi) dividends
paid to the holder of our Series B Preferred stock (which was fully converted in
October 2001) with cash payments of $4,900; and (vii) dividends totaling
$1,658,100 paid to our Series C preferred shareholders through the issuance of
108,434 shares of common stock (of which 104,254 shares were distributed by
December 31, 2001), plus cash paid for fractional dividend shares of $1,900.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the
foregoing, we had a net loss applicable to common shareholders of $19,059,900 in
2001 compared to $48,051,700 for 2000.
17
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET REVENUES. Consolidated net revenues for 2000 increased by
$4,418,000, or 15%, to $33,441,100 from consolidated net revenues of $29,023,100
for 1999. This net increase is primarily due to (i) volume increases in lab
results reporting device sales, servicing events and contract manufacturing in
our Laboratory Services business unit (increase of $4,599,900); (ii) electronic
prescription transaction volume and average per unit revenue increases in our
Prescription Services business unit (increase of $555,200); (iii) plus one-time
revenue of $500,000 for the termination of a previously executed multi-year
services agreement; (iv) offset by average per unit revenue decreases in our
Payer Services business unit as a result of the change in mix of our services
sold (decrease in revenue of $812,100); and (v) a one-time source code license
sale in the 1999 period (decrease of $425,000) in our Prescription Services
business unit. In terms of transaction volume processed through PROXYNET, for
2000, we processed a total of 59.2 million electronic clinical and financial
transactions, an increase of 30.4% over 1999 levels.
COST OF SALES. Cost of services and license fees includes third-party
electronic transaction processing costs, certain telecommunication costs,
revenue sharing and rebate arrangements with our business partners, third-party
database licenses and certain labor and travel expenses. Cost of sales for
communication devices, computer systems and other tangible goods includes
hardware, third-party software, and consumable materials. Consolidated cost of
sales as a percentage of revenues increased between 1999 and 2000 primarily due
to the higher percentage of overall revenues generated from our Laboratory
Services business unit which are at lower profit margins due to the general
tangible nature of the goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for 2000 increased by $159,400, or less than
1%, to $27,097,200 from consolidated SG&A expenses of $26,937,800 for 1999. This
increase is primarily due to (i) expenses related to the issuance of
compensatory options and warrants and other stock compensation awards to outside
consultants and our new chairman/chief executive officer in 2000 ($1,643,200);
(ii) increases in professional fees for legal and consulting projects
($566,100); (iii) a contingency for software licensing deficiencies ($200,000),
offset by (iv) decreases in net payroll, outside labor and related expenses net
of capitalization for software development primarily for PROXYMED.COM (decrease
of $1,454,000); (v) charges related to activities associated with our terminated
engagement of Salomon Smith Barney to help us evaluate our strategic
alternatives in 1999 (decrease of $492,000); and (vi) net decreases in other
general expenses (decrease of $303,900). Although the consolidated increase is
minimal, our expense structure had undergone significant decreases in the second
six months of the 2000 year as a result of our restructuring in May 2000 and the
refocus of our business strategy that was set in place after a new management
team was established. During the first six months of 2000, we continued to incur
significant expenses in additional personnel costs, advertising and promotion,
and development costs for our web portal. As a result of our expense reduction
plan enacted in the second quarter of 2000, we eliminated approximately $800,000
per month in expenses by the end of 2000. We continued to make additional
expense reductions in order to achieve profitability in 2001. As a result of
these factors, consolidated SG&A expenses as a percentage of consolidated net
sales decreased to 81% in 2000 from 93% in 1999.
RESTRUCTURING CHARGES. In May 2000, we announced a reorganization plan
aimed at reducing costs and reallocating resources. As a result, we reduced our
workforce by approximately 70 employees, including the resignation of our chief
executive officer, president/chief operating officer, chief financial officer,
chief marketing officer, and other management positions. We recorded a charge of
$1,330,000 in 2000 primarily for separation payments and marketing contracts
that were canceled. As a result of this plan and further expense reductions in
the fourth quarter of 2000 and first quarter of 2001, including the elimination
of additional employees, our annualized expenses were reduced by approximately
$9.5 million.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense increased $310,700, or 2%, to $13,374,900 for 2000 from
$13,064,200 for 1999. This net increase was primarily due to the (i)
18
commencement of the amortization of our PROXYMED.COM development projects in
June 2000 ($461,500); (ii) additional computer hardware and peripherals
purchased for our various production and administrative computer networks and
new manufacturing equipment at our Laboratory Services business unit ($77,900);
(iii) amortization of a non-compete agreement with our former president/chief
operating officer ($116,700); offset by (iv) an adjustment to amortization
expense related to the final debt payment paid in April 2000 for the acquisition
of Clinical MicroSystems, Inc., which we acquired in March 1997 ($95,400); and
(v) the termination of the exclusivity period related to our 1997 acquisition of
PRESCRIBE (decrease of $250,000).
WRITE-OFF OF OBSOLETE AND IMPAIRED ASSETS. As a result of our change in
business strategy, in December 2000, we wrote off $2,850,100 in obsolete fixed
assets, primarily computer hardware, and previously capitalized software
projects, including our costs to develop PROXYMED.COM. These write-offs are
expected to lower our depreciation and amortization charges by approximately
$335,000 per quarter in 2001.
INTEREST, NET. We incurred net interest expense of $4,133,000 for 2000
compared to $100,900 for 1999. The 2000 amount reflects (i) charges of
$1,269,800 related to the amortization of costs from our private placement of
convertible debt securities completed in June 2000; (ii) $3,202,900 for a
beneficial conversion charge resulting from the conversion price of the
convertible debt being less than the market price of our stock on the dates of
issuance; offset by (iii) $441,000 in additional interest income earned on
higher cash balances invested and the reduction of interest expense related to
our line of credit terminated in June 2000.
INCOME FROM LITIGATION SETTLEMENT AND OTHER, NET. In 2000, we settled a
matter out-of-court which resulted in income of $666,700, net of legal and other
costs.
LOSS FROM CONTINUING OPERATIONS. As a result of the foregoing, the loss
from continuing operations was $26,926,500 for 2000 compared to a loss from
continuing operations of $20,119,800 for 1999.
DISCONTINUED OPERATIONS. As a result of selling both the network
integration and prescription drug dispensing businesses in March 2000 for total
proceeds of approximately $3,652,900, we recorded a net gain of $545,300. The
loss from the operations of our discontinued network integration and
prescription drug dispensing businesses was $303,900 in 2000 compared to
$1,195,100 in 1999. Revenues from the network integration business were
$2,371,800 in 2000 compared to $11,106,600 in 1999. The net loss for this
business was $327,800 in 2000 compared to $1,045,100 in 1999. Revenues from the
prescription drug dispensing business were $574,700 in 2000 compared to
$2,200,300 in 1999. Net income for this business was $23,800 in 2000 compared to
a net loss of $149,800 in 1999.
DEEMED DIVIDENDS AND OTHER CHARGES. As a result of the Redemption and
Exchange Agreement entered into in May 2000 with the holders of 13,000 of the
15,000 Series B Preferred stock issued in December 1999 and the private
placement of convertible debt securities in June 2000, we incurred charges of
$14,614,300 in 2000 consisting of the following: (i) the unamortized beneficial
conversion feature of the debt upon the conversion to our new Series C Preferred
stock ($9,762,700); (ii) the premiums paid on the redemption of our Series B
Preferred shares ($3,050,900); (iii) the repricing of existing warrants
($610,100); (iv) the issuance of new warrants ($715,000); and (v) professional
and other fees ($475,700). Additionally, in 2000, we incurred a charge of
$500,000 from a beneficial conversion feature resulting from the private
placement of $1 million of Series C Preferred stock to our new chairman/chief
executive officer in August 2000 and in December 2000, we recorded a catch-up
accounting charge of $4,977,800 relating to the beneficial conversion of the
original Series B Preferred shares issued in December 1999. For 2000, we paid
dividends totaling $223,800 to the holders of the Series B Preferred stock
19
by issuing 2,123 shares of our common stock plus cash payments of $3,300, and
paid dividends totaling $1,047,100 to the holders of the Series C Preferred
stock by issuing 58,754 shares of our common stock (of which 29,071 shares were
distributed by December 31, 2000), plus cash paid for fractional dividend shares
of $200.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the
foregoing, we recorded a net loss applicable to common shareholders of
$48,051,700 for 2000 compared to $21,856,400 for 1999.
LIQUIDITY AND CAPITAL RESOURCES
In 2001, cash provided by operating activities totaled $1,019,400. This
was primarily due to our net loss offset by depreciation and amortization
charges and non-cash compensatory stock options and warrants. During 2001, we
paid $3,000,000 as our initial payment for our acquisition of MDP in May 2001;
paid $1,444,900 for fixed assets and capitalized software; paid $153,300 against
our capital leases, including the payoff of a note payable assumed as a result
of our acquisition of MDP; paid cash dividends of $4,900 to the holder of our
Series B preferred stock; and paid dividends totaling $1,660,000 to the holders
of our Series C preferred stock by issuing 108,434 shares of our common stock
and cash for fractional shares of $1,900. These activities were principally
financed through available cash resources and $297,600 collected on our
outstanding notes receivable. Additionally, in December 2001, we raised
$7,247,000 (net of expenses of $728,800) in a private placement of 483,414
shares of our common stock to nine U.S. and Canadian institutional and
accredited investors. After these activities, we had cash and cash equivalents
totaling $12,601,000 as of December 31, 2001. These available funds, plus the
$25 million investment from GAP (as described in the "In General" section
above), will be used for operations, strategic acquisitions, the further
development of our products and services, and other general corporate purposes.
In May 2001, we acquired the assets of MDP Corporation. We paid $3
million at closing and executed a $7 million promissory note payable in May
2002. The acquisition of MDP has been and is expected to continue to be
accretive to our operations. In January 2002, we paid the promissory note in
full and we can now complete our integration of that business into our existing
operations, improving the margin on that book of business. In addition to our
acquisition of MDP, we continue to evaluate other acquisition opportunities and
strategic alternatives that may add synergies to our product offerings and
business strategy.
In 2001, we spent approximately $494,000 relating to HIPAA compliance
for our computer networks and facilities. At the current time, we do not have
any material commitments for capital expenditures except for approximately
$500,000 that is committed evenly over the next three years related to the
licensing of software for use in our internal systems. Additionally, we have
forecasted approximately $2.6 million for other capital expenditures and
capitalized software for 2002 but are currently evaluating our expenditure
requirements as it relates to the continuation of our HIPAA compliance and
co-location of our production networks to a third-party site. We may adjust our
projected expenditure spending levels up or down accordingly.
The following table represents our contractual cash obligations due
over the next several years. At the present time, none of our contractual cash
obligations extend beyond 2005. Operating leases are shown net of any sublease
agreements. Other obligations include payments required to be made under our
separation agreement with our former Chief Legal Officer.
2002 2003 2004 2005
---------- ---------- ---------- ----------
Debt $7,000,000 $ -- $ -- $ --
Capital lease obligations 143,300 147,100 113,600 90,700
Operating leases 1,233,800 796,000 505,000 157,600
Maintenance obligations 162,900 20,700 4,900 --
Other obligations 86,800 -- -- --
---------- ---------- ---------- ----------
Totals $8,626,800 $ 963,800 $ 623,500 $ 248,300
========== ========== ========== ==========
20
While we continue to improve our operating performance and achieve
increased market acceptance of our products and services, we remain confident in
our ability to grow our business, both internally and externally. With the
additional equity financing at the end of March 2002, 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 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. On an ongoing basis, we evaluate our
estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements beginning on Page F-7.
REVENUE RECOGNITION - Electronic transaction processing fee and monthly
service revenues are recorded in the period the service is rendered. Certain
transaction revenues generated from our resellers, vendors and gateway partners
are subject to revenue sharing and rebate arrangements and are recorded as gross
revenues. Revenue from certain up-front development and connectivity fees is
amortized ratably over the expected life of the customer. Revenue from hardware
leases, software rentals and maintenance fees is recognized ratably over the
applicable period. Revenue from sales of software, software licenses, computer
hardware and manufactured goods is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable
and collectibility is probable. The same criteria are applied to each element of
multiple element arrangements after allocating the amounts paid to individual
elements based on vendor-specific objective evidence of fair value. Because we
rely primarily on customer purchase orders in our Lab Communication Solutions
business, revenues may fluctuate from period to period compared to revenues
generated in our Electronic Healthcare Transaction business which is primarily
based on recurring revenue streams.
21
GOODWILL - Goodwill is generated from the excess of the cost of a
business acquired over the fair market value of its identifiable assets. In
accordance with SFAS No. 142 (see New Accounting Pronouncements below), goodwill
will no longer be amortized, but instead be subject to periodic impairment
tests. We will adopt the provisions of SFAS No. 142 in the first quarter of 2002
and we will no longer record approximately $808,000 of amortization relating to
our existing goodwill each quarter, which would have been recorded through the
first quarter of 2004. SFAS No. 142 also requires that goodwill be tested at
least annually for impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step must be measured
as of the beginning of the fiscal year. We will complete that first step of the
goodwill impairment test during the first quarter of 2002. The second step of
the goodwill impairment test measures the amount of the impairment loss
(measured as of the beginning of the year of adoption), if any, and must be
completed by the end of our fiscal year. We do not anticipate recording an
impairment charge as a result of applying SFAS No. 142 during the first quarter
of 2002.
CAPITALIZED SOFTWARE DEVELOPMENT AND RESEARCH AND DEVELOPMENT - Costs
incurred internally and fees paid to outside contractors and consultants in the
development of our externally and internally used software products are expensed
as incurred as research and development expenses (which are included in selling,
general and administrative expenses) until reaching technological feasibility.
At that time, any future costs are properly capitalized and ultimately amortized
over the remaining estimated economic life of the product on a
product-by-product basis. Our judgment is used in determining whether costs meet
the criteria for immediate expense or capitalization. We periodically review
projected cash flows and other criteria in assessing the impairment of any
capitalized software and take impairment charges as needed.
EQUITY TRANSACTIONS - Over the past two years we have engaged in
various equity transactions. These transactions were first aimed at providing
capital to continue to operate and grow our business and then became a critical
step aimed at simplifying our capital structure. These transactions 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 our net loss applicable to common shareholders.
BAD DEBT ESTIMATES - We rely on estimates to determine the bad debt
expense and the adequacy of the reserve for doubtful accounts receivable. These
estimates our 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible
Assets", and SFAS No. 143 "Accounting for Asset Retirement Obligations".
Effective July 1, 2001, SFAS No. 141, "Business Combinations",
eliminates the pooling-of-interest method for business combinations and requires
application of the purchase method. Effective for financial statements issued
for fiscal years beginning after June 15, 2002, SFAS No. 143 "Accounting for
Asset Retirement Obligations" addresses financial accounting requirements for
retirement obligations associated with tangible long-lived assets. The adoption
of SFAS No. 141 and No. 143 are not expected to have any material impact on our
financial statements.
22
SFAS No. 142, "Goodwill and Other Intangible Assets", primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS No. 142 (1) prohibit the
amortization of goodwill and indefinite-lived intangible assets; (2) require
that goodwill and indefinite-lived intangibles assets be tested at least
annually for impairment; (3) require that reporting units be identified for the
purpose of assessing potential future impairments of goodwill; and (4) remove
the forty-year limitation on the amortization period of intangible assets that
have finite lives. We will adopt the provisions of SFAS No. 142 in first quarter
of 2002 and we will no longer record approximately $808,000 of amortization
relating to our existing goodwill each quarter, which would have been recorded
through the first quarter of 2004. SFAS No. 142 also requires that goodwill be
tested at least annually for impairment using a two-step process. The first step
is to identify a potential impairment and, in transition, this step must be
measured as of the beginning of the fiscal year. We will complete that first
step of the goodwill impairment test during the first quarter of 2002. The
second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if any,
and must be completed by the end of our fiscal year. We do not anticipate
recording an impairment charge as a result of applying SFAS No. 142 during the
first quarter of 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", that
replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". Effective for financial statements
issued for fiscal years beginning after December 15, 2001, SFAS No. 144 requires
that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
been incurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. The adoption of SFAS
No. 144 is not expected to have any material impact on our financial statements.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document contains forward-looking statements that reflect our
current assumptions and expectations regarding future events. While these
statements reflect our current judgment, they are subject to risks and
uncertainties. Actual results may differ significantly from projected results
due to a number of factors, including, but not limited to, the soundness of our
business strategies relative to the perceived market opportunities; our ability
to identify suitable acquisition candidates; our successful integration of MDP
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 assessment of the healthcare industry's need, desire and
ability to become technology efficient; and our ability and that of our business
associates to comply with various government rules regarding healthcare
information and patient privacy. These and other risk factors are more fully
discussed in our filings with the Securities and Exchange Commission, which we
strongly urge you to read. We expressly disclaim any intent or obligation to
update any forward-looking statements. When used in this document, the words
"believes", "estimated", "expects", "anticipates", "may" and similar expressions
are intended to identify forward-looking statements.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We own no derivative financial instruments or derivative commodity instruments.
We do not derive a significant amount of revenues from international operations
and do not believe that we are exposed to material risks related to foreign
currency exchange rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule are included beginning at Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
We have not had any change in or disagreement with our accountants on
accounting and financial disclosures during our two most recent fiscal years or
any later interim period.
24
PART III
The information required in Item 10 (Directors and Executive Officers of the
Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (certain Relationships and
Related Transactions) is incorporated by reference to our Definitive Proxy
Statement for our 2002 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission by April 30, 2002.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
PAGE
----
(a) (1) The following financial statements are included in
Part II, Item 8:
Consolidated Financial Statements:
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - December 31, 2001 and 2000 F-3
Consolidated Statements of Operations - Years Ended December 31, 2001,
2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows - Years Ended December 31, 2001,
2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 - F-35
(2) The following schedule for the years 2001, 2000 and 1999 is submitted
herewith:
Schedule II - Valuation and Qualifying Accounts - F-36
Years Ended December 31, 2001, 2000 and 1999
(3) Exhibits required to be filed by Item 601 of Regulation S-K
as exhibits to this Report are listed in the Exhibit Index
appearing on pages 29 through 32.
(b) Reports on Form 8-K:
OCTOBER 25, 2001 - Report on Third Quarter 2001 telephone
conference call held on October 12, 2001, including
transcript thereon, pursuant to Regulation FD.
DECEMBER 10, 2001 - Report on projected revenue and EBITDA
pursuant to Regulation FD.
26
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.
Dated: April 1, 2002 PROXYMED, INC.
By: /s/ MICHAEL K. HOOVER
----------------------------
Michael K. Hoover
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael K. Hoover and Judson E. Schmid
and each of them, his true and lawful attorney-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
In accordance with the Securities and Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ MICHAEL K. HOOVER Chairman of the Board and Chief Executive April 1, 2002
- ------------------------------------ Officer (principal executive officer)
Michael K. Hoover
/s/ JUDSON E. SCHMID Executive Vice President and Chief Financial April 1, 2002
- ------------------------------------ Officer (principal financial and accounting
Judson E. Schmid officer)
/s/ EDWIN M. COOPERMAN Director April 1, 2002
- ---------------------------
Edwin M. Cooperman
/s/ GERALD B. CRAMER Director April 1, 2002
- ------------------------------------
Gerald B. Cramer
/s/ MICHAEL S. FALK Director April 1, 2002
- ------------------------------------
Michael S. Falk
/s/ THOMAS E. HODAPP Director April 1, 2002
- ------------------------------------
Thomas E. Hodapp
/s/ EUGENE R. TERRY Director April 1, 2002
- ------------------------------------
Eugene R. Terry
27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
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).
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).
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).
10.2 Strategic Marketing Agreement among ProxyMed, IntePlex, Inc. and
Bergen Brunswig Drug Company dated February 1, 1996
(incorporated by reference to Exhibit 1 of Form 8-K, File No.
000-22052, reporting an event dated February 1, 1996).
10.3 Agreement for Acquisition of Stock between ProxyMed and National
Health Care Affiliates, Inc. dated September 6, 1995
(incorporated by reference to Exhibit 1 of Form 8-K, File No.
000-22052, reporting an event dated August 28, 1996).
29
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.4 Asset Purchase Agreement between ProxyMed and Eckerd Corporation
(incorporated by reference to Exhibit 1 to the Form 8-K, File
No. 000-22052, reporting an event dated February 7, 1995).
10.6 *Employment Agreement between ProxyMed and John Paul Guinan
(incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form SB-2, File No. 333-2678).
10.8 Asset Purchase Agreement between ProxyMed and Clinical
Microsystems, Inc. and Glenn Gilchrist (incorporated by
reference to Exhibit 1 of Form 8-K, File No. 000-22052,
reporting an event dated March 14, 1997).
10.9 *Employment Agreement between ProxyMed and Frank M. Puthoff
dated November 11, 1996 (incorporated by reference to Exhibit
10.7 of the Form 10-KSB for the period ending December 31,
1996).
10.10 *Amended 1993 Stock Option Plan (incorporated by reference to
Exhibit A of ProxyMed's Proxy Statement for its 1994 Annual
Meeting of Shareholders).
10.11 *1995 Stock Option Plan (incorporated by reference to Exhibit
3.1 of the Registration Statement on Form SB-2, File No.
333-2678).
10.12 *1995 Outside Director Stock Option Plan (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
SB-2, File No. 333-2678).
10.14 Form of Indemnification Agreement for All Officers and Directors
(incorporated by reference to Exhibit 10.3 of the 10-QSB for the
period ending September 30, 1996).
10.15 Stock Purchase Agreement between ProxyMed and WPJ, Inc. and
Robert Weinberger and Mark Pehl (incorporated by reference to
Exhibit 2.1 of Form 8-K, File No. 000-22052, reporting an event
dated May 19, 1998).
10.16 Asset Purchase Agreement between ProxyMed and Hayes Computer
Systems, Inc. and Danny Hayes (incorporated by reference to
Exhibit 1 of From 8-K, File No. 000-22052, reporting an event
dated April 30, 1997).
10.17 Asset Purchase Agreement between ProxyMed and US HealthData
Interchange, Inc. (incorporated by reference to Exhibit 2.1 of
Form 8-K, File No. 000-22052, reporting an event dated November
19, 1997).
10.18 *1997 Stock Option Plan (incorporated by reference to Exhibit A
of ProxyMed's Proxy Statement for its 1997 Annual Meeting of
Shareholders).
10.20 Agreement and Plan of Merger between ProxyMed Acquisition Corp.,
Key Communications Service, Inc., Jeff K. Carpenter, A. Thomas
Hardy and Carl W. Garmon (incorporated by reference to Exhibit
2.1 of Form 8-K, File No. 000-22052, reporting an event dated
December 31, 1998).
30
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.22 Asset Purchase Agreement between ProxyMed and Specialized
Medical Management, Inc. and its parent, Texas Health Management
Services, Inc., dated January 12, 1999 (incorporated by
reference to Exhibit 10.22 of the 10-K for the period ending
December 31, 1998).
10.23 *Form of Employee Non-Qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.23 of the Registration
Statement on Form S-8, File No. 333-92905).
10.25 Securities Purchase Agreement dated as of December 23, 1999, by
and among ProxyMed and the Series B Preferred investors listed
on the Schedule of Buyers attached thereto (incorporated by
reference to Exhibit 10.24 of Form 8-K, File No. 000-22052,
reporting an event on December 23, 1999).
10.26 Prospectus dated as of December 28, 2000, relating to the sale
of Series C Preferred to the selling shareholders listed therein
(incorporated by reference to the Registration Statement on Form
S-3, File No. 333-51856).
10.27 Redemption and Exchange Agreement between ProxyMed and certain
investors named therein (incorporated by reference to Exhibit
10.27 of Form 8-K, File No. 000-22052, reporting an event dated
May 4, 2000).
10.28 *Employment Agreement between ProxyMed and Michael K. Hoover
dated July 28, 2000 (incorporated by reference to Exhibit 99.1
of Form 10-Q for the period ending September 30, 2000).
10.29 *Employment Agreement between ProxyMed and Judson E. Schmid
dated September 29, 2000 (incorporated by reference to Exhibit
99.2 of Form 10-Q for the period ending September 30, 2000).
10.30 *Employment Agreement between ProxyMed and Nancy J. Ham dated
October 2, 2000 (incorporated by reference to Exhibit 99.3 of
Form 10-Q for the period ending September 30, 2000).
10.31 *Employment Agreement between ProxyMed and Timothy J. Tolan
dated January 23, 2001 (incorporated by reference to Exhibit
10.30 of Form 10-K for the period ending December 31, 2000).
10.32 *2000 Stock Option Plan (incorporated by reference to Exhibit B
of the Proxy Statement filed on July 7, 2000).
10.33 *2000-1/2 Stock Option Plan (incorporated by reference to
Exhibit C of the Proxy Statement filed on July 7, 2000).
10.34 *Employment Agreement between ProxyMed and Lonnie W. Hardin
dated March 29, 2001 (incorporated by reference to Exhibit 10.1
of Form 10-Q for the period ending March 31, 2001).
10.35 Exchange Agreement between ProxyMed and Fisher Capital Ltd. and
Wingate Capital Ltd. dated as of April 24, 2001 (incorporated by
reference to Exhibit 10.27 of Form 8-K, File No. 000-22052
reporting an event dated April 24, 2001).
31
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.36 Exchange Agreement between ProxyMed and Royal Bank of Canada
dated as of April 24, 2001 (incorporated by reference to Exhibit
10.28 of Form 8-K, File No. 000-22052 reporting an event dated
April 24, 2001).
10.37 Exchange Agreement between ProxyMed and Leonardo, L.P. dated as
of April 24, 2001 (incorporated by reference to Exhibit 10.29 of
Form 8-K, File No. 000-22052 reporting an event dated April 24,
2001).
10.38 Asset Purchase Agreement between ProxyMed and MDP Corporation
dated April 23, 2001 (incorporated by reference to Exhibit 2.1
of Form 8-K, File No. 000-22052, reporting an event dated May 1,
2001).
10.39 *2001 Stock Option Plan (incorporated by reference to Exhibit B
of the Proxy Statement filed on June 22, 2001).
10.40 *Employment Agreement between ProxyMed and A. Thomas Hardy dated
December 31, 2001.
10.41 Stock and Warrant Purchase Agreement between ProxyMed and
General Atlantic Partners 74, L.P., GAP Coinvestment Partners
II, L.P., GAPCO GmbH & Co., KG and GapStar, LLC (incorporated by
reference to Exhibit 10.1 of Form 8-K, File No. 000-22052,
reporting an event dated March 26, 2002).
10.42 Registration Rights Agreement between ProxyMed and General
Atlantic Partners 74, L.P., GAP Coinvestment Partners II, L.P.,
GapStar, LLC, and GAPCO GmbH & Co. KG (incorporated by reference
to Exhibit 10.3 of Form 8-K, File No. 000-22052, reporting an
event dated March 26, 2002).
10.43 Form of Common Stock Purchase Warrants issued to General
Atlantic Partners 74, L.P., GAP Coinvestment Partners II, L.P.,
GapStar, LLC and GAPCO GmbH & Co, KG (incorporated by reference
to Exhibit 10.2 of Form 8-K, File No. 000-22052, reporting an
event dated March 26, 2002).
21 Subsidiaries of ProxyMed, Inc.
23 Consent of PricewaterhouseCoopers LLP.
- ----------------------------
* Denotes employment agreement or compensatory plan.
32
PROXYMED, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE
----
Consolidated Financial Statements
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - December 31, 2001 and 2000 F-3
Consolidated Statements of Operations -
Years Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows -
Years Ended December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 - F-35
Schedule II - Valuation and Qualifying Accounts -
Years Ended December 31, 2001, 2000 and 1999 F-36
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of ProxyMed, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
ProxyMed, Inc. and its subsidiaries (the "Company") at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 12, 2002 (except as to Note 19, which is as
of March 26, 2002).
F-2
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,601,000 $ 8,841,100
Accounts receivable - trade, net of allowance for
doubtful accounts of $228,200 and $691,300 respectively 5,588,800 4,174,700
Other receivables 88,800 198,400
Inventory 3,351,100 2,640,700
Other current assets 330,600 860,800
------------- -------------
Total current assets 21,960,300 16,715,700
Property and equipment, net 3,831,700 3,905,000
Goodwill, net 7,960,400 3,038,600
Purchased technology, capitalized software and
other intangible assets, net 2,075,800 3,942,400
Other assets 53,300 64,700
------------- -------------
Total assets $ 35,881,500 $ 27,666,400
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 7,000,000 $ --
Accounts payable and accrued expenses 5,344,600 4,246,400
Deferred revenue 222,300 313,800
------------- -------------
Total current liabilities 12,566,900 4,560,200
Long-term deferred revenue and other long-term liabilities 442,100 729,100
------------- -------------
Total liabilities 13,009,000 5,289,300
------------- -------------
Commitments and contingencies
Stockholders' equity:
Series B 6% Convertible preferred stock - $.01 par value.
Authorized and issued 15,000 shares;
outstanding -0- and 110 shares, respectively;
liquidation preference $-0- and $110,000, respectively -- --
Series C 7% Convertible preferred stock - $.01 par value.
Authorized 300,000 shares; issued 253,265 shares;
outstanding 34,650 and 253,265 shares, respectively;
liquidation preference $3,465,000 and $25,326,500, respectively 300 2,500
Common stock - $.001 par value. Authorized 13,333,333 shares;
issued and outstanding 4,894,433 (after deducting 15,061
shares in treasury) and 1,372,898 shares, respectively 4,900 1,400
Additional paid-in capital 120,276,500 113,234,500
Accumulated deficit (97,223,300) (90,425,400)
Note receivable from stockholder (185,900) (435,900)
------------- -------------
Total stockholders' equity 22,872,500 22,377,100
------------- -------------
Total liabilities and stockholders' equity $ 35,881,500 $ 27,666,400
============= =============
See accompanying notes.
F-3
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
Revenues:
Transaction fees, services and license fees $ 23,366,200 $ 18,439,900 $ 18,195,000
Communication devices, computer systems
and other tangible goods 19,864,100 15,001,200 10,828,100
------------ ------------ ------------
43,230,300 33,441,100 29,023,100
------------ ------------ ------------
Costs and expenses:
Cost of transaction fees, services and license fees 6,530,000 1,886,200 1,577,200
Cost of tangible goods 13,878,000 10,362,800 7,379,900
Selling, general and administrative expenses 21,266,900 27,097,200 26,937,800
Depreciation and amortization 8,176,400 13,374,900 13,064,200
Restructuring charges -- 1,330,000 --
Write-off of impaired and obsolete assets 91,100 2,850,100 82,900
------------ ------------ ------------
49,942,400 56,901,200 49,042,000
------------ ------------ ------------
Operating loss (6,712,100) (23,460,100) (20,018,900)
Income from litigation settlement and other, net 39,800 666,600 --
Interest expense, net (125,600) (4,133,000) (100,900)
------------ ------------ ------------
Loss from continuing operations (6,797,900) (26,926,500) (20,119,800)
Discontinued operations (Note 3):
Loss from discontinued operations -- (303,900) (1,195,100)
Gain (loss) on disposal of discontinued operations -- 545,300 (519,300)
------------ ------------ ------------
-- 241,400 (1,714,400)
------------ ------------ ------------
Net loss (6,797,900) (26,685,100) (21,834,200)
Deemed dividends and other charges 12,262,000 21,366,600 22,200
------------ ------------ ------------
Net loss applicable to
common shareholders $(19,059,900) $(48,051,700) $(21,856,400)
============ ============ ============
Weighted average common shares outstanding 2,162,352 1,304,342 1,202,136
============ ============ ============
Basic and diluted net loss per share of common stock:
Loss from continuing operations $ (8.81) $ (37.03) $ (16.75)
Gain (loss) from discontinued operations -- .19 (1.43)
------------ ------------ ------------
Net loss $ (8.81) $ (36.84) $ (18.18)
============ ============ ============
See accompanying notes.
F-4
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ----------------------
NUMBER PAR NUMBER PAR NUMBER PAR
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
---------- ------ ---------- ------ ---------- ------
Balances, January 1, 1999 -- $ -- -- $ -- 1,187,211 $ 1,200
Sales of common stock, net
of expenses of $67,700 -- -- -- -- 16,667 --
Sale of preferred stock, net
of expenses of $840,000 15,000 200 -- -- -- --
Exercise of stock options and warrants -- -- -- -- 13,826 --
Common stock issued for
acquired businesses -- -- -- -- 3,456 --
Compensatory stock and
stock options -- -- -- -- 667 --
Repayment of stockholder note -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------- ------------- ---------- ------------- ------------- ---------
Balances, December 31, 1999 15,000 200 -- -- 1,221,827 1,200
Sale of Series C preferred stock -- -- 10,000 100 -- --
Exercise of stock options and warrants -- -- -- -- 11,229 --
Treasury stock received for sales
of discontinued businesses -- -- -- -- (15,061) --
Common stock issued
for acquired businesses -- -- -- -- 2,247 --
Common stock issued for
stock compensation award -- -- -- -- 13,333 --
Conversions of Series B
Preferred stock (1,890) -- -- -- 108,129 100
Redemptions of Series B
Preferred stock (13,000) (200) -- -- -- --
Warrants issued to placement agent
under advisory agreement -- -- -- -- -- --
Warrants issued to placement agent
pursuant to Convertible Debt offering -- -- -- -- -- --
Reclassification of unaccreted
value of Put Warrants -- -- -- -- -- --
Amortization of beneficial
conversion of Convertible Debt -- -- -- -- -- --
Conversion of Convertible
Debt into Series C
preferred stock, net of costs -- -- 243,265 2,400 -- --
Compensatory stock options -- -- -- -- -- --
Dividends on preferred stock -- -- -- -- 31,194 100
Reclassification of stockholder note -- -- -- -- -- --
Other, net -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------- ------------- ---------- ------------- ------------- ---------
Balances, December 31, 2000 110 -- 253,265 2,500 1,372,898 1,400
Sales of common stock, net
of expenses of $728,800 -- -- -- -- 483,414 500
Conversion of Series B
preferred stock (110) -- -- -- 8,766 --
Conversions of Series C
preferred stock -- -- (49,466) (500) 329,773 300
Conversions of Series C
preferred stock pursuant
to Conversion Offer -- -- (169,149) (1,700) 1,296,126 1,300
Exchange of Series B warrants
into common stock -- -- -- -- 218,828 200
Exchange of Series C warrants
into common stock -- -- -- -- 1,050,691 1,100
Dividends on preferred stock -- -- -- -- 133,937 100
Repayment of note from stockholder -- -- -- -- -- --
Other, net -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------- ------------- ---------- ------------- ------------- ---------
Balances, December 31, 2001 -- $ -- 34,650 $ 300 4,894,433 $ 4,900
============= ============= ========== ============= ============= =========
NOTE
RECEIVABLE
ADDITIONAL ACCUMULATED FROM
PAID-IN CAPITAL DEFICIT STOCKHOLDER TOTAL
---------------- ----------- ----------- ------------
Balances, January 1, 1999 $ 82,443,900 $ (41,906,200) $ (259,800) $ 40,279,100
Sales of common stock, net
of expenses of $67,700 2,932,300 -- -- 2,932,300
Sale of preferred stock, net
of expenses of $840,000 14,159,800 -- -- 14,160,000
Exercise of stock options and warrants 1,037,700 -- -- 1,037,700
Common stock issued for
acquired businesses 750,000 -- -- 750,000
Compensatory stock and
stock options 193,000 -- -- 193,000
Repayment of stockholder note -- -- 259,800 259,800
Dividends on preferred stock (22,200) -- -- (22,200)
Net loss -- (21,834,100) -- (21,834,100)
------------- ------------- ------------- -------------
Balances, December 31, 1999 101,494,500 (63,740,300) -- 37,755,600
Sale of Series C preferred stock 999,900 -- -- 1,000,000
Exercise of stock options and warrants 426,800 -- -- 426,800
Treasury stock received for sales
of discontinued businesses (1,929,800) -- -- (1,929,800)
Common stock issued
for acquired businesses 67,400 -- -- 67,400
Common stock issued for
stock compensation award 285,000 -- -- 285,000
Conversions of Series B
Preferred stock (100) -- -- --
Redemptions of Series B
Preferred stock (15,729,500) -- -- (15,729,700)
Warrants issued to placement agent
under advisory agreement 1,300,000 -- -- 1,300,000
Warrants issued to placement agent
pursuant to Convertible Debt offering 10,875,900 -- -- 10,875,900
Reclassification of unaccreted
value of Put Warrants 12,084,600 -- -- 12,084,600
Amortization of beneficial
conversion of Convertible Debt 3,202,900 -- -- 3,202,900
Conversion of Convertible
Debt into Series C
preferred stock, net of costs (332,300) -- -- (329,900)
Compensatory stock options 491,500 -- -- 491,500
Dividends on preferred stock (3,600) -- -- (3,500)
Reclassification of stockholder note -- -- (435,900) (435,900)
Other, net 1,300 -- -- 1,300
Net loss -- (26,685,100) -- (26,685,100)
------------- ------------- ------------- -------------
Balances, December 31, 2000 113,234,500 (90,425,400) (435,900) 22,377,100
Sales of common stock, net
of expenses of $728,800 7,247,000 -- -- 7,247,500
Conversion of Series B
preferred stock -- -- -- --
Conversions of Series C
preferred stock 200 -- -- --
Conversions of Series C
preferred stock pursuant
to Conversion Offer (31,600) -- -- (32,000)
Exchange of Series B warrants
into common stock (72,800) -- -- (72,600)
Exchange of Series C warrants
into common stock (53,700) -- -- (52,600)
Dividends on preferred stock (6,900) -- -- (6,800)
Repayment of note from stockholder -- -- 250,000 250,000
Other, net (40,200) -- -- (40,200)
Net loss -- (6,797,900) -- (6,797,900)
------------- ------------- ------------- -------------
Balances, December 31, 2001 $ 120,276,500 $ (97,223,300) $ (185,900) $ 22,872,500
============= ============= ============= =============
See accompanying notes.
F-5
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (6,797,900) $(26,685,100) $(21,834,200)
Adjustments to reconcile net loss to net provided by
(used in) operating activities:
Depreciation and amortization 8,176,400 13,705,500 14,213,200
Amortization of private placement related costs -- 4,472,700 --
Restructuring charges -- 1,330,000 --
Provision for doubtful accounts 69,600 425,400 639,600
Reserve for (recovery of) obsolete inventory (50,000) (25,500) 350,000
Compensatory stock options and warrants
and stock compensation awards issued 433,300 1,643,200 11,500
Payment for non-compete agreement -- (200,000) --
Write-off of obsolete and impaired assets 91,100 2,850,100 82,900
Net gain on sales of discontinued operations -- (545,300) --
Changes in net current assets of discontinued operations -- (734,600) 809,600
Changes in assets and liabilities, net of
effect of acquisitions and dispositions:
Accounts and other receivables (613,700) (1,209,700) (180,200)
Inventory (612,000) (773,200) 81,000
Accounts payable and accrued expenses 576,100 (1,015,700) (957,300)
Deferred revenue (264,700) (321,500) (128,200)
Other, net 11,200 7,100 305,000
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,019,400 (7,076,600) (6,607,100)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (1,324,700) (967,000) (1,787,400)
Capital expenditures of discontinued operations -- (230,100) (357,700)
Capitalized software (120,200) (1,610,700) (1,438,900)
Acquisition of businesses, net of cash acquired (3,000,000) -- (1,000,000)
Payment of acquisition contingency of discontinued operations -- -- (500,000)
Payments for acquisition-related costs (42,400) (18,000) (573,500)
------------ ------------ ------------
Net cash used in investing activities (4,487,300) (2,825,800) (5,657,500)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of convertible debt securities -- 21,383,200 --
Net proceeds from sale of convertible preferred stock -- 1,000,000 14,160,000
Net proceeds from sale of common stock 7,247,500 -- 2,932,300
Redemption of convertible preferred stock -- (15,748,400) --
Preferred stock conversion offer and warrant exchange costs (157,200) -- --
Dividends on preferred stock (6,800) (3,600) --
Proceeds from exercise of stock options and warrants -- 426,800 1,037,700
Collection of notes receivable 297,600 1,648,800 259,800
Draw on line of credit -- 2,000,000 4,930,000
Repayment of line of credit -- (3,000,000) (3,930,000)
Payment of notes payable, long-term debt and capital leases (153,300) (451,200) (263,900)
------------ ------------ ------------
Net cash provided by financing activities 7,227,800 7,255,600 19,125,900
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,759,900 (2,646,800) 6,861,300
Cash and cash equivalents at beginning of year 8,841,100 11,487,900 4,626,600
------------ ------------ ------------
Cash and cash equivalents at end of year $ 12,601,000 $ 8,841,100 $ 11,487,900
============ ============ ============
See accompanying notes.
F-6
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS OF PROXYMED - ProxyMed, Inc. ("ProxyMed" or "the Company") is
an electronic healthcare transaction processing services company
providing connectivity services and related value-added products to
physician offices, payers, medical laboratories, pharmacies and other
healthcare providers. ProxyMed's products and services are provided
from its operating facilities located in Fort Lauderdale, Florida; New
Albany, Indiana; Santa Ana, California; and Atlanta, Georgia.
In March 2000, the Company sold its non-core network integration and
prescription drug dispensing businesses. These two businesses are shown
as discontinued operations in the consolidated financial statements,
and the related notes have been reclassified to segregate the net
assets and operating results of these businesses (see Note 3).
In May 2001, the Company acquired substantially all of the assets and
the business of MDP Corporation ("MDP") for $10 million (see Note 2).
ProxyMed paid $3 million cash at closing and obligated itself with
monthly cash interest payments and a $7 million debt payment due in May
2002. The Company paid this note in full in January 2002.
On August 21, 2001, the Company's Board of Directors effected a
1-for-15 reverse stock split of the Company's common stock, par value
$.001 per share. All share and per share amounts have been restated to
reflect this transaction.
(b) PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of ProxyMed and its wholly-owned subsidiaries. All
significant intercompany transactions have been eliminated in
consolidation.
(c) USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(d) REVENUE RECOGNITION - Electronic transaction processing fee revenue is
recorded in the period the service is rendered. Certain transaction
fee revenue may be subject to revenue sharing or rebates per agreements
with resellers, vendors or gateway partners and are recorded as gross
revenues. Revenue from sales of software, software licenses, computer
hardware and manufactured goods is recognized when persuasive evidence
of an arrangement exists, delivery has occurred, the price is fixed or
determinable and collectibility is probable. The same criteria are
applied to each element of multiple element arrangements after
allocating the amounts paid to individual elements based on
vendor-specific objective evidence of fair value. Revenue from certain
up-front fees is amortized ratably over the expected life of the
customer. Revenue from hardware leases, software rentals and
maintenance fees is recognized ratably over the applicable period.
F-7
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(e) CASH AND CASH EQUIVALENTS - ProxyMed considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. Cash balances in excess of immediate needs are invested in
bank certificates of deposit, money market accounts and commercial
paper. At times, such amounts may be in excess of FDIC insurance
limits. ProxyMed has not experienced any loss to date on these
investments.
(f) INVENTORY - Inventory consisting of component parts, materials,
supplies and finished goods (including direct labor and overhead) used
to manufacture laboratory communication devices is stated at the lower
of cost (first-in, first-out method) or market. Reserves for obsolete,
damaged and slow-moving inventory are maintained and are periodically
reviewed by management.
(g) PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and
includes revenue earning equipment. Depreciation of property and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or the
estimated useful lives of the assets.
Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the accounts and any
resulting gains or losses are reflected in other income for the period;
upon sale or retirement of revenue earning equipment, the gross
proceeds are included in net revenues and the undepreciated cost of the
equipment sold is included in cost of sales. Maintenance and repair of
property and equipment are charged to expense as incurred. Renewals and
betterments are capitalized and depreciated. Examination for obsolete,
damaged and impaired fixed assets are periodically reviewed by
management.
(h) INTANGIBLE ASSETS
GOODWILL - Goodwill representing the excess of cost over the estimated
fair value of net assets acquired was amortized on the straight-line
basis over 3 to 15 years until December 31, 2001, at which time the
Company adopts SFAS No. 142 (see Note l(1) below).
F-8
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER INTANGIBLES - Other acquired intangible assets, consisting
primarily of customer contracts and covenants-not-to-compete, are being
amortized on a straight-line basis over their estimated useful lives of
5 to 12 years.
ProxyMed regularly reviews the recoverability of goodwill, other
intangible assets and other long-lived assets for indications that the
carrying value may be impaired or that the useful lives assigned may be
excessive. In performing such review, goodwill associated with
acquisition of the intangible assets is included in the analysis of the
impairment of such intangible assets. When indications exist that
impairment may have occurred, the carrying values are assessed based
upon an analysis of estimated future cash flows on an undiscounted
basis and before interest charges, or useful lives are changed
prospectively.
PURCHASED TECHNOLOGY AND CAPITALIZED SOFTWARE - ProxyMed has recorded
amounts related to various software and technology that it has
purchased or capitalized for external sale to its customers or for its
own internal systems use. Certain computer software costs for external
sale are capitalized and are reported at the lower of unamortized cost
or net realizable value. Such costs are capitalized when they are
related to a product that has achieved technological feasibility or
that has an alternative future use, and cease to be capitalized when
the product is available for general release to customers. The costs
are amortized on a product-by-product basis using the straight-line
method over their estimated useful lives, generally over 3 years, and
costs of maintenance and support are charged to expense. Costs for
computer software used for ProxyMed's own internal systems are
capitalized during the application development stage and are
periodically evaluated by ProxyMed for indications that the carrying
value may be impaired or that the useful lives assigned may be
excessive. Such software is being amortized on a straight-line basis
over its estimated useful life of 3 years. Purchased technology and
capitalized software and related accumulated amortization are
written-off from the accounts when fully amortized.
(i) RESEARCH AND DEVELOPMENT - Software development costs incurred prior to
achieving technological feasibility are charged to research and
development expense when incurred. Research and development expense of
approximately $1,960,700 in 2001, $3,130,000 in 2000, and $2,898,000 in
1999 was recorded in selling, general and administrative expenses.
F-9
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(j) INCOME TAXES - Deferred income taxes are determined based upon
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Deferred tax assets are also established for the future tax benefits of
loss and credit carryovers. Valuation allowances are established for
deferred tax assets when, based on the weight of available evidence, it
is deemed more likely than not that such amounts will not be realized.
(k) NET LOSS PER SHARE - Basic loss per share of common stock is computed
by dividing net loss applicable to common shareholders by the weighted
average shares of common stock outstanding during the year. Diluted per
share results reflect the potential dilution from the exercise or
conversion of securities into common stock; however, stock options and
warrants totaling 1,018,713 shares, 2,450,130 shares and 302,029 shares
for the three years ended December 31, 2001, 2000 and 1999,
respectively, as well as common shares issuable on conversion of Series
B and Series C preferred stock (231,000 shares, 1,696,500 shares and
110,284 shares if converted on December 31, 2001, 2000 and 1999,
respectively) were excluded from the calculation of diluted per share
results because their effect was antidilutive.
(l) NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations", SFAS No.
142, "Goodwill and Other Intangible Assets", and SFAS No. 143
"Accounting for Asset Retirement Obligations".
Effective July 1, 2001, SFAS No. 141, "Business Combinations"
eliminates the pooling-of-interest method for business combinations and
requires application of the purchase method. Effective for financial
statements issued for fiscal years beginning after June 15, 2002, SFAS
No. 143 "Accounting for Asset Retirement Obligations" addresses
financial accounting requirements for retirement obligations associated
with tangible long-lived assets. The adoption of SFAS No. 141 and SFAS
No. 143 are not expected to have any material impact on the Company's
financial statements.
SFAS No. 142, "Goodwill and Other Intangible Assets", primarily
addresses the accounting for goodwill and intangible assets subsequent
to their initial recognition. The provisions of SFAS No. 142 (1)
prohibit the amortization of goodwill and indefinite-lived intangible
assets; (2) require that goodwill and indefinite-lived intangibles
assets be tested at least annually for impairment; (3) require that
reporting units be identified for the purpose of assessing potential
future impairments of goodwill; and (4) remove the forty-year
limitation on the amortization period of intangible assets that have
finite lives. The Company will adopt the provisions of SFAS No. 142 in
first quarter of 2002 and expects that it will no longer record
approximately $808,000 of amortization relating to its existing
goodwill each quarter, which would have been recorded through the first
quarter of 2004. SFAS No. 142 also requires that goodwill be tested at
least annually for impairment using a two-step process. The first step
is to identify a potential impairment and, in transition, this step
must be measured as of the beginning of the fiscal year. The Company
will complete that first step of the goodwill impairment test during
the first quarter of 2002. The second step of the goodwill impairment
test measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be completed by
the end of the Company's fiscal year. The Company does not anticipate
recording an impairment charge as a result of applying SFAS No. 142
during the first quarter of 2002.
F-10
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", that replaces SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Effective for financial statements issued for fiscal years beginning
after December 15, 2001, SFAS No. 144 requires that long-lived assets
to be disposed of by sale, including those of discontinued operations,
be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued
operations. Discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not
yet been incurred. SFAS No. 144 also broadens the reporting of
discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and
that will be eliminated from the ongoing operations of the entity in a
disposal transaction. The adoption of SFAS No. 144 is not expected to
have any material impact on the Company's financial statements.
(m) RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform to the current year presentation.
(2) ACQUISITIONS OF BUSINESSES
(a) MDP CORPORATION - In May 2001, the Company acquired substantially all
of the assets and the business of MDP Corporation, a privately-owned
electronic claims clearinghouse and patient statement processor based
in Atlanta, Georgia for $10 million cash. ProxyMed paid $3 million at
the closing and executed a $7 million promissory note, payable in May
2002. Interest on this note is payable monthly at 7% simple interest.
The assets of MDP collateralized the note. The acquisition was
accounted for as a purchase and the purchase price was allocated as
follows: working capital ($272,800); property and equipment ($165,000);
and other assets ($3,800). The excess of the consideration paid over
the estimated fair value of net assets acquired in the amount of
$9,558,400 was recorded as goodwill. In January 2002, the Company paid
the $7 million promissory note in full.
F-11
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following unaudited pro forma summary presents the consolidated
results of operations of ProxyMed and MDP as if the acquisition of this
business had occurred at the beginning of 2000, including additional
pro forma amortization of goodwill of $1,064,400 and $3,196,000 and
interest expense of $161,200 and $490,000 for the years ended December
31, 2001 and 2000, respectively. These pro forma results do not
necessarily represent results that would have occurred if the
acquisition had taken place at those dates, or of results which may
occur in the future.
YEAR ENDED DECEMBER 31,
------------ ------------
2001 2000
------------ ------------
Revenues $ 45,484,800 $ 39,777,800
Loss from continuing operations $ (7,776,500) $(30,277,000)
Net loss applicable to
common shareholders $(20,038,500) $(51,643,600)
Basic and diluted net loss
per share of common stock $ (9.27) $ (39.59)
(b) SPECIALIZED MEDICAL MANAGEMENT - In January 1999, ProxyMed acquired the
electronic transaction processing business and assets of Specialized
Medical Management, Inc., a provider of healthcare financial electronic
transaction processing services primarily in the Southwestern United
States, for $1,000,000 in cash. Additionally, costs of $174,000
associated with the acquisition were incurred, and 667 shares of
unregistered common stock and warrants to purchase 1,333 shares of
ProxyMed's common stock at $171.60 (together valued at $181,600 and
included in the calculation of goodwill) were issued to an unrelated
third-party as a finder's fee for this transaction. The value of the
shares was computed based on the fair market value of the common stock,
and the value of the warrant was computed using the Black-Scholes
method subject to, in both cases, a discount due to restrictions on
marketability of the securities for one year from the date of issuance.
The acquisition was accounted for as a purchase, and the purchase price
was allocated as follows: net working capital ($206,400), property and
equipment ($38,500) and other intangible assets ($111,000). The excess
of the consideration paid over the estimated fair value of the net
assets acquired in the amount of $999,600 was recorded as goodwill.
F-12
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) DISCONTINUED OPERATIONS
In March 2000, ProxyMed sold its discontinued network integration and
prescription drug dispensing businesses in separate transactions.
Proceeds from the sale of the network integration business were
$3,398,000 and were paid with 13,928 shares of ProxyMed common stock
(valued at $1,776,000, based on the closing market price of the common
stock on the date of closing, and recorded as treasury stock) and a
note receivable of $1,622,000 due on July 31, 2000. The sale resulted
in a gain of $608,400. As of December 31, 2000, all amounts due under
this note receivable has been collected.
Proceeds from the sale of the prescription drug dispensing business
were $255,000 and were paid with 1,133 shares of ProxyMed common stock
(valued at $154,000, based on the closing market price of the common
stock on the date of closing, and recorded as treasury stock) and a
note receivable of $101,000 payable in monthly installments over two
years and bearing interest at 9% per annum. The sale resulted in a loss
of $63,100. As of December 31, 2001, $82,700 under this note receivable
has been collected.
The following table represents the results of discontinued operations
for the years ended December 31, 2000 and 1999:
2000 1999
------------ ------------
Net revenues:
Network integration $ 2,371,700 $ 11,106,600
Prescription drug dispensing 574,700 2,200,300
------------ ------------
$ 2,946,400 $ 13,306,900
============ ============
Net income (loss):
Network integration $ (327,700) $ (1,045,300)
Prescription drug dispensing 23,800 (149,800)
------------ ------------
$ (303,900) $ (1,195,100)
============ ============
F-13
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) RESTRUCTURING CHARGE
In May 2000, the Company announced a reorganization plan aimed at
reducing costs and reallocating resources. As a result, the Company
reduced its workforce by approximately 70 employees, including the
resignation of its chief executive officer, president/chief operating
officer, chief financial officer, chief marketing officer and other
management positions. The Company recorded a charge of $1,330,000 in
the year ended December 31, 2000 primarily for separation payments and
marketing contracts that were canceled in connection with the
implementation of the reorganization plan. As of December 31, 2001, all
restructuring charges had been paid. In conjunction with this
restructuring, the Company also paid $200,000 to its former
president/chief operating officer under the non-compete clause of his
employment contract. This payment had been recorded as a prepaid
expense and was being amortized over a one-year period through May
2001.
(5) EQUITY TRANSACTIONS
(a) SALES OF COMMON STOCK - In 1999, ProxyMed sold 16,667 shares of common
stock at $180.00 per share in a private placement, resulting in net
proceeds of $2,932,300 after costs of $67,700. As part of the sale,
ProxyMed issued five-year warrants to the investors for the purchase of
an aggregate of 8,000 shares of common stock for $150.00 per share and
issued a five-year warrant to the placement agent for the purchase of
2,333 shares of common stock at $199.65 per share.
On December 21, 2001, the Company sold 483,414 shares of common stock
at $16.50 per share in a private placement to nine U.S. and Canadian
institutional and accredited investors, resulting in net proceeds of
$7,247,500 after total costs of $728,800 (including a 7% cash fee and
reimbursement of out-of-pocket expenses totaling $602,200 to
Commonwealth Associates, L.P. ("Commonwealth") who acted as placement
agent in the transaction). Certain executive officers, directors and
controlling persons of the Company had agreed to a lock-up on all
shares owned or beneficially owned by them until a registration
statement covering the shares sold in the private placement was
declared effective. On February 14, 2002, a registration statement
filed by the Company under Form S-3 covering the above shares was
declared effective.
F-14
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) SERIES B PREFERRED STOCK - In December 1999, ProxyMed sold 15,000
shares of 6% Series B non-voting, non-redeemable convertible preferred
stock (the "Series B Preferred") in a private placement to
institutional investors resulting in net proceeds of $14,160,000 after
costs of $840,000. ProxyMed, in whole or in part during the first year,
could call for conversion at 93% of the then current market price of
its common stock, or redemption at 107% of the face value plus accrued
dividends, with full conversion or redemption (at ProxyMed's election)
of all of the preferred stock within two years. ProxyMed was required
to convert 30% of the preferred shares by June 23, 2000, and another
30% of the preferred shares by September 23, 2000. After the first
year, the preferred shares are convertible at the option of the
investors. Dividends are cumulative and are payable quarterly in cash
or common stock. As part of this sale, warrants to purchase 53,333
shares of common stock (the "Old Warrants") were issued at an exercise
price of $180.75 per share. As a result of a Redemption and Exchange
Agreement executed in May 2000, 46,222 of these warrants were repriced
(see Note 5(c) below). Additionally, in 2000, we recorded a catch-up
beneficial conversion charge of $4,977,800 included as a dividend
charge in the loss applicable to common shareholders pursuant to
accounting literature allowing for a cumulative adjustment relating to
convertible securities.
Through December 31, 2001, 2,000 shares of the Series B Preferred had
been converted into an aggregate of 116,895 shares of common stock. As
described below, the balance of 13,000 shares were redeemed pursuant to
a redemption agreement in May 2000.
During 2000, dividends valued at $223,800 were paid by issuing 2,123
shares of common stock plus cash payments of $3,300. In 2001, cash
dividends of $4,900 were paid on the Series B Preferred.
F-15
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(c) SERIES B REDEMPTION AND EXCHANGE AGREEMENT - Due to the decline in the
price of the Company's common stock below $63.15 for a period of ten
consecutive trading days in April and May 2000, certain contractual
provisions were triggered which would have permitted the holders of the
Series B Preferred shares to immediately convert the preferred shares
and exercise the Old Warrants into a potentially large number of shares
of common stock. As a result, on May 4, 2000, the Company entered into
a Redemption and Exchange Agreement (the "Redemption Agreement") with
the holders of 13,000 shares of the Series B Preferred (the "Redemption
Agreement Holders"). Under the terms of the Redemption Agreement, the
Company immediately redeemed 4,000 shares of the Series B Preferred for
$4,687,000 (a 16.5% premium) and was required to redeem an additional
2,500 shares of the Series B Preferred on each of June 19, 2000, August
1, 2000, and August 31, 2000, and an additional 1,500 shares of the
Series B Preferred on September 29, 2000. So long as the Company
remained in compliance with the terms of the Redemption Agreement, the
Redemption Agreement Holders were prohibited from converting their
shares of Series B Preferred into shares of common stock. As a result
of the completion of a private placement financing of convertible
securities (see Note 5(e) below), the Company was able to redeem the
remaining 9,000 shares of the Series B Preferred in June 2000 for
$10,636,000. The total premium of $2,322,900 paid on the redemption of
the 13,000 shares of Series B Preferred, in addition to $728,000 of
unamortized original issuance costs of the Series B Preferred, was
recorded as dividend charges included in the net loss applicable to
common stockholders in the year ended December 31, 2000.
Also pursuant to the Redemption Agreement, 46,222 of the Old Warrants
(with an exercise price of $180.75 per share) issued to the Redemption
Agreement Holders were exchanged for an equal number of warrants (the
"Exchanged Warrants") with an exercise price of $22.50 per share. Such
holders also received, in the aggregate, 43,333 additional warrants to
purchase common stock (the "New Warrants") at an exercise price of
$22.50 per share. The total value of the Exchanged Warrants and New
Warrants of approximately $1,325,100 was included as dividend charges
in the net loss applicable to common stockholders in the year ended
December 31, 2000. The Exchanged Warrants expire on December 23, 2002
and the New Warrants expire on May 5, 2003. The exercise price and
number of shares of common stock which may be purchased upon exercise
of the Exchanged Warrants and the New Warrants are subject to
adjustment upon the occurrence of certain dilution events including,
without limitation, certain issuances of common stock, stock options or
convertible securities issued after November 2000, or certain corporate
transactions such as stock splits, mergers or asset sales. As a result,
in February 2001, the Exchanged Warrants were converted into 228,366
warrants with an exercise price of $18.89 per share and the Company
recorded a deemed dividend charge of $1,968,000 in the quarter ended
March 31, 2001. Subject to certain restrictions, the holders of the
Exchanged Warrants and the New Warrants agreed not to exercise such
warrants for a period of 180 days following the date of the Redemption
Agreement. The Company incurred approximately $475,700 in costs for
professional fees and other charges related to the negotiation of the
Redemption Agreement which were recorded as dividend charges included
in the net loss applicable to common stockholders in the year ended
December 31, 2000.
F-16
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Additionally, under the terms of the Redemption Agreement, the Company
had agreed to pay the Redemption Agreement Holders the aggregate amount
of $4,333,333 if there is a change of control of the Company on or
before December 23, 2002.
The Company had not entered into an agreement to redeem the shares of
Series B Preferred held by the holder of 2,000 shares of the Series B
Preferred (the "Remaining Holder"). Through December 31, 2000, the
Remaining Holder had converted 1,890 shares of the Series B Preferred
into an aggregate of 108,129 shares of common stock, and the balance of
110 shares of Series B Preferred was converted into 8,766 shares of
common stock in October 2001.
In addition, as a result of certain anti-dilution provisions triggered
in June 2000, 7,111 Old Warrants issued to the Remaining Holder at an
exercise price of $180.75 were converted into 85,689 warrants with an
exercise price of $15.00 per share. In December 2001, these warrants
were reset into 98,493 warrants at an exercise price of $13.05 per
share as a result of a conversion offer to convert the Company's Series
C 7% Convertible Preferred Stock (see Note 5(g) below).
(d) SERIES B WARRANT EXCHANGE - In April 2001, the Company entered into an
exchange agreement (the "Series B Exchange Agreements") with the
Redemption Agreement Holders. Under the Series B Exchange Agreements,
the Company canceled and exchanged all outstanding Exchanged Warrants
and New Warrants for an aggregate of 218,828 shares of common stock. In
accordance with the terms of the Series B Exchange Agreements, the
Company registered these shares under Form S-3 effective on June 25,
2001. For this transaction, the Company recorded a deemed dividend
charge of $1,854,600 in the quarter ended June 30, 2001. In connection
with the cancellation and exchange of these warrants, the holders of
the Series B Preferred and the holders of Series C 7% Convertible
Preferred Stock agreed to waive certain anti-dilution rights afforded
by certain outstanding warrants, the Series B Preferred and the Series
C 7% Convertible Preferred Stock.
F-17
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(e) CONVERTIBLE DEBT AND SERIES C PREFERRED STOCK - In June 2000, the
Company sold, in a private placement to institutional and individual
investors (the "Financing"), a total of $24,310,000 of 7% Convertible
Senior Secured Notes (the "Notes") due January 1, 2001. Together with
the Notes, the Company issued five-year warrants for the purchase of an
aggregate of 810,333 shares of the Company's common stock at an
exercise price of $15.00 per share. The total net proceeds received by
the Company from the Financing was approximately $21,383,000. Under
different circumstances the Notes were convertible into either common
stock at a conversion price of $15.00 per share, or into shares of the
Company's Series C 7% Convertible Preferred Stock (the "Series C
Preferred") at the rate of one Series C Preferred share for each $100
of principal and accrued interest under the Notes. As described below,
all of the Notes have been converted into shares of Series C Preferred.
The conversion price of the Series C Preferred, the warrant exercise
price, and number of shares of common stock issuable upon exercise of
the warrants were subject to adjustment upon the occurrence of certain
dilution events including, without limitation, certain issuances of
common stock, stock options or convertible securities issued after June
2001, or certain corporate transactions such as stock splits, mergers
or asset sales. As the conversion price of the Notes was less than the
market price of the Company's common stock on the dates of issuance,
the Company recorded a beneficial conversion charge in interest expense
of approximately $3,203,000 in the year ended December 31, 2000. The
total proceeds were allocated between the debt and the warrants
resulting in an accretion charge through interest expense of
approximately $260,000 recorded in the year ended December 31, 2000.
The warrants issued to the investors in the Financing provided that
they were not exercisable until such time as the Company had obtained
shareholder approval of an increase in the number of shares of its
authorized common stock which was ultimately approved by the Company's
shareholders at its July 7, 2000 annual meeting. However, since the
investors agreed to accept a $30.00 per warrant redemption price as
protection in case shareholder approval did not occur before January 1,
2001, the value of these "put" warrants was accreted up to their
redemption value through July 7, 2000, the date shareholder approval
was obtained, at which time the recorded value of $12,084,600 was
reclassified from debt to equity. Charges of approximately $740,000
associated with accreting the put warrants up to their redemption value
was recorded as interest expense in the year ending December 31, 2000.
F-18
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As a result of completion of the redemption of the Series B Preferred
pursuant to the Redemption Agreement, the Notes, plus accrued interest
thereon of $20,000, automatically converted into 243,265 shares of
Series C Preferred on June 30, 2000. Shares of Series C Preferred were
immediately convertible into common stock at any time by the holder at
an initial conversion price of $15.00 per share, subject to adjustment
upon the occurrence of certain dilution events including, without
limitation, certain issuances of common stock, stock options or
convertible securities issued after June 15, 2001, or certain corporate
transactions such as stock splits, mergers or asset sales. Shares of
Series C Preferred are mandatorily convertible if the Company raised
more than $30 million in gross proceeds from the issuance of securities
in a private or public placement or if the closing stock price of the
Company is trading at $45.00 for 20 consecutive trading days. The
Series C Preferred is entitled to receive a 7% annual non-cumulative
dividend, payable quarterly in cash or shares of common stock at the
Company's option. If paid in stock, the stock is valued at $15.00 per
share, subject to adjustment. Additionally, upon the conversion of the
Notes to Series C Preferred, the unamortized balance of the beneficial
conversion feature of $9,762,700 was taken as a charge included in the
net loss applicable to common stockholders in the year ended December
31, 2000.
Commonwealth represented the Company as private placement agent in the
Financing for which it received cash fees of $2,431,000 and five-year
warrants to purchase 486,200 shares of the Company's common stock at an
exercise price of $15.00 per share (valued at $10,876,000). Other costs
of the transaction aggregated approximately $547,000.
Costs of $13,854,000 incurred in the Financing were capitalized and
were amortized through the original maturity date of the Notes. Of this
amount, $268,000 was charged to interest expense. However, due to the
conversion of the Notes to Series C Preferred on June 30, 2000, the
unamortized financing costs of $13,585,000, and the recorded value of
the debt of $12,704,600, were reclassified to equity.
F-19
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As required, the Company registered under Form S-3 the underlying
common shares with the Securities and Exchange Commission on December
14, 2000. The investors in this transaction agreed to a one-year
lock-up on the transfer or sale of any shares of common stock received
upon conversion of the Series C Preferred shares and exercise of the
warrants issued. Additionally, Commonwealth agreed to a 15-month lockup
on the sale or transfer of the shares of common stock underlying the
warrants issued in connection with this financing and certain officers
of the Company had also agreed to a similar lockup on all common stock
owned or acquired during the 15-month period. At the discretion of
Commonwealth, lockup periods for all parties could have been extended
for a period of up to an additional 12 months or may have been be
terminated early. Furthermore, as part of the financing, the size of
ProxyMed's Board of Directors was required to be increased including
the appointment of four new members, two of which were appointed by the
investors and the other two by Commonwealth. On July 20, 2000, one
existing director resigned and five new directors were appointed to
serve with the remaining three directors.
In August 2000, the Company sold 10,000 shares of Series C Preferred
for $1 million in a private placement and issued five-year warrants for
the purchase of 33,333 shares of the Company's common stock at an
exercise price of $15.00 per share to Mr. Hoover, its new
chairman/chief executive officer, under terms substantially identical
to the Financing. Mr. Hoover's shares were locked-up similarly to those
of other officers of the Company, as noted above. As the conversion
price of these preferred shares was less than the market price of the
Company's common stock on the date of issuance, the Company recorded a
beneficial conversion charge of $500,000 in the year ended December 31,
2000.
Through December 12, 2001, 49,466 shares of Series C Preferred had been
converted into 329,773 shares of common stock under terms in the Series
C Preferred. On December 13, 2001, the Company offered to convert any
of the 203,799 outstanding shares of Series C Preferred at a reduced
conversion rate (see Note 5(g) below).
Dividends on the Series C Preferred for 2001 and 2000 valued at
$1,658,100 and $1,047,100, respectively, were paid with 108,434 shares
of common stock (of which 104,254 shares were distributed by December
31, 2001) and 58,754 shares of common stock (of which 29,071 shares
were distributed by December 31, 2000), plus cash for fractional shares
of $1,900 and $200, respectively. Dividends were paid through the date
of conversion for all conversions of Series C Preferred.
F-20
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(f) SERIES C WARRANT EXCHANGE - In June 2001, the Company offered to
exchange into shares of common stock (the "Series C Exchange Offer")
(i) 843,667 warrants (the "Investor Warrants") that were issued to
holders of the Series C Preferred; (ii) 552,867 warrants (the "Agent's
Warrants") that were issued to Commonwealth in connection with the
private placement of the Series C Preferred; and (iii) 66,667 warrants
(the "Advisory Warrants") that were issued to Commonwealth for certain
advisory services that Commonwealth provided to the Company. Under the
terms of the Series C Exchange Offer, the Company would issue 0.75
shares of its common stock for each Investor Warrant, 0.75 shares of
its common stock for each Agent's Warrant, and 0.625 shares of its
common stock for each Advisory Warrant. The Investor Warrants, the
Agent's Warrants and the Advisory Warrants are collectively known as
the "Series C Warrants".
On August 15, 2001, the Company canceled and exchanged 1,412,033, or
96.5%, of the 1,463,201 Series C Warrants for 1,050,691 shares of
common stock. As required in accordance with terms of the original
Subscription Agreement dated June 15, 2000, these shares were
registered under a Form S-3 on February 14, 2002. In connection with
the cancellation and exchange of the Series C Warrants, the exchanged
shares were subject to an additional lock-up period through February
15, 2002. Additionally, for this transaction, the Company recorded a
deemed dividend charge of $3,201,300 in 2001. As of December 31, 2001,
51,168 of the Series C Warrants remain outstanding.
(g) SERIES C PREFERRED CONVERSION OFFER - On December 13, 2001, the Company
offered to convert the 203,799 shares of the 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 conversion price of $15.00. As of December 31, 2001,
holders of 83.0% of the outstanding Series C Preferred had converted
their shares into 1,296,126 shares of common stock and, as a result,
the Company recorded a deemed dividend charge of $3,365,400 included in
the net loss applicable to common shareholders in the fourth quarter of
2001. At the conclusion of the Conversion Offer on February 11, 2002,
holders of 98.5% of the outstanding Series C Preferred had converted
their shares into a total of 1,538,636 common shares. A deemed dividend
charge of approximately $612,000 will be recorded in the first quarter
of 2002 for conversions consummated after the 2001 year end. As of
February 11, 2002, there were 20,000 unconverted shares of Series C
Preferred.
In addition, holders of more than two-thirds of the outstanding Series
C Preferred had voted to amend the Articles of Designation governing
the Series C Preferred and the Subscription Agreement dated as of June
15, 2000. These amendments eliminated certain rights of the Series C
Preferred shareholders, including anti-dilution provisions, voting
rights and certain restrictive covenants agreed to by the Company, and
apply to those Series C Preferred shareholders who decided not to
participate in the Conversion Offer.
F-21
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As noted above, a registration statement filed by the Company under
Form S-3 was declared effective on February 14, 2002 covering the
resale of the December 2001 private placement shares of the investors,
the additional shares that would have been required to be issued to the
investors under that private placement if a registration statement was
not declared effective by March 20, 2002, and the resale of the
additional shares issuable to the holders of the Series C Preferred
shares electing to convert at the reduced conversion price pursuant to
the Conversion Offer.
As a result of the reduced conversion price in the Conversion Offer,
85,689 warrants with an exercise price of $15.00 per share issued to
the Remaining Holder in connection with our Series B Preferred were
reset into 98,493 warrants with a new exercise price of $13.05 per
share as a result of anti-dilution provisions relating to the Series B
Preferred. As a result of this reset, the Company recorded a deemed
dividend charge of approximately $207,800 in the fourth quarter of
2001.
(h) OTHER WARRANTS - At December 31, 2001, there are 28,949 warrants
exercisable at prices ranging from $113.40 to $199.65 at various times
through June 2007 issued in connection with prior equity and other
business transactions consummated by ProxyMed.
(i) REVERSE STOCK SPLIT - On August 21, 2001, the Company's Board of
Directors effected a 1-for-15 reverse stock split of its common stock
whereby each 15 shares of common stock was exchanged for one new share
of common stock. As a result of this reverse stock split, the par value
of the common stock remained unchanged at $.001 per share and no cash
was issued for fractional interests.
(j) OTHER - ProxyMed has remaining 1,731,735 authorized but unissued shares
of preferred stock, par value $.01 per share, which are entitled to
rights and preferences to be determined at the discretion of the Board
of Directors.
The value of any stock options and warrants issued in connection with
the sales of common stock and convertible preferred stock are netted
against the proceeds within stockholders' equity, and have no impact on
earnings.
F-22
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) SEGMENT INFORMATION
ProxyMed operates in two reportable segments which are separately
managed: electronic healthcare transaction processing and laboratory
communication solutions. Electronic healthcare transaction processing
includes transaction and value-added services principally between
physicians and insurance companies (Payer Services) and physicians and
pharmacies (Prescription Services); and laboratory communication
solutions includes the sale, lease and service of communication
devices principally to laboratories and the contract manufacturing of
printed circuit boards (Laboratory Services). Intersegment sales are
not material and there were no foreign sales for any periods presented.
YEAR ENDING DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net revenues:
Electronic healthcare transaction processing $ 16,938,400 $ 10,103,400 $ 10,285,300
Laboratory communication solutions 26,291,900 23,337,700 18,737,800
------------ ------------ ------------
$ 43,230,300 $ 33,441,100 $ 29,023,100
============ ============ ============
Operating income (loss):
Electronic healthcare transaction processing $ (6,858,700) $(18,949,800) $(14,909,900)
Laboratory communication solutions 3,685,900 3,724,200 990,400
Corporate and consolidating (3,539,300) (6,904,500) (6,099,400)
Restructuring charges -- (1,330,000) --
------------ ------------ ------------
$ (6,712,100) $(23,460,100) $(20,018,900)
============ ============ ============
Depreciation and amortization:
Electronic healthcare transaction processing $ 7,285,400 $ 12,146,900 $ 11,815,100
Laboratory communication solutions 560,600 722,300 908,400
Corporate and consolidating 330,400 505,700 340,700
------------ ------------ ------------
$ 8,176,400 $ 13,374,900 $ 13,064,200
============ ============ ============
Capital expenditures and capitalized software:
Electronic healthcare transaction processing $ 771,600 $ 2,125,800 $ 2,464,200
Laboratory communication solutions 627,600 358,300 448,000
Corporate and consolidating 45,700 93,600 314,100
------------ ------------ ------------
$ 1,444,900 $ 2,577,700 $ 3,226,300
============ ============ ============
DECEMBER 31,
----------------------------
Total assets: 2001 2000
------------ ------------
Electronic healthcare transaction processing $ 14,075,900 $ 9,958,700
Laboratory communication solutions 8,525,100 8,070,800
Corporate and consolidating 13,280,500 9,636,900
------------ ------------
$ 35,881,500 $ 27,666,400
============ ============
F-23
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) INVENTORY
Inventory consists of the following at December 31, 2001 and 2000:
2001 2000
---------- ----------
Materials, supplies and component parts $2,433,400 $1,777,700
Work in process 159,100 203,600
Finished goods 758,600 659,400
---------- ----------
$3,351,100 $2,640,700
========== ==========
(9) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2001
and 2000:
ESTIMATED
2001 2000 USEFUL LIVES
---------- ---------- ---------------
Furniture, fixtures and equipment $2,052,000 $1,665,200 5 to 7 years
Computer hardware and software 3,548,100 3,204,900 3 to 5 years
Service vehicles 250,400 267,400 5 years
Leasehold improvements 759,300 610,700 Life of lease
Revenue earning equipment 772,300 703,300 5 years
---------- ----------
7,382,100 6,451,500
Less accumulated depreciation 3,550,400 2,546,500
---------- ----------
Property and equipment, net $3,831,700 $3,905,000
========== ==========
Depreciation expense was $1,469,700 in 2001, $1,515,000 in 2000 and
$1,146,000 in 1999. Accumulated depreciation for revenue earning
equipment at December 31, 2001 and 2000 was $447,000 and $340,900,
respectively. In addition, as a result of ProxyMed's periodic review
for impairment, ProxyMed wrote off $91,100 and $364,000 of remaining
book value in obsolete and damaged fixed assets in 2001 and 2000,
respectively.
F-24
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2001 and 2000:
2001 2000
----------- -----------
Goodwill $10,259,600 $19,391,100
Less accumulated amortization 2,299,200 16,352,500
----------- -----------
Goodwill, net $ 7,960,400 $ 3,038,600
=========== ===========
Purchased technology $ -- $11,000,000
Capitalized software 637,400 641,100
Other intangible assets 3,584,400 3,584,400
----------- -----------
4,221,800 15,225,500
Less accumulated amortization 2,146,000 11,283,100
----------- -----------
Purchased technology, capitalized software
and other intangible assets, net $ 2,075,800 $ 3,942,400
=========== ===========
Amortization of goodwill was $4,636,600 in 2001, $6,299,000 in 2000 and
$6,561,000 in 1999. In accordance with SFAS No. 142, the Company will
discontinue the amortization of goodwill effective January 1, 2002 and
will periodically evaluate for potential impairment (see Note 1(1)
above).
Amortization of purchased technology, capitalized software and other
intangible assets was $1,986,800 in 2001, $5,194,000 in 2000 and
$4,857,000 in 1999. In addition, as a result of ProxyMed's periodic
review for impairment, ProxyMed wrote off the remaining carrying value
of previously capitalized software costs of $2,486,000 in 2000 and
$83,000 in 1999 due to project cancellations and changes in
technologies relating to its web development and certain products for
resale.
F-25
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following at
December 31, 2001 and 2000:
2001 2000
---------- ----------
Accounts payable $2,500,500 $1,729,600
Accrued payroll and related costs 1,579,500 1,163,400
Restructuring charges -- 257,000
Other accrued expenses 1,264,600 1,096,400
---------- ----------
Total accounts payable and accrued expenses $5,344,600 $4,246,400
========== ==========
Other accrued expenses include the current portion of capital leases
payable, customer deposits, and estimated property and other taxes.
Additionally, at December 31, 2000, other accrued expenses include
$200,000 for a software licensing deficiency contingency (See Note
18(g) below).
(12) DEBT OBLIGATIONS
(a) REVOLVING LINE OF CREDIT - In July 1999, ProxyMed entered into an
accounts receivable-based revolving line of credit agreement of up to
$5,000,000. In June 2000, ProxyMed terminated this line of credit and
repaid all outstanding balances.
(b) ACQUISITION-RELATED OBLIGATION - As a result of its acquisition of
Clinical MicroSystems, Inc. in March 1997, ProxyMed was obligated to
pay $500,000 and $750,000 in April 1999 and 2000, respectively, to the
former owner of Clinical MicroSystems. These obligations were recorded
net of interest imputed at the rate of 10.31% per annum and are to be
repaid at least 50% in cash, with the remaining balance, if any, paid
in shares of unregistered common stock. In April 1999, ProxyMed elected
to make its $500,000 payment with $250,000 in cash and 50% in 1,667
shares of common stock. In April 2000, the Company paid the third and
final debt payment. The $750,000 payment was paid with $375,000 in cash
and 2,247 shares of common stock. The number of shares of common stock
issued was based on a price of $166.80 per share (as determined by the
purchase agreement). However, at the time of the actual payment, the
price of the stock had fallen to $30.00 per share. Therefore, due to
this drop in the stock price, the Company reduced the remaining
goodwill and other intangible assets related to this acquisition to
zero (total of $212,200) and recorded the excess as a reduction of
amortization expense ($95,400) in the year ended December 31, 2000.
F-26
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) INCOME TAXES
The significant components of the deferred tax asset account is as
follows at December 31, 2001 and 2000:
2001 2000
------------ ------------
Net operating losses - Federal $ 20,497,700 $ 19,469,500
Net operating losses - State 2,387,400 2,267,600
Depreciation and amortization 9,387,000 8,043,200
Other - net 3,282,700 3,456,500
------------ ------------
Total deferred tax assets 35,554,800 33,236,800
Less valuation allowance (35,554,800) (33,236,800)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
Based on the weight of available evidence, a valuation allowance has
been provided to offset the entire deferred tax asset amount. Net operating loss
carryforwards, which amount to $60,287,400 as of December 31, 2001, begin to
expire in 2008. Upon completion of the 2000 tax return, certain deferred tax
accounts were adjusted to their proper values resulting in a decrease to the
previously reported net operating loss carryforwards.
F-27
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The benefit for income taxes differs from the amount computed by
applying the statutory federal income tax rate to the net loss
reflected on the Consolidated Statements of Operations in the three
years ended December 31, 2001 due to the following:
2001 2000 1999
------ ------ ------
Federal income tax benefit at statutory rate 34.0% 34.0% 35.0%
State income tax benefit 3.6 1.6 3.5
Non-deductible items (3.5) (5.2) --
Increase in valuation allowance (34.1) (30.4) (38.5)
------ ------ ------
--% --% --%
====== ====== ======
(14) STOCK OPTIONS
ProxyMed has various stock option plans for employees, directors and
outside consultants, under which both incentive stock options and
non-qualified options may be issued. Under such plans, options to
purchase up to 681,017 shares of common stock may be granted. Options
may be granted at prices equal to the fair market value at the date of
grant, except that incentive stock options granted to persons owning
more than 10% of the outstanding voting power must be granted at 110%
of the fair market value at the date of grant. In addition, as of
December 31, 2001, options for the purchase of 420,782 shares were
granted to newly-hired employees. Stock options issued by ProxyMed
generally vest within three years, and expire up to ten years from the
date granted. Stock option activity was as follows for the three years
ended December 31, 2001:
OPTIONS WEIGHTED AVERAGE
AVAILABLE OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING OF OPTIONS
---------- ----------- ----------------
Balance, December 31, 1998 1,511 104,958 $86.85
Options authorized 91,567 -- --
Options granted (97,017) 97,017 $172.80
Options exercised -- (10,324) $78.30
Options expired/forfeited 14,922 (17,937) $137.25
-------- --------
Balance, December 31, 1999 10,983 173,714 $130.20
Options authorized 646,979 -- --
Options granted (667,183) 667,183 $22.20
Options exercised -- (5,208) $81.90
Options expired/forfeited 39,473 (87,360) $127.95
-------- --------
Balance, December 31, 2000 30,252 748,329 $34.50
Options authorized 292,131 -- --
Options granted (101,236) 101,236 $15.97
Options expired/forfeited 11,320 (19,794) $74.58
-------- --------
Balance, December 31, 2001 232,467 829,771 $31.22
======== ========
F-28
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information regarding outstanding and
exercisable options as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
$12.00 - $18.00 112,547 8.9 $14.52 31,584 $14.60
$18.01 - $22.00 147,836 8.6 $18.69 68,094 $18.78
$22.01 - $23.00 479,371 8.4 $22.64 176,504 $22.67
$23.01 - $203.40 90,017 2.4 $118.43 79,575 $111.43
------- -------
829,771 355,757
======== =======
The following table summarizes information regarding options
exercisable as of December 31:
2001 2000 1999
---------- ---------- ----------
Number exercisable 355,757 125,102 80,061
Weighted average exercise price $41.06 $74.55 $91.05
ProxyMed applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
in accounting for its stock-based compensation plans. Accordingly, no
compensation expense has been recognized for its stock-based
compensation plans for options issued to employees. Had compensation
cost for such options been recorded based upon the fair value at the
grant date consistent with the methodology prescribed in SFAS No. 123,
"Accounting for Stock-Based Compensation", ProxyMed's net loss and net
loss per share would have been $(12,678,700) and $(5.87) for 2001,
$(29,868,700) and $(22.95) for 2000, and $(23,331,300) and $(19.50) for
1999, respectively. The weighted average grant date fair value of
options granted ($12.65 in 2001, $16.65 in 2000, and $69.75 in 1999)
was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:
2001 2000 1999
--------- ---------- ---------
Risk-free interest rate 4.75% 6.00% 5.74%
Expected life 9.9 years 10.0 years 7.3 years
Expected volatility 82.8% 80.9% 74.5%
Expected dividend yield 0.0% 0.0% 0.0%
F-29
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In September 2000, the Company's Board of Directors approved the
issuance of options for the six independent directors to purchase
93,333 shares of the Company's common stock at an exercise price as of
the approval date of $18.30 per share. Of these options granted, 31,111
were issued under existing stock option plans previously approved by
the Company's shareholders and will vest after one year. The remaining
62,222 options were originally granted outside of any approved plan,
would vest equally on the second and third anniversary dates of the
date of grant at an exercise price of $18.30 per share, and were
subject to approval at the Company's next annual meeting of
shareholders. At its annual meeting of shareholders held on July 25,
2001, the Company's shareholders approved the 2001 Stock Option Plan
including these options. Since the closing market price on the date of
the approval was lower than the $18.30 exercise price of these
remaining options, no compensatory charge was recorded for these
options in 2000 or 2001.
In April 2001, the Company's Board of Directors authorized the issuance
of 65,000 options to purchase the Company's common stock to ProxyMed's
executive and senior management as part of their compensation plan for
the 2001 year. Of these options granted, 19,333 options were issued
with an exercise price of $15.15 under available stock option plans,
and the balance of 45,667 options were granted under the Company's
proposed 2001 Stock Option Plan, subject to approval by the Company's
shareholders at its annual meeting on July 25, 2001. In July 2001, the
shareholders of the Company approved the 2001 Stock Option Plan
pursuant to which options to purchase 333,333 shares of common stock
may be issued to employees, officers and directors and, as a result,
the 45,667 options were issued with an exercise price of $13.80 per
share. These options are for a ten-year term and vest after five years.
In addition, these options contain a clause which enables the
accelerated vesting of a portion or all of the options if specific,
pre-determined individual performance goals are met during the 2001
year and, as a result of these performance goals being met, 4,978
options with an exercise price of $15.15 and 11,757 options with an
exercise price of $13.80 were accelerated to vest on December 31, 2001.
Additionally, certain stock options for executive management and
directors were amended in 2000 to allow for extensions of exercise
periods (typically one to three years) after termination of employment.
In January 2002, certain vested stock options for three resigning
directors were amended to allow for an extension of the exercise period
through December 31, 2003 (see Note 18(c) below). In all cases, the
market price of ProxyMed's common stock was below the exercise price of
these options at the time of amendment.
Subsequent to December 31, 2001, the Company's Board of Directors
agreed to cancel up to 37,767 stock options with exercise prices
ranging from $57.45 to $202.50 issued to current officers and employees
of the Company with the intent of reissuing the same number of options
in the future at the then current market price.
F-30
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEAR ENDING DECEMBER 31,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash paid for interest $ 367,900 $ 184,100 $ 208,500
=========== =========== ===========
Common stock issued for payment of preferred stock dividends $ 1,658,100 $ 1,270,900 $ --
=========== =========== ===========
Common stock issued for payment of long-term debt $ -- $ 375,000 $ 250,000
=========== =========== ===========
Acquisition of businesses:
Contingent common stock issued for prior year acquisition $ -- $ -- $ 500,000
=========== =========== ===========
Acquisition of businesses:
Common stock issued for businesses acquired $ -- $ -- $ 181,600
Debt issued for businesses acquired 7,000,000 -- --
Other acquisition costs accrued 30,300 -- 174,000
Details of acquisitions:
Working capital components, other than cash (303,100) -- (206,400)
Property and equipment (165,000) -- (38,500)
Goodwill (9,558,400) -- (999,600)
Purchased technology, capitalized software
and other intangibles -- -- (111,100)
Other assets (3,800) -- --
----------- ----------- -----------
Net cash used in acquisitions $(3,000,000) $ -- $(1,000,000)
=========== =========== ===========
Disposition of businesses:
Common stock received $ -- $(1,929,800) $ --
Notes and other receivables received -- (1,723,100) --
Net gain recognized -- 545,300
Details of dispositions:
Working capital components, other than cash -- 1,905,900 --
Property and equipment -- 1,070,900 --
Goodwill -- 109,700 --
Other assets -- 21,100 --
----------- ----------- -----------
Net cash provided by dispositions $ -- $ -- $ --
=========== =========== ===========
During 2000, the Company acquired $504,700 of equipment through the
execution of capital leases.
F-31
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) CONCENTRATION OF CREDIT RISK
Substantially all of ProxyMed's accounts receivable are due from
physicians and various healthcare institutional suppliers (payers,
laboratories and pharmacies). Collateral is not required. Approximately
10% of the 2001 revenues and 11% of the 1999 revenues were from a
single, but different, customer for the sale, lease and service of
communication devices. There were no sales to any one customer in
excess of 10% of consolidated revenues in 2000.
(17) EMPLOYEE BENEFIT PLANS
Through November 30, 2000, ProxyMed had two 401(k) retirement plans,
including one plan that was acquired in its merger with Key
Communications, for substantially all employees who met certain minimum
lengths of employment and minimum age requirements. As of December 1,
2000, these two plans have been combined. Contributions are made by
employees based on up to 15% of their annual compensation. For the plan
acquired from Key Communications, ProxyMed made matching contributions
of up to 5% of participant's salary or $1,000, whichever was greater,
prorated through April 30, 2000. Matching contributions under the
combined plan were made in January 2001 and covered eligible wages paid
to Key Communications participants from May 1, 2000 through December
31, 2000 and annual eligible wages paid to ProxyMed employees for the
full 2000 year. Matching contributions paid to all eligible employees
for 2001 were made in February 2002. Matching contributions under the
combined plans are based on 1% of eligible wages up to $1,000 and
limited by the employee's actual contribution into the plan. No prior
matching contributions had been made under the original ProxyMed plan.
Matching contributions under the original Key Communications plan
vested after 5 years of employment. Matching contributions under the
combined plan vest under a five-year schedule, based on completed full
years of service, as follows: 20% after one year; 40% after two years;
60% after three years; 80% after four years; and 100% after five years.
For all Key Communications employees still employed after December 1,
2000, all matching contributions were grandfathered in under the
five-year vesting schedule. Matching contributions totaling $51,100,
$105,000 and $131,000 for the years ended December 31, 2001, 2000 and
1999, respectively, have been expensed. Funding of matching
contributions each year are offset by forfeitures from terminated
employees.
F-32
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(18) COMMITMENTS, CONTINGENCIES AND OTHER
(a) LEASES - ProxyMed leases certain equipment used in its contract
manufacturing business that have been classified as capital leases and
also leases premises, operating and office equipment, and vehicles
under operating leases which expire on various dates through 2006. The
leases for the premises contain renewal options, and require ProxyMed
to pay such costs as property taxes, maintenance and insurance. At
December 31, 2001, the present value of the capital leases and the
future minimum lease payments under non-cancelable operating leases
with initial or remaining lease terms in excess of one year (net of
payments to be received under subleases) are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
2002 $143,300 $1,233,800
2003 147,100 796,000
2004 113,600 505,000
2005 90,700 157,600
-------- ----------
Total minimum lease payments 494,700 $2,692,400
==========
Less amount representing interest 63,500
--------
Present value of
minimum lease payments $431,200
========
Total rent expense for all operating leases amounted to $1,405,400 in
2001, $1,157,000 in 2000, and $1,116,000 in 1999. The current portion
of capital leases is included in accounts payable and other accrued
expenses and the long-term portion of capital leases is included in
other long-term liabilities in the balance sheet at December 31, 2000
and 2001. Accumulated depreciation for assets under capital leases was
$236,900 and $108,000 at December 31, 2001 and 2000, respectively.
(b) RELATED PARTY TRANSACTION - In April 1997, the Company made loans
totaling $350,000 to Mr. Blue, its former chairman of the board and
chief executive officer. The funds were advanced pursuant to two demand
promissory notes in the principal amounts of $290,000 and $60,000,
respectively, each bearing interest at a rate of 7-3/4% per annum. On
June 30, 2000, the Company amended the terms of these notes whereby
interest on the notes ceased to accrue subsequent to July 1, 2000 and
the loan plus accrued interest, totaling $435,900 at June 30, 2000,
would be payable in a balloon payment in December 2001. The loans were
collateralized with options to purchase 36,667 shares of common stock
granted to Mr. Blue under the Company's stock option plans. As of
December 31, 1999 these loans were included in other assets; as of
December 31, 2001 and 2000, all amounts owed under these loans have
been reclassified to stockholders' equity.
F-33
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In December 2001, a payment of $250,000 was received from Mr. Blue and
applied against the outstanding balance of the loans. The Company
agreed to refinance the remaining $185,983 balance and a new promissory
note was executed by Mr. Blue. This new note requires monthly interest
payments at prime rate plus 1%, established at the beginning of each
calendar quarter, and is payable in a balloon payment on or before
December 31, 2003. The note is collateralized with options to purchase
36,667 shares of common stock granted to Mr. Blue under the Company's
stock option plans along with additional warrants granted to Mr. Blue
from various other public companies. In January 2002, Mr. Blue resigned
from the Company's Board of Directors and the remaining Board members
agreed to extend the exercise period of the stock options of the
Company held as collateral for the note in an effort to maximize the
potential for repayment.
Additionally, in August 2000, the Company entered into a consulting
agreement with Mr. Blue which commenced upon the appointment of a new
chief executive officer. Under the terms of this agreement, the
chairman would provide consulting services to the Company for a period
of one year and would receive consulting fees in an amount equal to his
current annual base salary in lieu of any separation payments and other
benefits he would have been entitled to receive under his employment
agreements. During December 2000, the Company terminated this agreement
in consideration for a lump sum payment of $105,000.
(c) RESIGNATION OF DIRECTORS - In January 2002, three directors of the
Company resigned in an effort to reconstitute the size of the Board of
Directors from nine members to seven. One vacancy currently remains
unfilled. Additionally, the remaining Board members agreed to extend
the exercise period of certain vested options held by the three
resigning directors through December 31, 2003.
(d) EMPLOYMENT AGREEMENTS - During 2000, the Company entered into
three-year employment agreements with its new chairman/chief executive
officer, new chief operating officer, and chief financial officer with
compensation for up to nine months and the vesting of all options
granted if terminated under certain conditions. As part of the
employment agreement with the Company's new chairman/chief executive
officer, 13,333 shares of common stock were issued resulting in a
compensation charge of $285,000 recorded in the year ended December 31,
2000. Under separate stock option agreements entered into concurrently
with their employment agreements, the new chairman/chief executive
officer and chief operating officer received non-qualified options to
purchase 333,333 shares of common stock at $22.50 per share and 43,333
shares of common stock at $15.00, respectively. The options vest
equally on each of the first, second and third anniversary dates of the
respective option agreements.
F-34
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(e) FINANCIAL ADVISORY AGREEMENT - On May 8, 2000, ProxyMed entered into an
advisory agreement with Commonwealth to assist the Company in
performing certain financial advisory services including the sale of
securities and the possible sale, merger, or other business combination
involving the Company. Pursuant to this agreement, the Company paid to
Commonwealth a cash fee of $250,000 and issued to Commonwealth a
five-year warrant to purchase 66,667 shares of common stock at an
exercise price of $22.50 per share (valued at $1,300,000). These costs
were amortized over a one-year period through April 2001. This Advisory
Warrant was subsequently exchanged into 41,667 shares of common stock
pursuant to the Series C Exchange Offer in August 2001 (see Note 5(f)
above).
(f) SETTLEMENT OF LITIGATION - In September 2000, the Company received an
out-of-court settlement for a matter of approximately $667,000, net of
legal and other costs. This settlement has been recorded as other
income in the accompanying statement of operations in the year ended
December 31, 2000.
(g) CONTINGENCY -In December 2000, the Company accrued $200,000 for a
deficiency in its licensing of software used in its internal computer
systems. In March 2001, an additional $175,000 was accrued for this
contingency. In October 2001, the Company settled this software
licensing contingency for $350,000.
(19) SUBSEQUENT EVENT
On March 26, 2002, the Company agreed to sell 1,569,366 shares of
unregistered common stock at $15.93 per share, including a two-year
warrant for the purchase of 549,279 shares of common stock also at
$15.93 per share, in a private placement to four entities affiliated
with General Atlantic Partners, LLC, a private equity investment fund.
The transaction, which is expected to close on April 5, 2002, will
result in net proceeds to the Company of $25 million.
F-35
PROXYMED, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
--------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------------------------
YEAR ENDED BALANCE AT CHARGED TO CHARGED TO BALANCE AT
DECEMBER 31, BEGINNING OF YEAR COSTS AND EXPENSES OTHER ACCOUNTS (1)(2) DEDUCTIONS(3) END OF YEAR
------------ ------------------ ------------------- ---------------------- ------------- ------------
2001 $691,300 69,600 83,800 616,500 $228,200
======== ======= ======= ======= ========
2000 $662,800 420,400 244,700 636,600 $691,300
======== ======= ======= ======= ========
1999 $521,300 553,400 2,200 414,100 $662,800
======== ======= ======= ======= ========
(1) Includes amounts charged to revenue adjustments in 1999, 2000 and 2001
(2) Includes amounts acquired through acquisitions in 1999 and 2001
(3) Primarily write-off of bad debts and revenue adjustments, net of
recoveries
F-36