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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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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 0-22052
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PROXYMED, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0202059
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(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
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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 (/Section/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 $10.00 per share, the closing price of the
registrant's common stock on the Nasdaq National Market on March 10, 2000, was
$108,296,000.
As of March 10, 2000, 18,478,090 shares of the registrant's common
stock were issued and outstanding.
Documents Incorporated by Reference: NONE
PART I
ITEM 1. BUSINESS
ProxyMed, Inc. is one of the nation's most experienced eHealth
companies providing eSolutions to physicians and business-to-business healthcare
electronic commerce services to healthcare information systems providers.
Physician practices are, or will be able to, securely exchange clinical and
financial messages with payers, labs, pharmacies, suppliers and their patients
through desktop software and services being developed for our physician portal,
PROXYMED.COM. Our software and eCommerce solutions simplify the financial,
administrative and clinical processes of the physician's office, resulting in
more cost-effective healthcare management and increased quality of patient care.
Our principal executive offices are located at 2555 Davie Road, Suite
110, Fort Lauderdale, Florida 33317-7424, and our telephone number is (954)
473-1001.
OVERVIEW OF PROXYMED
In order to maximize our efforts in providing end-to-end services to
physicians, we focus on providing eHealth services to physicians and
business-to-business (b2b) transactions for healthcare providers. In 1999, we
processed approximately 60 million electronic transactions among physicians and
insurance companies, managed care companies, pharmacies and laboratories.
Currently, our customer base includes approximately 2,000 labs and 63,000
physicians, consisting of 20,000 physicians using our five different software
applications and approximately 43,000 physicians directly connected to our
ProxyNet network through vendor partnerships. Additionally, we provide medical
laboratory smart printer services for approximately 175,000 physicians. We
provide "back-end" connectivity to approximately 880 insurance companies and
33,000 pharmacies.
Recently we announced and launched our physician office internet
portal, PROXYMED.COM. PROXYMED.COM is a comprehensive web site for healthcare
professionals that aggregates, organizes and personalizes connectivity, content
and eCommerce services. These services eventually will include a broad set of
clinical and financial transaction services to physicians. Our plan will be to
migrate our existing physician customer base to our internet solutions and grow
by adding more physician users to our web portal.
OUR BUSINESS IS DRIVEN BY THE HEALTHCARE COMMUNITY'S NEED TO MORE EFFICIENTLY
PROCESS INFORMATION
The major driver of our business are physicians who want to adopt a
secure electronic solution that improves the quality of their patient care while
reducing cost. This change would alter age-old standards of practice within the
physician office. We believe that physicians will adopt our solutions if we
offer a total solution that touches every piece of the physician's practice. Our
efforts concentrate on innovative design that makes the solutions easy to use,
reliable and secure. Our PROXYMED.COM portal employs "Secure Sockets Layer"
encryption technology, which is the same technology used to protect sensitive
data in the financial and banking industries. Our strategic intent is
"Empowering Physicians with eSolutions(TM)". The internet is the key enabler
that makes much of this possible. More importantly, however, our significant
back-end connectivity is the differentiating factor. We are a leader in solving
these back-end connections and provide a host of transaction services to the
physicians.
CONNECTIVITY AND EXISTING RELATIONSHIPS ARE KEY STRENGTHS
Our advantage lies in two critical areas. First, our existing
connectivity to laboratories, pharmacies and insurance companies provides the
backbone for our eHealth solutions. Our electronic transaction processing
services support a broad range of both financial transactions (such as claims,
2
eligibility verification, referrals, etc.) and clinical transactions (such as
laboratory orders and results, and prescription orders and refills). To
facilitate these services, we have developed and operate ProxyNet(R), our
proprietary national electronic healthcare information network, which provides
physicians and other primary care providers with connectivity to what we believe
is the industry's second largest list of payers, the largest list of chain and
independent pharmacies and the largest list of clinical laboratories. These
connections allow information to reliably move back and forth from the
physician's office to the supplier (insurance company, laboratory, pharmacy,
etc.), enabling diagnosis, treatment and payment. We have licensing agreements
with many other well-known eHealth companies who are using our connectivity to
provide these services. However, we believe it makes good business sense to
deliver these solutions directly to the physician rather than through other
intermediaries - hence, our eHealth initiative. Our second advantage is our
customer relationships. We have more than 20,000 physicians directly using at
least one of our existing solutions and thousands more using our services
through other intermediaries. Converting these physicians to an electronic
web-based solution is the challenge we face, but we believe that this task is
made easier by the depth of our existing relationships.
EHEALTH AND B2B OPERATIONS THRIVE ON EACH OTHER CREATING A SYNERGISTIC OPERATING
SYSTEM AND END-TO-END SOLUTION
eHealth is the front end of our business--the piece that the physicians
and their office staffs use on a daily basis. These applications are delivered
to the physician via the internet, allowing fast and efficient distribution and
adoption. Our philosophy is to provide the physician with choice - solutions
that meet their needs and help them accomplish their specific objectives. Our
back-end b2b connectivity operations connect the many suppliers (e.g.
laboratories, pharmacies, insurance companies, etc.) that augment or support the
physician's activities. Our goal is to include as many suppliers as possible in
our b2b network and to continually deliver value to those customers beyond
delivering transaction data. We believe there is a tremendous business
opportunity to deliver information to these suppliers, enabling them to improve
the efficiency and ultimately the cost-effectiveness of their operations. Our
eHealth operations and b2b operations are dependent on each other and are
equally important. The eHealth operations will make the b2b operations
successful, and vice versa. We believe they are synergistic and will be
catalysts for strong revenue growth.
OUR PHYSICIAN NETWORK IS LARGE AND GROWING
Today we have approximately 20,000 physicians using our five different
software applications and approximately 43,000 physicians directly connected to
our ProxyNet network through vendor partnerships. Additionally, we provide
medical laboratory smart printer services for approximately 175,000 physicians.
We envision all of these physicians as potential opportunities. Clearly, the
20,000 physicians who use our services directly represent our best opportunity
for our eHealth initiative.
WE HAVE BUILT A COMPREHENSIVE BACK-END MODEL WHICH WOULD TAKE COMPETITORS YEARS
TO REPLICATE
Recently there have been a large number eHealth companies going public.
We were an early entrant into the healthcare electronic transaction model,
having developed, as a result of our own efforts and through acquisitions, our
b2b connectivity over the last 20 years. We believe that the development of our
b2b connections was complex, and represents a barrier to entry for most other
eHealth competitors. Having accomplished much of this task, there is a
significant opportunity for us to take these solutions, enabled by the internet,
directly to physicians.
MARKETING/BRANDING
We plan to increase our marketing, advertising and sales budgets to
create stronger brand-name recognition of ProxyMed in the physician's office and
accelerate our revenue growth. We believe that
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since we have limited our target market to physicians, we can increase our sales
growth through focused, targeted marketing campaigns that provide high hit rates
per dollar spent. Our sales force is being cross-trained to sell both our
eHealth and b2b services either through our "thick client" software or through
our "thin client" browser-based portal, PROXYMED.COM, whichever the physician
prefers.
HEALTHCARE ELECTRONIC TRANSACTION PROCESSING SERVICES AND COMMUNICATION DEVICES
To gain access to the greatest number of physicians, we utilize the
following distribution channels for our products and services:
DISTRIBUTION CHANNEL FOCUS
-------------------- -----
PROXYMED.COM We are establishing ourselves as a
provider of financial and clinical
electronic transaction processing
services through the web, which may be
accessed by any physician with an
internet connection.
ProxyMed Software and Communication We have a direct sales force that serves
Devices physicians, payers, pharmacies and
labs. We license access to our
proprietary network, ProxyNet, and to
our proprietary software products for
use on physician desktops, and provide
devices for communication between
healthcare participants.
Other Intermediaries We work with providers of
physician desktop software so that they
may enable their existing applications
to communicate through ProxyNet to
payers, pharmacies and labs. We also
connect other electronic transaction
processing networks to ProxyNet so that
the participants on both networks can
communicate with each other.
RECENT FINANCING OFFERS US FINANCIAL FLEXIBILITY TO GROW
In December 1999, we completed a $15 million convertible preferred
stock offering. Conversion to common stock is 100% directed by ProxyMed for the
first year, so it is yet undetermined at what share price we will convert this
equity. We are obligated to convert 30% of the preferred shares by June 23,
2000, and another 30% by September 30, 2000. The common shares will be issued at
a 7% discount and we pay preferred shareholders a 6% quarterly dividend in stock
or cash. The preferred shareholders have warrants to buy 800,000 common shares
at $12.05 each.
PRODUCT DEVELOPMENT
We are currently broadening our offerings to include internet-based
financial and clinical electronic transaction processing services to be embedded
in a web-based physician office suite of applications. All applications will
have a common user interface and will be easily accessed via the internet
through our web-based portal, PROXYMED.COM. Planned subscription services will
include complete clinical transactions such as electronic prescription orders
and refills, formulary messaging, laboratory orders and results reports,
financial transactions such as claims processing, encounters, eligibility
verification, referrals, electronic remittance advices; and office applications
such as secure e-mail. The first two applications, laboratory test results
reporting and eligibility transactions, are available today on PROXYMED.COM,
along with other content and links to other web sites that physicians are
interested in to enhance their practices and their personal lives. For example,
physicians are able today to access the PROXYMED.COM library channel, which is
an extensive suite of on-line databases and research services targeting the
healthcare professional. Also currently available is the PROXYMED.COM
marketplace channel, a means through which physicians can access other providers
of goods and services needed by healthcare professionals, such as medical and
office supplies, books, flowers and others. We
4
intend to expand our products and services through acquisition and internal
development. Our product development group is responsible for improving and
upgrading existing products and services, exploring applications of core
technologies and incorporating new technologies into our products and services.
The total amount capitalized for purchased technology, capitalized
software and other intangible assets as of December 31, 1999, was $10,028,000,
net of amortization. Research and development expense was approximately
$2,898,000 in 1999, $2,978,000 in 1998, and $1,908,000 in 1997. See Note 1 of
Notes to Consolidated Financial Statements.
NETWORK INTEGRATION AND PRESCRIPTION DRUG-DISPENSING SEGMENTS ARE DISCONTINUED
OPERATIONS AND WILL BE SOLD
Hayes Computer Systems, our network integration segment, has been an
important building block for ProxyMed. To succeed at our vision of creating a
value-added physician network, we required expertise in building and operating
virtual private encryption networks. Hayes Computer Systems, which built and
operates an internet and intranet network for several agencies in the State of
Florida, provided us with the expertise and learning necessary to advance this
vision. With the completion of our network and its internet interface in
November 1999, this business is no longer core to our business plans. ProxyCare,
Inc., our prescription drug dispensing segment, brought additional assets
critical to our vision in the area of prescription expertise. However, the
prescription drug dispensing activity is no longer core to our business. Thus,
we announced in February 2000 that Hayes Computer Systems and ProxyCare would be
accounted for as discontinued operations and would be sold to fund our core
eHealth business. Revenue from the two units was approximately $13,307,000 in
1999. The divestment of these two units reflects our intention to focus on our
core competency: eHealth solutions to physicians and b2b transactions.
COMPETITION
We face competition from many eHealth and b2b healthcare companies and
other technology companies. Many of our competitors are significantly larger and
have greater financial resources than we do, and some have established
reputations for success in implementing "thick client" healthcare information
software products. The healthcare electronic transaction processing industry has
been targeted for growth by many companies, including companies developing new
technologies utilizing internet-based systems.
PROPOSED HEALTHCARE LEGISLATION
The federal Health Insurance Portability and Accountability Act of
1996, known as HIPAA, mandates the use of standard transactions, standard
identifiers, administrative procedures to establish and monitor security
measures 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.
Clearinghouses may utilize non-standard transactions and convert them to the
mandated standards on behalf of their customers.
We anticipate Congress and many state legislatures will continue to
propose healthcare legislation regarding healthcare delivery systems, payment
methods, confidentiality and privacy concerns, and public debate of these issues
will likely continue in the future.
We believe that we have already implemented much of the
hardware/network infrastructure and software necessary to comply with the
technical security and physical safeguards currently proposed by the HIPAA
regulations. When they become effective, we intend to continue to comply with
all regulations as they become effective and within the time frames as may be
required, if not sooner. We
5
believe we are in compliance in all material respects with all federal and state
laws governing our operations and have obtained all licenses necessary for the
operation of our business.
INSURANCE
We maintain the following insurance policies:
o A general liability insurance policy that includes a
$1,000,000 per occurrence limit of liability and a $2,000,000
aggregate limit of liability. The general liability coverage
for our prescription drug dispensing segment includes druggist
professional liability.
o A $10,000,000 umbrella policy above and beyond the general
liability limits.
o An electronic data processing errors and omissions insurance
policy with a $2,000,000 limit of liability per occurrence and
in the aggregate.
We believe our present insurance coverage is adequate for the services
which we provide.
INTELLECTUAL PROPERTY
In large part our success is dependent on our proprietary information
and technology. We rely on a combination of contract terms, copyright, trademark
and trade secret laws, and other measures to protect our proprietary information
and technology. We have federal trademark registrations for ProxyCare, ClinScan,
PreScribe, ProxyNet, ProxyScript and RxReceive and have filed trademark
applications for "Empowering Physicians with eSolutions", which is currently
pending approval. If used, these trademarks may be renewed for an indefinite
period of time. We have copyright registrations for PreScribe Clinic for Windows
and other related materials. In October 1999, we filed copyright applications
for 12 software products, which are currently pending approval. We have also
registered 12 internet domain names, including PROXYMED.COM. We have no patents.
As part of our confidentiality procedures, we generally enter into nondisclosure
agreements with our employees, distributors and customers which seek to preserve
the confidentiality of our trade secrets, and limit access to and distribution
of our software, databases, documentation and other proprietary information.
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,
software developers may become increasingly subject to infringement claims.
EMPLOYEES
As of March 10, 2000, we employed 388 full-time employees, of which 39
work at our discontinued segments. 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
We lease various properties as described below. We are also obligated
under several other operating leases for certain operating facilities which are
for periods of less than one year or are otherwise immaterial. Our leases
generally contain renewal options and require us to pay costs such as property
taxes, maintenance and insurance. We consider our present facilities adequate
for our operations and believe that alternative and additional facilities are
readily available in the event that a particular lease is not renewed.
6
- ---------------------------------------------- ---------------------------------- --------------------- --------------
AGGREGATE
MONTHLY
INDUSTRY SEGMENT LOCATION SQUARE FOOTAGE LEASE PAYMENT
- ---------------------------------------------- ---------------------------------- --------------------- --------------
Corporate; eHealth and b2b Services Fort Lauderdale, FL 20,484 $19,558
- ---------------------------------------------- ---------------------------------- --------------------- --------------
eHealth and b2b Services New Albany, IN 43,560 $34,393
- ---------------------------------------------- ---------------------------------- --------------------- --------------
eHealth and b2b Services Santa Ana, CA 7,732 $19,645
- ---------------------------------------------- ---------------------------------- --------------------- --------------
Network Integration Services Tallahassee, FL 7,000 $8,025
- ---------------------------------------------- ---------------------------------- --------------------- --------------
Prescription Drug Dispensing Fort Lauderdale, FL 4,700 $3,101
- ---------------------------------------------- ---------------------------------- --------------------- --------------
ITEM 3. LEGAL PROCEEDINGS
We currently do not have any material 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, 1999.
7
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
1998:
First Quarter ............................ $15.75 $ 5.25
Second Quarter ........................... 17.13 8.38
Third Quarter ............................ 10.81 6.75
Fourth Quarter ........................... 11.88 6.63
1999:
First Quarter ............................ $14.50 $ 8.50
Second Quarter ........................... 21.25 11.25
Third Quarter ............................ 16.44 10.75
Fourth Quarter ........................... 15.88 8.75
2000:
First Quarter ............................ $11.25 $ 8.25
(through March 10, 2000)
On March 10, 2000, the last reported sale price of the common stock was
$10.00 per share. As of March 10, 2000, there were 146 holders of record of the
common stock. We believe that many of these holders of record are in "street
name" and that the number of individual shareholders is greater than 2,500.
We have not paid any dividends on our common stock. We intend to retain
all 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 is within the discretion of our Board of
Directors. Any future decision with respect to dividends 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, 1999, and has been derived from our audited consolidated
financial statements. Since March 1995, our business focus changed from
primarily the sale of prescription drugs to eHealth and b2b services.
Accordingly, financial information relating to our prescription drug dispensing
and network integration segments 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.
8
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 29,023,065 $ 22,249,326 $ 1,817,122 $ 1,886,007 $ 63,262
Operating loss $(20,018,869) $(11,087,044) $(14,860,160) $ (4,341,356) $ (2,318,418)
Loss from continuing
operations $(20,119,778) $(11,193,700) $(14,593,012) $ (2,889,501) $ (3,203,917)
Income (loss) from
discontinued
operations $ (1,714,407) $ (594,485) $ (3,924,110) $ 35,766 $ (314,634)
Net loss applicable to
common shareholders $(21,856,377) $(11,788,185) $(18,517,122) $ (2,949,538) $ (2,962,249)
PER SHARE DATA:
Basic and diluted net loss
per share of common stock:
Loss from continuing $ (1.12) $ (0.71) $ (1.38) $ (0.39) $ (0.69)
operations
Loss from discontinued
operations $ (0.09) $ (0.04) $ (0.37) $ -- $ (0.06)
Net loss $ (1.21) $ (0.75) $ (1.75) $ (0.39) $ (0.61)
Weighted average common
shares outstanding 18,032,042 15,653,374 10,589,333 7,660,383 4,816,980
DIVIDEND DATA:
Dividends on common
stock $ -- $ -- $ -- $ -- $ --
Dividends on cumulative
preferred stock $ 22,192 $ -- $ -- $ 95,803 $ 113,362
DECEMBER 31,
------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital $ 12,579,689 $ 7,564,487 $ 1,966,406 $ 12,426,178 $ 990,734
Long-term obligations $ 583,136 $ 1,367,192 $ 1,049,630 $ -- $ 299,393
Total assets $ 44,772,884 $ 46,902,702 $ 18,348,466 $ 15,651,940 $ 4,898,375
Net assets of discontinued
operations $ 3,022,130 $ 4,039,716 $ 2,477,834 $ 888,348 $ 1,199,264
Stockholders' equity $ 37,755,579 $ 40,279,119 $ 13,151,752 $ 14,915,305 $ 2,593,620
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IN GENERAL
ProxyMed is an eHealth company providing eSolutions to physicians and
business-to-business healthcare electronic commerce services to healthcare
information system suppliers such as pharmacies, commercial and hospital
laboratories, insurance companies, managed care organizations and nursing homes.
Our products and services are provided from our three operating facilities
located in Fort Lauderdale, Florida; Santa Ana, California; and New Albany,
Indiana.
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In May 1999, we announced and commenced the development of
PROXYMED.COM, a healthcare portal website aimed at increasing the use of our
services through the internet. In November 1999, the first version of the
website was introduced. In March 2000, version 2.0 of the portal was introduced
with our first two transaction services: eligibility verification and laboratory
test results reporting. When fully developed, PROXYMED.COM will offer a secure,
single access point through the web for all connectivity needs of physicians and
other healthcare providers to facilitate healthcare eCommerce services.
Business combinations were consummated during the periods presented and
are included in the consolidated financial statements after their respective
dates of acquisition. Specialized Medical Management, a financial EDI company,
was acquired in January 1999. Key Communications Service, Inc., a company that
sells and services laboratory communication devices, merged with ProxyMed in
December 1998 (accounts of Key Communications are includable as of May 1, 1998
due to a leveraged buy-out consummated on April 30, 1998 by Key Communications'
shareholders); Integrated Medical Systems, another financial EDI company, was
acquired in May 1998. US HealthData Interchange, another financial EDI company,
was acquired in November 1997. Clinical MicroSystems, a laboratory software
company, was acquired in March 1997.
In February 2000, we adopted a plan to sell our non-core network
integration and prescription drug dispensing segments. These two segments are
shown as discontinued operations and the consolidated financial statements and
related notes have been reclassified to segregate the net assets and operating
results of these segments. Sales of both of these segments are expected to be
completed by the end of 2000.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUES. Consolidated net revenues for 1999 increased by
$6,773,739, or 30%, to $29,023,065 from consolidated net revenues of $22,249,326
for 1998. This increase is primarily due to the net effect of: (i) our
acquisitions of Key Communications, Specialized Medical Management and
Integrated Medical Systems ($11,525,000), which were all consummated during or
subsequent to the 1998 period, partially offset by (ii) decreases from the sales
of non-exclusive source code licenses for our prescription and laboratory
software products, which were sold in the 1998 period ($4,751,000), for which
there were no comparable transactions in 1999.
COST OF SALES AND GROSS PROFIT MARGIN. Cost of services and license
fees includes third-party electronic transaction processing costs, certain
telecommunication costs, third-party databases, and certain labor and travel
costs. Cost of sales for communication devices, computer systems, and other
tangible goods includes hardware, third-party software, direct labor and
consumable materials. Consolidated gross profit margin for 1999 was 71% compared
to 79% in 1998. This decrease was primarily due to the favorable impact in the
1998 period from higher sales of non-exclusive prescription and laboratory
source code software licenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for 1999 increased by $7,522,962, or 38%, to
$27,484,067 from consolidated SG&A expenses of $19,961,105 for 1998. This
increase is primarily due to the net effect of (i) increases in SG&A expenses
from our acquisitions of Key Communications, Specialized Medical Management and
Integrated Medical Systems, all of which were acquired during or subsequent to
the 1998 period, including costs associated with the integration of previously
separate processing networks for financial transactions ($5,741,000), (ii)
development expenses related to PROXYMED.COM ($1,411,000), (iii) estimated
credit loss due to the declaration of bankruptcy by one customer ($306,000),
(iv) charges related to activities associated with our now terminated engagement
of Salomon Smith Barney to help us
10
evaluate our strategic alternatives ($492,000), partially offset by (v) expenses
associated with our merger with Key Communications incurred in 1998 ($427,000).
As a result of these factors, consolidated SG&A expenses as a percentage of
consolidated net sales increased to 95% in 1999 from 90% in 1998.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization expense increased $4,417,893, or 51%, to $13,064,146 for 1999 from
$8,646,253 for 1998. This increase was primarily due to amortization charges for
goodwill and other intangible assets associated with our acquisitions of
Specialized Medical Management in 1999 and Integrated Medical Systems in 1998.
LOSS FROM CONTINUING OPERATIONS. As a result of the foregoing, the loss
from continuing operations was $20,018,869 in 1999 compared to a loss from
continuing operations of $11,087,044 in 1998.
DISCONTINUED OPERATIONS. The loss from the discontinued operations of
our network integration and prescription drug dispensing segments increased by
$600,636, to a loss of $1,195,121 in 1999 from a loss of $594,485 in 1998.
Additionally, we have estimated a loss on the disposal of the prescription drug
dispensing segment of $519,286 including estimated operating losses through the
disposal date and other exit costs.
Revenues from the network integration segment were $11,106,571 in 1999
compared to $13,855,458 in 1998. In 1999, in connection with our new initiative
to develop PROXYMED.COM, management decided to adopt Microsoft technology for
email, and abandoned the Krypton Internet Messaging Server in-process research
and development technology acquired in its acquisition of Hayes Computer
Systems. Accordingly, the 1999 contingent payment made to the former owner of
Hayes Computer Systems was recorded as goodwill, and is being amortized through
April 30, 2000. Amortization expense included in 1999 was $666,667, compared to
no amortization expense in 1998. Additionally, as a result of the 1998
contingent payment, we recorded a charge of $742,623 in 1998 related to the
expensing of in-process research and development technology. As a result of the
foregoing, primarily as a result of decreased sales, the net loss for this
segment was $1,045,298 in 1999 compared to $538,888 in 1998.
Revenues from the prescription drug dispensing segment were $2,200,303
in 1999 compared to $1,662,893 in 1998. The net loss for this segment was
$149,823 in 1999 compared to $55,597 in 1998.
DIVIDENDS. As a result of the issuance of preferred stock December
1999, we accrued $22,192 in dividends for 1999.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the
foregoing, we recorded a net loss applicable to common shareholders of
$21,856,377 for 1999 compared to a net loss of $11,788,185 for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Consolidated net revenues for 1998 increased by
$20,432,204, or 1124%, to $22,249,326 from consolidated net revenues of
$1,817,122 in 1997. This increase was primarily due to: (i) the acquisitions of
Integrated Medical Systems in 1998 ($2,530,000) and US HealthData Interchange in
late 1997 ($2,099,000), (ii) the merger with Key Communications in 1998
($10,439,000), and (iii) three software licenses sold in 1998 for our ProxyCare
and ClinScan products ($4,751,000).
COST OF SALES AND GROSS PROFIT MARGIN. Cost of services and license
fees includes third-party electronic transaction processing costs, certain
telecommunication costs, third-party databases, and certain labor and travel
costs. Cost of sales for communication devices, computer systems, and other
tangible
11
goods includes hardware, third-party software, direct labor and consumable
materials. Consolidated gross profit margin was 79% in both 1998 and 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated SG&A
expenses for 1998 increased by $8,958,765, or 81%, to $19,961,105 from
consolidated SG&A expenses of $11,002,340 in 1997. The increase consisted
primarily of: (i) SG&A expenses of Key Communications ($5,441,000), Integrated
Medical Systems ($1,616,000) and US HealthData Interchange ($1,801,000), all of
which were acquired in 1998 or late in 1997, (ii) expenses associated with our
merger with Key Communications ($427,000), partially offset by (iii) net
decreases of $326,000 in SG&A expenses from existing operations. Consolidated
SG&A expenses as a percentage of consolidated net sales decreased to 90% in
1998, from 605% in 1997, as we established a higher revenue base through our
acquisitions. In addition, the rate of increase in sales in 1998 exceeded the
rate of increase in SG&A expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$7,652,329, or 770%, to $8,646,253 in 1998 from $993,924 in 1997. This increase
was due to the following: (i) amortization charges for goodwill associated with
our acquisitions completed in 1997 and 1998 which are being amortized over three
years ($3,971,000); (ii) amortization of purchased technology and capitalized
software costs ($2,946,000); (iii) depreciation charges associated with our
internal systems and related equipment ($348,000); (iv) amounts payable to
Walgreens associated with the acquisition of PreScribe ($250,000); and (v)
amortization charges for other intangibles associated with our acquisitions
($137,000). Goodwill previously recorded from the acquisitions of US HealthData
Interchange and Clinical Microsystems is being amortized on the straight-line
method over three years beginning April 1, 1998. Goodwill from these
acquisitions was previously being amortized on the straight-line method over 15
years. This change in estimate results in an additional amortization expense of
approximately $1,015,000 per year. The decision to change the goodwill
amortization periods in fiscal 1998 resulted from changes in the business
strategies for Clinical MicroSystems and US HealthData Interchange. Clinical
MicroSystems' primary product, ClinScan, is still being sold and supported, but
is being de-emphasized in favor of an electronic transaction processing model
for the transmission of lab order and results. For US HealthData Interchange,
our subsequent acquisition of Integrated Medical Systems resulted in the
substitution of Integrated Medical Systems' technology platform and transaction
processing systems from those of US HealthData Interchange. In both cases, due
to these subsequent actions, we reconsidered the original 15-year life for
goodwill and deemed it appropriate to change it to a shorter three-year life in
recognition of these reasons and the frequently changing nature of the
technology environment in which we operate.
IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY. As a result of a
contingent payment made to the former owner of Hayes Computer Systems in 1998,
we recorded a charge of $742,623 in 1998 related to the expensing of in-process
research and development technology (included in discontinued operations). In
1997, we recorded a charge of $8,467,098 for in-process research and development
technology. A full description of these charges is contained in the following
paragraphs.
Portions of the initial purchase prices for the Hayes Computer Systems
and Clinical MicroSystems acquisitions were allocated to in-process research and
development technology, resulting in charges to our 1997 operations of
$4,167,098 for the Hayes Computer Systems acquisition (included in discontinued
operations) and $4,300,000 for the Clinical MicroSystems acquisition. The
following products are includable as in-process research and development
technology.
(a) KIMS - The in-process research and development acquired from Hayes
Computer Systems consisted of the Krypton Internet Messaging
Server ("KIMS"), a server-to-server intranet email system designed
to provide more security, higher performance and a lower price
than comparable UNIX based email systems. At the time of the
acquisition, this product was in the alpha phase of programming
and had the capability of processing only simple email
12
communications. ProxyMed intended to complete the development of a
testing lab, the development of the KIMS product, and the
development of the electronic transaction processing version of
the product at an estimated cost of approximately $253,000 and
include it in its electronic transaction processing product
offering to physicians and other healthcare providers using the
ProxyNet network by the end of calendar 1997. Material risks
affecting the timely completion and commercialization of the KIMS
product included new technologies that make the KIMS technology
obsolete or unusable, the availability of programming and design
resources to complete the product, the availability of funding
necessary to complete the product, the nature of technical issues
that are discovered during the development and testing stages, and
product acceptance by physicians and other healthcare providers as
compared to other products available in the marketplace.
Shortly after the acquisition, Microsoft Corporation released its
improved email product. Therefore, the decision to complete the
KIMS product was temporarily suspended until an assessment of the
Microsoft product could be completed. At first, after analyzing
the KIMS product and discussing the opportunities for it, we
decided to complete the KIMS product and expected to have it
completed in 1999 and include it in our future web-based product
line; however, in 1999, in connection with our new initiative to
develop PROXYMED.COM, our healthcare portal website, we decided to
adopt Microsoft's technology for email, and abandon the KIMS
in-process research and development technology.
(b) ClinScan Intranet - The in-process research and development
acquired from Clinical MicroSystems consisted of the ClinScan
Intranet, a system designed to provide hospitals with the
capability to connect hospital-based and office-based physicians
together, in a private wide area network, or Intranet. The
hospitals and physicians would have the ability to electronically
exchange messages, images, files and other valuable clinical
information, including the exchange of clinical orders and results
using proven interface technology. By incorporating the ClinScan
workstation at physician sites, this software application would
provide access to all of the hospital-based legacy systems
invisibly. By adding high-speed communications access, hospitals
and physicians would be able to access the internet. At the time
of the acquisition, completion of the communication protocols for
incoming and outgoing messaging and an interface for
communications to the legacy systems had been developed. ProxyMed
intended to complete the global patient data repository, routing
functionality, cross-relation master indexes, and master catalogue
of clinical functionality of the product at an estimated cost of
approximately $600,000 and include it as a clinical electronic
transaction processing product offering to physicians,
laboratories and other healthcare providers by the start of 1998.
The technology supported by the research performed on the ClinScan
Intranet was used by ProxyMed to develop its Lab Network Intranet
Server, the central information processor for its latest ClinScan
software product. Revenues from the sales of the ClinScan
involving its Lab Network Internet Server commenced in 1998.
To determine the fair value of the acquired in-process research and
development, ProxyMed used independent appraisals which utilized standard
appraisal methodologies. Each appraisal procedure performed involved projected
cash flows for KIMS and ClinScan Intranet over their estimated useful lives, net
of ongoing operating investment needs (including working capital, fixed assets
and other assets) that support the products. An effective income tax rate of
37.6% was applied to each of the cash flows representing the expected marginal
combined federal and state tax rate to apply over the cash flow periods. These
cash flows were discounted to their present value using a discount rate of 70%,
which is reflective of a "start-up" company for which the KIMS and ClinScan
Intranet products are similar in risk. The KIMS product was valued at $6,400,000
and the ClinScan Intranet product was valued at $4,300,000
13
using these model assumptions. The development of these projects had not yet
reached technological feasibility to permit capitalization, and the technology
had no alternative future use. Income tax benefits resulted from these charges
of approximately $1,563,000 and $1,613,000 for the Hayes Computer Systems and
Clinical MicroSystems acquisitions, respectively; however, based on the weight
of available evidence, valuation allowances for the full amounts have been
recorded.
INTEREST, NET. We incurred net interest expense for 1998 of $106,656,
whereas we earned net interest income for 1997 of $267,148. The 1998 amount
reflects interest expense incurred on the debt of Key Communications ($206,000)
and interest expense on the debt issued for the acquisition of Clinical
MicroSystems ($122,000) offset by interest earned on invested funds ($221,000).
In connection with the merger with Key Communications, the debt guaranteed by
Key Communications was retired.
LOSS FROM CONTINUING OPERATIONS. As a result of the foregoing, the loss
from continuing operations was $11,193,700 in 1998 compared to a loss from
continuing operations of $14,593,012 in 1997.
DISCONTINUED OPERATIONS. The loss from the discontinued operations of
our network integration and prescription drug dispensing segments decreased by
$3,329,625, to a loss of $594,485 in 1998, compared to a loss of $3,924,110 in
1997.
Revenues from the network integration segment were $13,855,458 in 1998
compared to $7,779,787 in 1997. The net loss for this segment was $538,888 in
1998 compared to $3,942,150 in 1997. The losses include charges for in-process
research development of $742,643 in 1998 and $4,167,098 in 1997.
Revenues from the prescription drug dispensing segment were $1,662,893
in 1998 compared to $1,335,060 in 1997. The net loss for this segment was
$55,597 in 1998 compared to net income of $18,040 in 1997.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the
foregoing, we recorded a net loss applicable to common shareholders of
$11,788,185 in 1998, as compared to a net loss of $18,517,122 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
In 1999, cash used in operating activities totaled $6,607,092. This was
primarily due to our net loss partially offset by depreciation and amortization
charges. In January 1999, we purchased the healthcare electronic transaction
processing assets of Specialized Medical Management for $1,000,000 in cash.
Additionally, we spent approximately $3,584,000 for fixed assets and capitalized
software development costs, $573,000 for acquisition-related costs, paid
$500,000 in cash and issued 26,846 shares of common stock in final payment for
the Hayes Computer Systems acquisition, paid $250,000 in cash and issued 25,000
shares of common stock for our debt obligation to the former owner of Clinical
MicroSystems, Inc., and paid $500,000 to Walgreens under our contract for the
purchase of PreScribe. These activities were financed through available cash
resources, a private placement sale of 15,000 shares of convertible preferred
stock resulting in net proceeds of $14,160,000, a private placement sale of
250,000 shares of our common stock resulting in net proceeds of $2,940,000, net
draws of $1,000,000 on our revolving line of credit, and $1,038,000 in proceeds
from the exercise of stock options and warrants. As a result of these
activities, we had cash and cash equivalents totaling $11,487,938 as of December
31, 1999.
In February, 2000, we adopted a plan to sell our non-core network
integration and prescription drug dispensing segments. The sale of these
entities by the end of 2000 will provide additional cash to further support our
core businesses.
14
Our available funds continue to be used for operations, the further
development and marketing of our products and services (including PROXYMED.COM,
our healthcare portal website), equipment and other general corporate purposes.
As a result of acquisitions made in 1997 and 1998, we are obligated to pay
$750,000 in April 2000 to the former owner of Clinical Microsystems, and
$500,000 in June 2000 to the former owner of PreScribe. The Clinical
MicroSystems payment may be made at least 50% in cash and the balance, if any,
in common stock. In addition, we are continuously evaluating acquisition
opportunities and other strategic alternatives that add synergies to our product
offerings and business strategy.
In general, we believe that the long-term effects of our various
acquisitions have been accretive to our liquidity. While no assurances can be
given that revenue synergies will occur, we expect that there will be
opportunities to increase revenues by cross-selling products and services to the
customers of the acquired entities, as well as revenue opportunities from our
product development efforts, including PROXYMED.COM. In addition, we expect to
continue to experience cost reduction synergies from operations that have been
or are planned to be combined. For example, we believe cost reductions have been
achieved, or will be achieved, from the following measures: the electronic
transaction processing operations relating to the acquisitions of Integrated
Medical Systems, US HealthData Interchange and Specialized Medical Management
have been merged into one location; the lab operations relating to the Clinical
MicroSystems products and the Key Communications operations have been merged
together; and the PreScribe technology has been merged with our pre-existing
prescription electronic transaction processing products. However, on a
short-term basis, we generally incur additional expenses resulting from our
acquisitions due to stay-pay incentives during the transition period, moving
costs for employees that are retained, and the merging of different transaction
networks. We do not expect our interest costs to increase as a result of our
acquisitions, as most of the financing for the acquisitions resulted from
issuances of our equity securities, and debt carried by the acquired entities
was paid off. While amortization of goodwill and other intangible assets from
our acquisitions will not affect our future cash outflows, we expect that such
acquisition-related charges will approximate $2,700,000 per quarter through the
first quarter of 2001 and then decrease to $250,000 per quarter by the end of
2001.
In July 1999, we signed an accounts receivable-based revolving line of
credit agreement of up to $5,000,000. Borrowings are based on 85% of eligible
accounts receivable, repayable on July 30, 2000, collateralized by a lien on all
of our assets, and bear interest at the prime rate plus 2% payable monthly
(which has ranged from 10% to 10.5%). As of December 31, 1999, we had $1,000,000
outstanding and approximately $3,200,000 available for borrowing under this
credit facility.
At the current time, we do not have any material commitments for
capital expenditures. However, our capital spending will increase over the next
several quarters as the continued development and infrastructure for
PROXYMED.COM and the related personnel staffing is completed.
The ratio of current assets to current liabilities was 3.0 times at
December 31, 1999 and 2.4 times at December 31, 1998. This increase is primarily
due to the remaining proceeds from the private placement of convertible
preferred stock in December 1999. For the periods ended December 31, 1999 and
1998, accounts receivable turnover for us was 7.6 times in the 1999 period and
is comparable to 7.8 times in the 1998 period. Our inventory turnover was 3.9
times in the 1999 period compared to 3.1 times in the 1998 period. This increase
is attributable to improved efficiency in operations at Key Communications.
We expect to continue to incur negative net cash flow from operations
until we begin receiving higher levels of revenues, primarily driven by
PROXYMED.COM, our healthcare web portal. Management is committed to the strategy
of investing funds in further marketing and development of our products and
services, specifically for PROXYMED.COM, which will integrate our existing
desktop products into a single
15
internet-based solution. We may also pursue additional acquisitions which are
deemed to be in accordance with our business strategy. All of these plans may
require additional equity or debt financing. We believe that we have access to
sources of cash to continue to fund our operating needs, our research and
development activities, our acquisition obligations and our strategic needs. In
the recent past, we have raised cash to fund our operations and pay for
acquisitions from the private placement sales of our common stock. We believe
that we can continue to finance our short-term cash needs in this manner as well
as utilize our asset-based debt financing. We are currently evaluating the
long-term cash needs of PROXYMED.COM, and we may seek cash through the public
equity markets; however, there can be no assurances that any such financing will
be available under terms and conditions acceptable to us. We believe that if we
are not successful in obtaining additional financing to fund the increased
research and development expenditures and increased marketing expenditures
either through equity raises, debt issuance or the sale of non-core assets, such
increased expenditures could be reduced to historical levels, and we could
operate at near cash flow break-even until such additional financing is
available.
FUTURE OUTLOOK
We continue to grow through concentration of our efforts on our core
eHealth business (including PROXYMED.COM), our business relationships, our
strategic acquisitions and other plans to increase the usage of our healthcare
information technology products and services to achieve requisite economies of
scale. Prior to the second quarter of 1999, we had successfully reduced our
operating losses before non-cash charges. Such non-cash charges are significant
and result primarily from amortization expenses related to our acquisitions.
However, with the development, marketing and implementation of PROXYMED.COM, we
anticipate that our operating losses may grow until we generate sufficient
recurring revenues from our products and services to cover the total of our cash
and non-cash expenses. There can be no assurance that we will realize an
adequate level of recurring revenues from the sale of our products and services,
or that revenues from our operations, the business plan for PROXYMED.COM, or
those of our recently acquired businesses and any future acquisitions will
ultimately result in achievement of profitability.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on applying generally accepted accounting
principles for recognizing revenue. SAB 101 is effective for fiscal years
beginning after December 15, 1999. We believe that the impact of adopting SAB
101 will not be material to our consolidated financial statements.
YEAR 2000 COMPLIANCE
GENERAL. Many installed computer systems and software products were
coded to accept only two digit dates. Such systems would not be able to
distinguish 20th century dates from 21st century dates. To address these and any
other Year 2000 operational issues which could affect us, in September 1998 we
appointed a Year 2000 Committee and hired a Year 2000 project manager to review
our internal computer systems and our products and services as well as review
the progress of our principal customers, vendors and resellers.
The Committee developed a priority order list of our products and
services and commenced the Year 2000 project plan in accordance with this list.
Our Year 2000 project plan consisted of four phases: assessment, remediation,
validation and distribution.
The primary purpose of the assessment phase was to list and analyze the
inventory of our products sold and supported. The major issues encountered
during this phase were the identification of language the software is written
in, the source code and any third-party libraries in a product. The
16
remediation phase was where changes to the programs and codes were actually
made. The validation phase was where the remediated products were tested and
then submitted for independent verification and validation. The distribution
phase, specifically for proprietary products, was where the remediated products
were provided to our customers.
As of the end of 1999, we had completed all phases of our Year 2000
project plan. We did not experience any material adverse impact on our
operations during the beginning of 2000 as a result of Year 2000 issues of our
customers, internal systems, suppliers and vendors.
PRODUCTS AND SERVICES. With respect to our products and services, we
met our expected completion date of September 1999 for distribution of
remediated proprietary laboratory, financial, and prescription software
applications. By the end of 1999, remediation of our financial and clinical
networks was completed. All new software application releases have been prepared
in accordance with our Year 2000 readiness standards.
Additionally, we had contacted all third party vendors whose
proprietary tools and library products are incorporated into our products in
order to determine their respective Year 2000 readiness status. Certain of those
third parties had required actions to be taken by us. Such actions have been
performed in accordance with instructions provided by the vendor.
Finally, we had contacted our customers to inform them of our Year 2000
readiness status. Updates to that information will continue to be posted on our
website.
ACQUISITIONS. The Committee was also responsible for identifying Year
2000 issues that may be present in acquisition candidates, as Year 2000
compliance was a factor in determining the suitability of an acquisition. Recent
acquisitions had included representations from the sellers regarding Year 2000
compliance so that we would have recourse in the event that unforeseen Year 2000
issues arose.
Based on representations made at time of our merger with Key
Communications, we believed that Key Communications' products and services would
operate satisfactorily in a Year 2000 environment. By the end of 1999, we
completed the assessment, remediation and validation phases of their products
and services to verify those representations, and based on procedures performed,
we have not had to take any additional actions.
Concerning our acquisition of Specialized Medical Management, we had
identified three potential Year 2000 issues, all of which were resolved by the
end of 1999. First, all of Specialized Medical Management's customers required a
software upgrade and we replaced their software with our Year 2000-ready
products. Second, Specialized Medical Management's financial transactions
network was combined with our existing financial transactions network, which is
Year 2000 compliant. Third, certain financial transaction services provided to a
certain payer were remediated.
INTERNAL SYSTEMS, VENDORS AND SUPPLIERS. We completed the assessment
and remediation phases with respect to our internal administrative systems. Risk
assessment was evaluated on all documentation received from our vendors,
suppliers, and clinical and financial transaction processing partners. Final
attempts to contact unresponsive requests were completed by the end of October
1999.
COSTS. Since the formation of the Year 2000 Committee in September
1998, we spent approximately $283,000, through February 29, 2000, primarily for
personnel and hardware costs. The total estimated budget for expenditures
directly related to our Year 2000 effort was approximately $500,000. The budget
included staffing costs for employees hired specifically to address Year 2000
issues; however, it did not include internal staff costs, as these costs were
considered part of the normal release structure of our products. The estimated
budget also included hardware upgrade costs, much of
17
which would have been incurred in our normal equipment replacement plans. As we
did not, or expect to, experience significant systems or other Year 2000
problems at or after the turn of the millennium, we do not expect to incur any
significant additional costs related to our Year 2000 efforts.
CONTINGENCY PLAN. While some "worst-case scenarios" were associated
with risks outside our control (including power and communications), we
attempted to assess those scenarios within our control. The Year 2000 Committee
identified the major areas of concern to be the handling of data formatting and
transmitting compliant data, and our customers' usage of our software products.
To deal with some of these concerns, we had informed our financial network users
of the availability of an algorithm to allow those with non-compliant formats to
continue transmitting to payers in a Year 2000-compatible format. Our customer
support departments had developed policies and procedures and mock testing
scenarios to assist our hardware and software customers with Year 2000 related
issues. A permanent Year 2000 business continuity and contingency plan for
potential disruption and data corruption issues brought about by the Year 2000
was completed in September 1999.
While unforeseen Year 2000 failures may dictate changes to previously
established procedures, we will continually and immediately attempt to diagnose
and fix problems, if they arise. Each particular problem dictates an alternate
method of processing to maintain business continuity. In the event that a Year
2000 problem occurs at an external entity, that entity will be informed of the
problem and we will continue to review and repair the dates until the problem is
fixed.
However, as not all Year 2000 issues will necessarily surface during
the beginning of 2000, no assurance can be given that one or more of our major
customers or suppliers will not encounter future Year 2000 problems which could
have a material adverse impact on our operations. The extent of our future Year
2000 exposure is based on our management's knowledge to date, and although we do
not expect any Year 2000 issues to surface in the future, there is no guarantee
that this will be achieved. Specific factors that give rise to this uncertainty
include, but are not limited to, availability and cost of personnel, failure to
identify and correct all Year 2000 susceptible systems and applications, future
Year 2000 problems encountered by customers, suppliers and other third parties
whose systems and operations impact us, and other similar uncertainties.
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 expectations regarding future events. While these statements reflect our
best 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 assumptions, beliefs and opinions
relating to our growth strategy based upon our interpretation and analysis of
healthcare industry trends and management's ability to successfully develop,
market, sell and implement its eCommerce solutions, clinical and financial
eTransaction services and software applications to physicians, pharmacies,
laboratories and payers. These factors and other risk factors are more fully
discussed in the our filings with the Securities and Exchange Commission. We
expressly disclaim any intent or obligation to update any forward-looking
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules are included beginning at Page
F-1.
18
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.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers are as follows:
NAME AGE POSITION
- ---- --- --------
Michael E. Bedell 39 Chief Marketing Officer and Executive
Vice President
Harold S. Blue 38 Chairman of the Board
John Paul Guinan 39 Chief Information Officer and
PRESIDENT-PROXYMED.COM
Bennett Marks 51 Chief Financial Officer, Executive Vice
President and Director
John B. Okkerse, Jr., Ph.D. 50 Chief Executive Officer and Director
James H. Pickering 45 Chief Operating Officer and President
Frank M. Puthoff 54 Chief Legal Officer, Executive Vice
President and Secretary
Kevin E. Moley (2) 53 Director
Bertram J. Polan (1)(2) 48 Director
Peter A.A. Saunders (1)(2) 58 Director
Eugene R. Terry (1) 61 Director
- --------------------------
(1) Member of the Audit Committee, the Chairman of which is Mr. Saunders.
(2) Member of the Compensation Committee, the Chairman of which is Mr. Polan.
MICHAEL E. BEDELL was appointed Executive Vice President and Chief
Marketing Officer in September 1999. From February 1996 to September 1999, Mr.
Bedell was an Executive Vice President, Group Account Director of Alcone
Marketing Group, a full service Marketing Communications agency, wholly-owned by
Omnicom Group, where he was responsible for the United Distillers and Vintners
and HJ Heinz USA accounts. Between February 1994 and February 1996, he was a
Managing Director of Ryan Partnership Marketing Agency. From 1988 to February
1994, Mr. Bedell held several executive positions with Clarion Marketing and
Communications, advancing to Vice President and internal Board member. Mr.
Bedell has over 17 years of marketing experience for clients including: Pepsi,
P&G, Kraft, Dannon, NFL Properties, Fort James Paper, Prudential Real Estate,
General Electric and American Tobacco.
HAROLD S. BLUE joined ProxyMed in 1993 and currently serves as Chairman
of the Board. He also held the position of Chief Executive Officer until
December 1999. Blue was also President and Chief Executive Officer of Health
Services, Inc., a physician practice management company, from 1992 to 1996, at
which time it was sold to InPhyNet Medical Management, Inc. In September 1984,
Mr. Blue
20
founded Best Generics, Incorporated, which was later sold to pharmaceutical
manufacturer, IVAX Corporation, where Mr. Blue served as a member of IVAX's
Board of Directors from 1988 to 1990. From 1979 to 1984, Mr. Blue was President
and Chief Executive Officer of Budget Drugs, Inc., a retail discount pharmacy
chain located in South Florida.
JOHN PAUL GUINAN joined ProxyMed in June 1995 and currently serves as
President-PROXYMED.COM and Chief Information Officer. Mr. Guinan served as
President and a director of ProxyMed between June 1995 and December 1999. He was
also its Chief Operating Officer from August 1996 to January 1998. He was an
Executive Vice President of ProxyMed from July 1993 until June 1995. From March
1993 to June 1993, Mr. Guinan was the Chief Executive Officer and co-founder of
ProxyScript, Inc. (f/k/a Medical Containment Systems, Inc.), which ProxyMed
acquired in June 1993. From 1989 until April 1993, Mr. Guinan founded and
developed two companies: The Desktop Professionals, Inc., a company which
supplied automation systems to South Florida professional offices; and POSitive
Thinking, Inc., a software development company which specialized in
point-of-sale systems.
BENNETT MARKS was appointed Co-President between November 1998 and
December 1999, and currently serves as Executive Vice President - Finance. He
has also served as Chief Financial Officer and a director of ProxyMed since
October 1993. From May 1991 to October 1993, Mr. Marks was Vice President -
Finance and a director of another public company engaged in the manufacturing
and marketing of network management systems for use by telecommunication
companies. From 1981 to April 1991, Mr. Marks was an audit partner with KPMG, an
international accounting and consulting firm. While with KPMG, Mr. Marks was the
partner on audits of numerous public companies and served as an Associate SEC
Reviewing Partner. He also served as the Administrative Partner in charge of
KPMG's West Palm Beach, Florida office. Mr. Marks is a certified public
accountant.
JOHN B. OKKERSE, JR., PH.D. was appointed Chief Executive Officer and
Director of ProxyMed in December 1999. Prior to joining ProxyMed, Dr. Okkerse
spent 24 years at SmithKline Beecham working in the clinical laboratory
division. From April 1998 to August 1999, Dr. Okkerse was the Chief Operating
Officer for SB Healthcare Services. In this capacity, he oversaw the operations
of SmithKline's clinical laboratory, SmithKline Beecham Clinical Laboratories
(SBCL) and its pharmacy benefit management company, Diversified Pharmaceutical
Services. From October 1996 to April 1998, Dr. Okkerse was President of
SmithKline Beecham Clinical Laboratories, one of the largest commercial clinical
laboratories. Prior to his appointment as President, Dr. Okkerse was SBCL's
Chief Technology Officer from 1994 to 1996 and was Vice President and General
Manager of SBCL's operation in Florida from 1988 to 1994. Dr. Okkerse has a
Ph.D. in Cellular and Molecular Biology from the University of Southern
California.
JAMES H. PICKERING was appointed Co-President between November 1998 and
December 1999, and currently serves as President and has been the Chief
Operating Officer since January 1998. From September 1995 to January 1998, Mr.
Pickering served as President of Med-Link Technologies, Inc., a healthcare
electronic transaction processing company and a subsidiary of SPS Payment
Systems, Inc., a New York Stock Exchange company and affiliate of Morgan
Stanley, Dean Witter Discover and Co. From October 1991 to September 1995, Mr.
Pickering was Vice President - Systems for National Electronic Information
Corporation (NEIC), also a healthcare electronic transaction processing company.
Prior to that, Mr. Pickering served as a consultant for Metropolitan Life
Insurance Company and the Prudential Insurance Company designing and
implementing claims administration, utilization review and managed-care
capitation systems.
FRANK M. PUTHOFF was appointed Executive Vice President, Chief Legal
Officer and Secretary of ProxyMed in August 1996. From July 1994 to August 1996,
he was Vice President, General Counsel and Secretary for Miami Subs Corporation.
Between July 1990 and July 1994, he held several executive
21
positions with Ground Round Restaurants, Inc., an affiliate of Hanson PLC,
serving most recently as Senior Vice President, General Counsel and Secretary.
Prior thereto, he served as Division Counsel for PepsiCo, Inc. and held various
executive positions with Pizza Hut, Inc. and Marriott Corporation, and was in
private practice. He is a licensed attorney in Ohio, the District of Columbia
and Florida.
KEVIN E. MOLEY has been a director of ProxyMed since June 1999. From
November 1998 to December 1999, Mr. Moley served as Chairman of the Board of
Patient Care Dynamics LLC, a provider of computer hardware and software to
physicians. From January 1996 to February 1998, he was President and Chief
Executive Officer of Integrated Medical Systems, Inc. where he served as a
director since 1994. From February 1993 to December 1995, Mr. Moley was Senior
Vice President to PCS Health Systems, Inc., a provider of prescription
management services. From 1989 to 1992, Mr. Moley served in the George Bush
administration as an Assistant Secretary of the U.S. Department of Health and
Human Services ("HHS"), and in 1992-1993 as Deputy Secretary of HHS. He also
serves as a director of Innovative Clinical Solutions, Ltd., a site management
organization, Merge Technologies, Inc., a medical imaging software company, Per
Se Technologies, a medical billing company, and Cephalon, Inc., a bio-technology
company.
BERTRAM J. POLAN has been a director of ProxyMed since August 1995. Mr.
Polan is the founder and President of Gemini Bio-Products, Inc., a
California-based supplier of biological products used in medical schools,
private medicine research institutes and the bio-technology industry, which he
founded in 1985. From 1973 to 1985, Mr. Polan was employed in various executive
capacities, most recently as vice president of sales and marketing, with
Northern American Biologicals, Inc., one of the world's largest independent
providers of human plasma products.
PETER A.A. SAUNDERS, F.R.S.A. (Fellow of Royal Society of Arts) is the
owner and Chairman of Pass Consultants, a marketing and business consulting firm
he founded in Surrey, England in 1988. From 1992 through 1994, he also served as
Managing Director of United Artist Communications (London-U.K.), Ltd. From 1959
to 1984, Mr. Saunders held various executive and directorship positions with
Allders Department Stores, a subsidiary of United Drapery Department Stores
Group, and, after its acquisition by Hanson Trust, P.L.C. in 1984, continued as
a Director until 1988. Since 1989, Mr. Saunders has been serving as a Director
of Theragenics Corporation, a public company located in Norcross, Georgia,
specializing in the treatment of prostate cancer; as a non-executive Director of
Mayday Healthcare NHS Trust, a 700-bed hospital in Surrey, England from 1992 to
1998; and as a non-executive Director of Eurbell (Sussex) Limited, a United
Kingdom cable television and telecommunications company from 1993 to 1998.
EUGENE R. TERRY has been a director of ProxyMed since August 1995. Mr.
Terry is a pharmacist and the founder and Chairman of Bloodline, Inc., a New
Jersey-based company engaged in the blood services business, which he founded in
1980. In 1971, Mr. Terry founded Home Nutritional Support, Inc. ("HNSI"), one of
the first companies established in the home infusion industry. In 1984, HNSI was
sold to Healthdyne, Inc. HNSI was later sold to the W.R. Grace Group. From 1975
to 1984, Mr. Terry was also founder and Chief Executive Officer of Paramedical
Specialties, Inc., a respiratory and durable medical equipment company, which
was also sold to Healthdyne, Inc.
AUDIT COMMITTEE - Our Audit Committee consists of three non-employee
directors: Peter A.A. Saunders (Chair), Bertram J. Polan and Eugene R. Terry.
The Audit Committee is responsible for meeting with representatives of our
independent accountants and with representatives of senior management to review
the general scope of our annual audit, matters relating to internal audit
control systems and the fee charged by the independent accountants. In addition,
the Audit Committee is responsible for reviewing and monitoring the performance
of non-audit services by our independent accountants and for recommending the
engagement or discharge of our independent accountants.
22
COMPENSATION COMMITTEE - Our Compensation Committee consists of three
non-employee directors: Bertram J. Polan (Chair), Kevin E. Moley and Peter A.A.
Saunders. The Compensation Committee is responsible for approving and reporting
to the Board on the annual compensation for all officers, including salary,
stock options and other consideration, if any. The Committee is also responsible
for granting stock awards, stock options and other awards to be made under our
existing plans.
Directors are elected annually at our annual meeting of shareholders.
Each director serves until his successor is elected and qualified or until the
earlier death, resignation, removal or disqualification of the director. The
officers are elected annually by the directors.
We have "key person" life insurance policies for our benefit on the
lives of Mr. Blue and Mr. Guinan in the amount of $1,000,000 each.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 (the "Exchange
Act") requires our officers and directors, and persons who own more than 10% of
the registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC").
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file.
Based on our review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, we believe that, during our fiscal year ended
December 31, 1999, all filing requirements applicable to our officers and
directors and greater than 10% beneficial owners were complied with, except that
(1) Mr. Saunders unknowingly failed to timely file a Form 4 for a transaction in
June 1998 and for a transaction in June 1999, but has since timely filed a Form
5 covering these transactions; and (2) we have not received from Bellingham
Industries Inc. a Form 5 or a written representation that no Form 5 is required.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the past
three fiscal years to our Chief Executive Officers and our other four most
highly compensated executive officers with annual compensation over $100,000 for
such years (the "named executive officers"), plus two additional individuals for
whom disclosure would have been provided but for the fact that the individuals
were not serving as executive officers at the end of the last completed fiscal
year:
23
SUMMARY COMPENSATION TABLE
-------------------------------------
LONG-TERM COMPENSATION
------------------------------------ ------------------------------------- -----------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ------------------------ ------ ------------------------------------ -------------------------- ---------- ALL
SECURITIES OTHER
NAME AND OTHER RESTRICTED UNDERLYING LTIP COMPEN-
PRINCIPAL ANNUAL STOCK OPTIONS/ PAYOUTS SATION
POSITION YEAR SALARY BONUS COMP. AWARD(S) SARS
- ------------------------ ------ ------------- -------- ------------- ------------ ------------- ---------- -----------
John B. Okkerse, Jr.
CEO 1999 16,154(1) -- -- -- 400,000 -- --
Harold S. Blue
Chairman and CEO 1999 202,198 -- -- -- 50,000 -- --
1998 145,033 -- -- -- -- -- --
1997 125,000 -- -- -- -- -- --
John Paul Guinan
Pres., PROXYMED.COM 1999 180,609 5,000 -- -- 35,000 -- --
1998 163,943 15,063 -- -- -- -- --
1997 125,000 -- -- -- -- --
Bennett Marks
EVP & CFO 1999 182,198 15,000 -- -- 25,000 -- --
1998 145,305 20,000 -- -- 20,000 -- --
1997 128,646 15,000 -- -- -- -- --
James H. Pickering
President & COO 1999 201,236 -- 36,540(3) -- 20,000 -- --
1998 165,456 10,000 47,182(2) -- 130,000 -- --
Jeff K. Carpenter
Pres., Lab Division 1999 282,408 100,000 -- -- 142,000 -- --
Bruce S. Roberson
EVP-Business Dev. 1999 182,447 -- -- -- 35,000 -- --
1998 180,000 50,000 22,506(2) -- 20,000 -- --
1997 30,000 -- 24,759 -- -- --
- ------------------------ ------ ------------- -------- ------------- ------------ ------------- ---------- -----------
- ------------------
(1) Dr. Okkerse joined us on November 26, 1999.
(2) Consists of reimbursement of relocation expenses.
(3) Consists of reimbursement of certain commuting expenses.
The following table provides information on stock option grants during
fiscal year 1999 to each of the named executive officers:
24
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------- -----------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
% OF TOTAL
# OF SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/ EMPLOYEE IN EXERCISE OR EXPIRATION
NAME SARS GRANTED FISCAL YEAR BASE PRICE DATE 5% 10%
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
Harold S. Blue 50,000 3% $13.25 6/28/04 $ 183,037 $ 404,463
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
John Paul Guinan 35,000 2% $13.25 6/28/04 $ 128,126 $ 283,124
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
Bennett Marks 25,000 2% $13.25 6/28/04 $ 91,518 $ 202,231
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
John B. Okkerse, Jr. 400,000 27% $10.25 11/26/09 $2,578,468 $6,534,344
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
James H. Pickering 20,000 1% $13.25 6/28/04 $ 73,215 $ 161,785
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
Jeff K. Carpenter 44,000 3% $11.75 1/4/09 $ 325,139 $ 823,965
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
Jeff K. Carpenter 98,000 7% $11.00 8/11/04 $ 297,832 $ 658,130
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
Bruce S. Roberson 35,000 2% $13.25 6/28/04 $ 128,126 $ 283,124
- ------------------------- ---------------- ---------------- ------------- -------------- --------------- -------------
The following table sets forth certain information concerning
unexercised options held by each of the named executive officers:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUES
-------------------------------- --------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END (#) OPTIONS/SARS AT FY-END ($)*
- ----------------------- -------------- ------------- -------------------------------- --------------------------------
# OF SHARES
ACQUIRED ON $ VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- -------------- ------------- --------------- ---------------- ---------------- ---------------
Harold S. Blue -- -- 150,000 50,000 $ 937,500 --
- ----------------------- -------------- ------------- --------------- ---------------- ---------------- ---------------
John Paul Guinan -- -- 217,500 35,000 $1,232,475 --
- ----------------------- -------------- ------------- --------------- ---------------- ---------------- ---------------
Bennett Marks -- -- 107,917 38,333 $ 564,981 $34,132
- ----------------------- -------------- ------------- --------------- ---------------- ---------------- ---------------
John B. Okkerse, Jr. -- -- -- 400,000 -- --
- ----------------------- -------------- ------------- --------------- ---------------- ---------------- ---------------
James H. Pickering -- -- 44,000 106,000 $ 121,000 $232,700
- ----------------------- -------------- ------------- --------------- ---------------- ---------------- ---------------
Jeff K. Carpenter -- -- 44,000 98,000 -- --
- ----------------------- -------------- ------------- --------------- ---------------- ---------------- ---------------
Bruce S. Roberson 68,550 $261,014 38,117 48,333 $ 107,109 $37,466
- ----------------------- -------------- ------------- --------------- ---------------- ---------------- ---------------
*Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end market
value of the common stock, which was $9.75 on December 31, 1999.
There were no awards made to named executive officers in the last
completed fiscal year under any long-term incentive plan for performance to
occur over a period longer than one fiscal year. We do not have any defined
benefit or actuarial plans for our employees. No stock options for named
executive officers were amended, cancelled, replaced or otherwise repriced
during the past ten years.
COMPENSATION OF DIRECTORS
Our employee directors are not compensated for their services as
directors. Outside directors receive $2,000 for each regularly scheduled board
meeting personally attended, $500 for each telephonic board meeting, and $500
each quarter for each committee a director is a member. All directors are
reimbursed for reasonable expenses incurred in attending board meetings. In
addition, non-employee directors receive stock options under the 1995 Outside
Plan (described below) upon the directors' initial election or appointment to
the Board of Directors. During 1995 through 1999, Messrs. Polan and Terry, upon
joining the Board, were each granted options to purchase 75,000 shares of common
stock at an
25
exercise price equal to the market price on the date of grant. These options are
now fully vested and expire on August 28, 2000. Upon joining the Board in 1998,
Mr. Saunders received 20,000 options at $7.19 price per share. Half of these
options vested in September 1998, and the other half vested in September 1999.
These options expire ten years after the date of grant. Upon joining the Board
in 1999, Mr. Moley received 25,000 options at $13.00 price per share. These
options will vest over three years and expire five years after the date of
grant.
EMPLOYMENT AGREEMENTS WITH THE NAMED EXECUTIVE OFFICERS
On April 1, 1996, we entered into an employment agreement with Mr. Blue
for a period of three years, which is automatically extended from year to year
unless terminated by either party upon 60 days' written notice. Mr. Blue
receives an annual base salary of $204,407 and is entitled to such bonuses as
may be awarded from time to time by the Board of Directors and to participate in
any stock option or bonus plans which we may now have or in the future develop.
Mr. Blue may be terminated for "cause", as defined in the agreement. If he is
terminated for cause, he will be entitled to base salary earned, and he will
retain all vested stock options which shall remain exercisable for 90 days after
the date of termination. If he is terminated "without cause", then he will be
entitled to receive an amount equal to his base salary plus bonus, if any, and
continuation of health insurance for six months following termination. In
addition, the agreement contains confidentiality and non-competition covenants.
Mr. Guinan has an employment agreement with us for a three-year term commencing
on December 5, 1995, which is substantially similar to Mr. Blue's, with an
annual base salary of $200,391. The employment agreements were renewed by their
terms for an additional year.
In November 1996, we entered into an employment agreement with Mr.
Marks. In November 1997, we entered into an employment agreement with Mr.
Pickering. The agreements are for a three-year term and automatically extend
from year to year thereafter unless terminated by us upon 90 days' written
notice or by the employee upon 30 days' written notice prior to the end of the
initial term or any extension. Mr. Marks and Mr. Pickering receive an annual
base salary of $200,325 and $225,325, respectively, and are entitled to such
bonuses as may be awarded from time to time and to participate in any stock
option or bonus plans which we may now have or in the future develop. They may
be terminated for "cause" as defined in their agreements. If terminated for
cause, they will be entitled to base salary earned, and they will retain all
vested stock options which shall remain exercisable for 90 days after the date
of termination. If, upon 90 days' prior written notice, they are terminated
"without cause", they will be entitled to receive an amount equal to their base
salary plus bonus, if any, and continuation of health insurance for six months
following termination, plus any unvested options shall vest. In addition, the
agreements contain confidentiality and non-competition covenants. Mr. Mark's
employment agreement was renewed by its terms for an additional year.
In November 1999, we entered into an employment agreement with Dr.
Okkerse. The agreement is for a three-year term and automatically extends from
year to year thereafter unless terminated by us upon 90 days' written notice or
by the employee upon 30 days' written notice prior to the end of the initial
term or any extension. He receives an annual base salary of $200,000 and is
entitled to bonuses as may be awarded from time to time and has the ability to
earn an additional cash bonus of at least $200,000 per year, and to participate
in any stock option or bonus plans which we may now have or in the future
develop. He may be terminated for "cause" as defined in his agreement. If
terminated for cause, he will be entitled to base salary earned, and he will
retain all vested stock options which shall remain exercisable for 90 days after
the date of termination. If, upon 90 days' prior written notice, he is
terminated "without cause", he will be entitled to receive an amount equal to
his base salary plus bonus, if any, and continuation of health insurance for
nine months following termination, plus any unvested options shall vest. In
addition, the agreement contains confidentiality and non-competition covenants.
26
LIABILITY AND INDEMNIFICATION OF OUR DIRECTORS AND OFFICERS
We have entered into indemnification agreements with each of our
directors and executive officers limiting their personal liability for monetary
damages for breach of their fiduciary duties as officers and directors, except
for liability that cannot be eliminated under the Florida Business Corporation
Act. The Florida Business Corporation Act provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duty as directors, except for liability (i) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (ii) for any unlawful payment of a dividend or unlawful stock
repurchase or redemption, as provided in Section 607.0834 of the Florida
Business Corporation Act, (iii) for any transaction from which the director
derived an improper personal benefit, or (iv) for a violation of criminal law.
Our Restated Articles of Incorporation and Bylaws also provide that we shall
indemnify our directors and officers to the fullest extent permitted by Section
607.0831 of the Florida Business Corporation Act, including circumstances in
which indemnification is otherwise discretionary. We have procured and maintain
a policy of insurance under which our directors and officers are insured,
subject to the limits of the policy, against certain losses arising from claims
made against such directors and officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 10, 2000, with respect to (i) each
person known to us to be the beneficial owner of more than 5% of our common
stock, (ii) each director, (iii) each executive officer named in the Summary
Compensation Table, and (iv) all of our directors and officers as a group:
NAME AND ADDRESS(1) # OF SHARES(2) % OF CLASS
------------------- -------------- ----------
Harold S. Blue(3) 804,132 4.3%
John Paul Guinan(4) 197,500 1.1%
Bennett Marks(5) 131,417 *
John B. Okkerse, Jr., Ph.D. 0 0
James H. Pickering(4) 77,000 *
Kevin E. Moley 0 0
Bertram J. Polan(6) 87,500 *
Peter A.A. Saunders(7) 22,500 *
Eugene R. Terry(4) 75,000 *
Bellingham Industries Inc.(8) 6,017,342 32.1%
Urraca Building
Frederico Boyd Avenue
Panama City, Panama
27
All directors and officers 2,904,936 14.9%
as a group (34 persons)(9)
- ----------------------
*Less than 1%
(1) The address for each person, unless otherwise noted, is 2555 Davie
Road, Suite 110, Fort Lauderdale, Florida 33317-7424.
(2) In accordance with Rule 13d-3 of the Exchange Act, shares that are not
outstanding, but that are subject to options, warrants, rights or
conversion privileges exercisable within 60 days from March 3, 2000,
have been deemed to be outstanding for the purpose of computing the
percentage of outstanding shares owned by the individual having such
right, but have not been deemed outstanding for the purpose of
computing the percentage for any other person.
(3) Includes 654,132 shares held of record, and 150,000 shares issuable
upon the exercise of currently exercisable stock options.
(4) Represents shares issuable upon the exercise of currently exercisable
stock options.
(5) Includes 23,500 shares held of record, and 107,917 shares issuable upon
the exercise of currently exercisable stock options.
(6) Includes 12,500 shares held of record, and 75,000 shares issuable upon
exercise of currently exercisable stock options.
(7) Includes 2,500 held of record, plus 20,000 shares issuable upon
exercise of currently exercisable stock options.
(8) Includes 5,767,342 shares held of record, and 250,000 shares issuable
upon the exercise of currently exercisable stock options. Share amounts
were provided by Bellingham.
(9) Includes 1,878,932 shares held of record, and 1,026,004 shares issuable
upon the exercise of currently exercisable stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 30, 1997, we loaned a total of $350,000 to Mr. Blue. The funds
were advanced pursuant to two demand promissory notes with recourse in the
principal amounts of $290,000 and $60,000, respectively, each bearing interest
at a rate of 7 3/4% per year. Mr. Blue has agreed to collateralize the notes
pursuant to pledges of securities, including shares of our common stock,
satisfactory to our Board of Directors.
28
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, 1999 and 1998 F-3
Consolidated Statements of Operations - Years Ended December 31, 1999, F-4
1998 and 1997
Consolidated Statements of Stockholders' Equity - Years Ended F-5
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1999, F-6
1998 and 1997
Notes to Consolidated Financial Statements F-7 - F-23
(2) The following schedule for the years 1999 and 1998 is submitted
herewith:
Schedule II - Valuation and Qualifying Accounts - F-24
Years Ended December 31, 1999 and 1998
(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 31 through 33.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1999, a Form 8-K
report was filed by ProxyMed with the Securities and
Exchange Commission on December 28, 1999, reporting an
event dated December 23, 1999, regarding the convertible
preferred stock offering and warrants.
29
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: March 23, 2000 PROXYMED, INC.
By: /s/ JOHN B. OKKERSE, JR.
----------------------------------
John B. Okkerse, Jr., Ph.D.
Chief Executive Officer
In accordance with the Exchange Act, 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/ HAROLD S. BLUE Chairman of the Board March 23, 2000
- ------------------------------------
Harold S. Blue
/s/ JOHN B. OKKERSE, JR., PH.D. Chief Executive Officer and Director March 23, 2000
- ---------------------------------- (principal executive officer)
John B. Okkerse, Jr., Ph.D.
/s/ BENNETT MARKS Executive Vice President-Finance, March 23, 2000
- ------------------------------------ Chief Financial Officer and Director
Bennett Marks (principal financial and accounting
officer)
/s/ KEVIN E. MOLEY Director March 23, 2000
- ------------------------------------
Kevin E. Moley
/s/ BERTRAM J. POLAN Director March 23, 2000
- ------------------------------------
Bertram J. Polan
/s/ PETER A. A. SAUNDERS Director March 23, 2000
- ---------------------------
Peter A. A. Saunders
/s/ EUGENE R. TERRY Director March 23, 2000
- ------------------------------------
Eugene R. Terry
30
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).
10.1 License Agreement between ProxyMed and Blue Cross and Blue Shield of
Massachusetts, Inc., dated March 1, 1996 (incorporated by reference
to Exhibit 3.1 of the Registration Statement on Form SB-2, File No.
333-2678).
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).
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).
10.5 *Employment Agreement between ProxyMed and Harold S. Blue
(incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form SB-2, File No. 333-2678).
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).
10.7 *Employment Agreement between ProxyMed and Bennett Marks dated
November 11, 1996 (incorporated by reference to Exhibit 10.7 of the
Form 10-KSB for the period ending December 31, 1996).
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).
31
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).
10.13 *Employment Agreement between ProxyMed and Bruce Roberson dated
October 17, 1996 (incorporated by reference to Exhibit 10.1 of the
10-QSB for the period ending September 30, 1996).
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).
10.19 *Employment Agreement between ProxyMed and James Pickering dated
November 10, 1997 (incorporated by reference to Exhibit 10.19 of the
10-K for the period ending December 31, 1997).
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 #000-22052, reporting an event dated December 31, 1998).
10.21 *Employment Agreement between ProxyMed and Jeff K. Carpenter dated
December 31, 1998 (incorporated by reference to Exhibit 2.5 of Form
8-K, File No. 000-22052, reporting an event on December 31, 1998).
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).
10.24 *Employment Agreement between ProxyMed and Michael E. Bedell dated
September 8, 1999 (incorporated by reference to Exhibit 2 of Form
10-Q for the period ending September 30, 1999).
32
10.25 Securities Purchase Agreement dated as of December 23, 1999, by and
among ProxyMed and the 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 *Employment Agreement between ProxyMed and John B. Okkerse, Jr.,
Ph.D. dated November 26, 1999.
21 Subsidiaries of the ProxyMed (incorporated by reference to
Exhibit 21 of Form 10-K for the period ending December 31, 1998).
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
- ----------------------
*Denotes employment agreement or compensatory plan.
33
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, 1999 and 1998 F-3
Consolidated Statements of Operations - F-4
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - F-5
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - F-6
Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements F-7 - F-23
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts - F-24
Years Ended December 31, 1999 and 1998
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, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. 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 schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
February 21, 2000
F-2
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
------ ------------- -------------
Current assets:
Cash and cash equivalents $ 11,487,938 $ 4,626,649
Accounts receivable - trade, net of allowance for
doubtful accounts of $662,813 and $521,319, respectively 3,298,298 3,168,862
Other receivables 246,366 460,539
Inventory 1,842,055 1,923,093
Other current assets 419,410 213,152
Net current assets of discontinued operations 1,719,791 2,428,583
------------- -------------
Total current assets 19,013,858 12,820,878
Property and equipment, net 4,321,943 3,529,955
Goodwill, net 9,629,115 14,974,201
Purchased technology, capitalized software and
other intangible assets, net 10,027,887 13,418,211
Other assets 477,742 548,324
Net long-term assets of discontinued operations 1,302,339 1,611,133
------------- -------------
Total assets $ 44,772,884 $ 46,902,702
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Borrowings under revolving credit facility $ 1,000,000 $ --
Current portion of long-term debt 735,788 498,452
Accounts payable and accrued expenses 4,263,032 4,394,393
Deferred revenue 435,349 363,546
------------- -------------
Total current liabilities 6,434,169 5,256,391
Long-term debt -- 667,193
Long-term deferred revenue and other long-term liabilities 583,136 699,999
------------- -------------
Total liabilities 7,017,305 6,623,583
------------- -------------
Commitments and contingencies
Stockholders' equity:
Series B 6% Convertible preferred stock - $.01 par value
Authorized, issued and outstanding 15,000 shares;
liquidation preference $16,050,000 150 --
Common stock - $.001 par value. Authorized
50,000,000 shares; issued and outstanding
18,327,402 and 17,808,172 shares, respectively 18,327 17,808
Additional paid-in capital 101,477,438 82,427,262
Accumulated deficit (63,740,336) (41,906,151)
Note receivable from stockholder -- (259,800)
------------- -------------
Total stockholders' equity 37,755,579 40,279,119
------------- -------------
Total liabilities and stockholders' equity $ 44,772,884 $ 46,902,702
============= =============
See accompanying notes.
F-3
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
Revenues:
Services and license fees $ 18,194,955 $ 16,279,854 $ 1,575,729
Communication devices, computer systems
and other tangible goods 10,828,110 5,969,472 241,393
------------ ------------ ------------
29,023,065 22,249,326 1,817,122
------------ ------------ ------------
Costs and expenses:
Cost of services and license fees 1,215,104 1,163,380 173,332
Cost of tangible goods 7,278,617 3,565,632 207,686
Selling, general and administrative expenses 27,484,067 19,961,105 11,002,340
Depreciation and amortization 13,064,146 8,646,253 993,924
In-process research and development technology -- -- 4,300,000
------------ ------------ ------------
49,041,934 33,336,370 16,677,282
------------ ------------ ------------
Operating loss (20,018,869) (11,087,044) (14,860,160)
Interest income (expense), net (100,909) (106,656) 267,148
------------ ------------ ------------
Loss from continuing operations (20,119,778) (11,193,700) (14,593,012)
Discontinued operations (Note 3):
Loss from discontinued operations (1,195,121) (594,485) (3,924,110)
Estimated loss on disposal of discontinued operations (519,286) -- --
------------ ------------ ------------
(1,714,407) (594,485) (3,924,110)
------------ ------------ ------------
Net loss (21,834,185) (11,788,185) (18,517,122)
Dividends on cumulative preferred stock 22,192 -- --
------------ ------------ ------------
Net loss applicable to
common shareholders $(21,856,377) $(11,788,185) $(18,517,122)
============ ============ ============
Weighted average common shares outstanding 18,032,042 15,653,374 10,589,333
============ ============ ============
Basic and diluted net loss per share of common stock:
Loss from continuing operations $ (1.12) $ (.71) $ (1.38)
Loss from discontinued operations (.09) (.04) (.37)
------------ ------------ ------------
Net loss $ (1.21) $ (.75) $ (1.75)
============ ============ ============
See accompanying notes.
F-4
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Note
PREFERRED STOCK COMMON STOCK receivable
---------------- --------------------
NUMBER PAR NUMBER PAR ADDITIONAL ACCUMULATED FROM
OF SHARES VALUE OF SHARES VALUE PAID-IN CAPITAL DEFICIT STOCKHOLDER TOTAL
--------- ----- ---------- -------- ------------- ------------- --------- -------------
Balances, January 1, 1997 -- $ -- 9,541,610 $ 9,542 $ 25,944,057 $ (11,038,294) $ -- $ 14,915,305
Sales of common stock, net
of expenses of $664,863 -- -- 1,625,000 1,625 13,389,762 -- -- 13,391,387
Exercise of stock options
and warrants -- -- 211,261 211 1,102,440 -- -- 1,102,651
Common stock issued for
acquired businesses -- -- 514,001 514 2,055,937 -- -- 2,056,451
Warrants issued for acquisition
of assets -- -- -- -- 731,938 -- -- 731,938
Compensatory stock options -- -- -- -- 26,100 -- -- 26,100
Purchase of treasury stock -- -- (110,000) (110) (554,848) -- -- (554,958)
Net loss -- -- -- -- -- (18,517,122) -- (18,517,122)
--------- ----- ---------- -------- ------------- ------------- --------- -------------
Balances, December 31, 1997 -- -- 11,781,872 11,782 42,695,386 (29,555,416) -- 13,151,752
Sales of common stock, net
of expenses of $1,091,360 -- -- 3,013,416 3,013 29,115,492 -- -- 29,118,505
Exercise of stock options
and warrants -- -- 422,639 423 1,711,077 -- (259,800) 1,451,700
Common stock issued for pooled
and acquired businesses -- -- 2,590,245 2,590 5,287,894 554,848 -- 5,845,332
Retirement of debt for
pooled company -- -- -- -- 3,015,505 -- -- 3,015,505
Tax distributions for
pooled company -- -- -- -- (515,490) -- -- (515,490)
Reclassification of retained
earnings of pooled
company upon termin-
ation of S Corporation
tax status -- -- -- -- 1,117,398 (1,117,398) -- --
Net loss -- -- -- -- -- (11,788,185) -- (11,788,185)
--------- ----- ---------- -------- ------------- ------------- --------- -------------
Balances, December 31, 1998 -- -- 17,808,172 17,808 82,427,262 (41,906,151) (259,800) 40,279,119
Sale of common stock, net
of expenses of $67,673 -- -- 250,000 250 2,932,077 -- -- 2,932,327
Sale of preferred stock, net
of expenses of $840,000 15,000 150 -- -- 14,159,850 -- -- 14,160,000
Exercise of stock options
and warrants -- -- 207,384 207 1,037,450 -- -- 1,037,657
Common stock issued for
acquired businesses -- -- 51,846 52 749,948 -- -- 750,000
Compensatory stock and
stock options -- -- 10,000 10 193,043 -- -- 193,053
Repayment of stockholder note -- -- -- -- -- -- 259,800 259,800
Dividends on preferred stock -- -- -- -- (22,192) -- -- (22,192)
Net loss -- -- -- -- -- (21,834,185) -- (21,834,185)
--------- ----- ---------- -------- ------------- ------------- --------- -------------
Balances, December 31, 1999 15,000 $ 150 18,327,402 $ 18,327 $ 101,477,438 $ (63,740,336) $ -- $ 37,755,579
========= ===== ========== ======== ============= ============= ========= =============
See accompanying notes.
F-5
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(21,834,185) $(11,788,185) $(18,517,122)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 14,213,148 8,977,127 1,078,300
In-process research and
development technology -- 742,623 8,467,098
Provision for doubtful accounts 639,604 355,757 76,963
Reserve for obsolete inventory 350,000 -- --
Amortization of covenant not-to-compete -- (20,000) (80,000)
Write-off of retired assets 82,905 -- 363,237
Compensatory options and warrants issued 11,490 -- 26,100
Net current assets of discontinued operations 809,629 (1,291,322) (1,271,368)
Changes in assets and liabilities, net of
effect of acquisitions and dispositions:
Accounts and other receivables (180,196) 129,699 (25,247)
Inventory 81,038 (393,789) (80,700)
Accounts payable and accrued expenses (957,347) (1,847,661) 1,847,738
Deferred revenue (128,201) 559,052 (116,915)
Other, net 305,023 180,963 (16,656)
------------ ------------ ------------
Net cash used in operating activities (6,607,092) (4,395,736) (8,248,572)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (1,000,000) (19,933,922) (9,909,551)
Payment of acquisition contingency of discontinued operations (500,000) (500,000) --
Payments for acquisition-related costs (573,440) (557,985) (575,443)
Capital expenditures (1,787,419) (1,207,329) (1,214,866)
Capital expenditures of discontinued operations (357,684) (318,731) (171,288)
Purchased technology and capitalized software (1,438,932) (510,132) (3,182,288)
Maturities of U.S. Treasury Notes -- -- 6,008,698
------------ ------------ ------------
Net cash used in investing activities (5,657,475) (23,028,099) (9,044,738)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of equity securities 17,092,327 29,118,505 13,391,387
Proceeds from exercise of stock options and warrants 1,037,657 1,451,700 1,102,651
Payment of notes payable, long-term debt and capital leases (263,928) (1,156,556) (9,375)
Collection of note receivable 259,800 -- --
Purchase of treasury stock -- -- (554,958)
Draw on line of credit 4,930,000 -- 2,500,000
Repayment of line of credit (3,930,000) -- (2,500,000)
------------ ------------ ------------
Net cash provided by financing activities 19,125,856 29,413,649 13,929,705
------------ ------------ ------------
Net increase (decrease) in cash 6,861,289 1,989,814 (3,363,605)
Cash and cash equivalents at beginning of period 4,626,649 2,636,835 6,000,440
------------ ------------ ------------
Cash and cash equivalents at end of period $ 11,487,938 $ 4,626,649 $ 2,636,835
============ ============ ============
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") is an
eHealth company providing eSolutions to physicians and
business-to-business healthcare electronic commerce services
to healthcare information system suppliers such as pharmacies,
commercial and hospital laboratories, insurance companies,
managed care organizations and nursing homes. ProxyMed's
products and services are provided from its operating
facilities located in Fort Lauderdale, Florida; Santa Ana,
California; and New Albany, Indiana.
In February 2000, ProxyMed adopted a plan to sell its non-core
network integration and prescription drug dispensing segments.
These two segments are shown as discontinued operations and
the consolidated financial statements and related notes have
been reclassified to segregate the net assets and operating
results of these segments (see Note 3).
(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 generally accepted accounting principles
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.
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 is applied to each element of multiple
element arrangements after allocating the amounts paid to
individual elements based on vendor-specific objective
evidence of fair value. Revenue from hardware leases, software
rentals and maintenance fees is recognized ratably over the
applicable period.
(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 U.S. Treasury Notes, or in
bank certificates of deposit and money market accounts. At
times, such amounts may be in excess of FDIC insurance limits.
ProxyMed has not experienced any loss to date on these
investments.
F-7
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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;
depreciation of revenue earning equipment is included in cost
of sales. 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.
(h) INTANGIBLE ASSETS
GOODWILL - Goodwill, representing the excess of cost over the
estimated fair value of net assets acquired, is amortized on
the straight-line basis over 3 to 15 years.
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 4 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.
F-8
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PURCHASED TECHNOLOGY AND CAPITALIZED SOFTWARE - ProxyMed has
recorded amounts related to various software and technology
that it has purchased or capitalized both 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.
Management believes that future revenues related to these
projects will be sufficient to realize the amounts capitalized
at December 31, 1999, and as such these amounts will be
recovered over the lives of the related projects. It is
reasonably possible, however, that those estimates of future
revenues could be adversely impacted if these projects are not
released timely or if the market acceptance of the related
technology is not what is anticipated by management. As a
result, the recoveries of these capitalized costs through
future revenues could be reduced materially.
(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 was approximately $2,898,000 in 1999,
$2,978,000 in 1998, and $1,908,000 in 1997, respectively.
(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.
F-9
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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, warrants
and contingent shares totaling 4,530,431 shares, 2,553,488
shares, and 2,808,233 shares for the three years ended
December 31, 1999, 1998 and 1997, respectively, as well as
common shares issuable on conversion of preferred stock
(1,654,260 shares if converted on December 31, 1999) were
excluded from the calculation of diluted per share results
because their effect was antidilutive.
(l) SEGMENT INFORMATION - In prior years, ProxyMed reported its
operations under three segments. As a result of adopting a
plan to sell its network integration and prescription drug
dispensing segments, ProxyMed's results are now reported
solely in the eHealth and business-to-business healthcare
electronic commerce services segment.
(m) NEW ACCOUNTING PRONOUNCEMENTS - In December 1999, the
Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on applying generally
accepted accounting principles for recognizing revenue. SAB
101 is effective for fiscal years beginning after December 15,
1999. ProxyMed believes that the impact of adopting SAB 101
will not be material to the consolidated financial statements.
(n) RECLASSIFICATIONS - Certain prior year amounts have been
reclassified to conform to the current year presentation.
(2) ACQUISITIONS OF BUSINESSES
(a) 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 10,000 shares of
unregistered common stock and warrants to purchase 20,000
shares of ProxyMed's common stock at $11.44 (together valued
at $181,563 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 ($206,408), property and equipment ($38,546) and other
intangible assets ($111,060). The excess of the consideration
paid over the estimated fair value of the net assets acquired
in the amount of $999,549 was recorded as goodwill. Pro forma
operating results from this acquisition are not significantly
different from historical results reported.
F-10
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) KEY COMMUNICATIONS - On December 31, 1998, ProxyMed merged
with Key Communications Service, Inc., a privately-owned
company based in New Albany, Indiana. Key Communications is a
designer, manufacturer, distributor and servicing company for
laboratory results reporting communication products for
national, regional and hospital-based laboratories. ProxyMed
issued 2,078,106 shares of common stock in exchange for all of
Key Communications' capital stock. The transaction was
accounted for as a pooling of interests. Because of a
leveraged buyout transaction consummated on April 30, 1998 by
the former stockholders of Key Communications, the accounts of
Key Communications were combined with those of ProxyMed
commencing May 1, 1998. For the period May 1, 1998 to December
31, 1998, Key Communications had net revenues of $10,439,327
and net income of $1,117,398. Merger related expenses of
$426,970 have been included in selling, general and
administrative expenses for 1998. In connection with the
merger, certain debt guaranteed by Key Communications' assets
was retired, and as a result, $3,015,505 was credited to
additional paid-in capital. In addition, distributions of
$515,490 were recorded, representing S Corporation income tax
obligations arising from Key Communications' operations prior
to the merger.
(c) INTEGRATED MEDICAL SYSTEMS - In May 1998, ProxyMed acquired
all of the capital stock of WPJ, Inc., d/b/a Integrated
Medical Systems, a privately-owned company based in Santa Ana,
California. Integrated Medical Systems provides financial
electronic transaction processing services including medical
claims, encounters and other financial transactions. The
purchase price consisted of $20,620,000 in cash, 481,836
unregistered shares of ProxyMed's common stock which the
sellers have agreed not to dispose of until one year after the
closing (valued at $5,345,325 after discounting for a block of
restricted stock with a one-year holding period), and
acquisition-related costs of $328,433. No registration rights
for the shares were granted to the sellers. The cash portion
of the purchase price was funded through the private placement
sale of common stock. The acquisition was accounted for as a
purchase, and the purchase price was allocated as follows: net
working capital ($497,897); property, equipment and other
assets ($373,319); purchased technology ($11,000,000); and
long-term liabilities ($227,189). The excess of the
consideration paid over the estimated fair value of the net
assets acquired in the amount of $14,649,731 was recorded as
goodwill.
F-11
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) DISCONTINUED OPERATIONS
In February 2000, ProxyMed's Board of Directors approved a plan to sell
its non-core network integration and prescription drug dispensing segments. The
following table represent the results of discontinued operations for the years
ended December 31, 1999, 1998 and 1997:
1999 1998 1997
------------ ------------ ------------
Net revenues:
Network integration $ 11,106,571 $ 13,855,458 $ 7,779,787
Prescription drug dispensing 2,200,303 1,662,893 1,335,060
------------ ------------ ------------
$ 13,306,874 $ 15,518,351 $ 9,114,847
============ ============ ============
Net income (loss):
Network integration $ (1,045,298) $ (538,888) $ (3,942,150)
Prescription drug dispensing (149,823) (55,597) 18,040
------------ ------------ ------------
$ (1,195,121) $ (594,485) $ (3,924,110)
============ ============ ============
At December 31, 1999 the net assets of the network integration segment
were approximately $2,672,000 and consisted primarily of net current assets of
$1,440,000 and net long-term assets of $1,232,000. ProxyMed expects that the
amount of net proceeds received from the sale of the network integration
segment, after including the results of operations from the measurement date to
the disposal date, will result in a gain. At December 31, 1999, the net assets
of the prescription drug dispensing segment were approximately $350,000 and
consisted primarily of net current assets of $280,000 and net long-term assets
of $70,000.
F-12
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY
In 1997, ProxyMed acquired Hayes Computer Systems, Inc., a network
integration company, and Clinical MicroSystems, Inc., a company that sold
software for laboratory/physician use. Portions of the initial purchase prices
for these acquisitions were allocated to in-process research and development
technology, resulting in charges to ProxyMed's 1997 operations of $4,167,098 for
the Hayes Computer Systems acquisition (which is included in discontinued
operations) and $4,300,000 for the Clinical MicroSystems acquisition. The
following products are includable as in-process research and development
technology:
(a) KIMS - The in-process research and development technology
acquired from Hayes Computer Systems consisted of the Krypton
Internet Messaging Server ("KIMS"), a server-to-server
intranet email system designed to provide more security,
higher performance and a lower price than comparable UNIX
based email systems. At the time of the acquisition, this
product was in the alpha phase of programming and had the
capability of processing only simple email communications.
ProxyMed intended to complete the development of a testing
lab, the development of the KIMS product, and the development
of the electronic transaction processing version of the
product at an estimated cost of approximately $253,000 and
include it in its electronic transaction processing product
offering to physicians and other healthcare providers using
the ProxyNet network by the end of calendar 1997. ProxyMed
anticipated that revenues would commence in 1998, and would
grow at a rate ranging from 53% to 25% per year through 2006,
with the lower growth rates being achieved in the later years.
In addition, ProxyMed had assumed operating expenses
associated with this product in the range of 40% to 50% of
gross revenues, as well as expenditures for fixed assets and
further software development.
However, shortly after the acquisition, Microsoft Corporation
released its improved email product. Therefore, the decision
to complete the KIMS product was temporarily suspended until
an assessment of the Microsoft product could be completed. In
1999, in connection with ProxyMed's new initiative to develop
PROXYMED.COM, our healthcare portal website, management
decided to adopt Microsoft technology for email, and abandoned
the KIMS in-process research and development technology.
F-13
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) CLINSCAN INTRANET - The in-process research and development
acquired from Clinical MicroSystems consisted of the ClinScan
Intranet, a system designed to provide hospitals with the
capability to connect hospital-based and office-based
physicians together, in a private wide area network, or
Intranet. The hospitals and physicians would have the ability
to electronically exchange messages, images, files and other
valuable clinical information, including the exchange of
clinical orders and results using proven interface technology.
By incorporating the ClinScan workstation at physician sites,
this software application would provide access to all of the
hospital-based legacy systems invisibly. By adding high-speed
communications access, hospitals and physicians would be able
to access the Internet. At the time of the acquisition,
completion of the communication protocols for incoming and
outgoing messaging and an interface for communications to the
legacy systems had been developed. ProxyMed intended to
complete the global patient data repository, routing
functionality, cross-relational master indexes, and master
catalogue of clinical functionality of the product at an
estimated cost of approximately $600,000 and include it as a
clinical electronic transaction processing product offering to
physicians, laboratories and other healthcare providers by the
start of 1998.
The technology supported by the research performed on the
ClinScan Intranet was used by ProxyMed to develop its Lab
Network Intranet Server, the central information processor for
its latest ClinScan software product. Revenues from the sales
of ClinScan involving a Lab Network Intranet Server commenced
in 1998.
Management of ProxyMed is responsible for estimating the fair value of
acquired in-process research and development. To assist in determining the fair
value of the acquired in-process research and development, ProxyMed used
standard appraisal methodologies. Each appraisal procedure performed involved
projected cash flows for KIMS and ClinScan Intranet over their estimated useful
lives, net of ongoing operating investment needs (including working capital,
fixed assets and other assets) that support the products. An effective income
tax rate of 37.6% was applied to each of the cash flows representing the
expected marginal combined federal and state tax rate to apply over the cash
flow periods. These cash flows were discounted to their present value using a
discount rate of 70%, which is reflective of a "start up" company for which the
KIMS and ClinScan Intranet products are similar in risk. The KIMS product was
valued at $6,400,000 and the ClinScan Intranet product was valued at $4,300,000
using these model assumptions. The development of these projects had not yet
reached technological feasibility to permit capitalization, and the technology
had no alternative future use. Income tax benefits resulted from these charges
of approximately $1,563,000 and $1,613,000 for the Hayes Computer Systems and
Clinical MicroSystems acquisitions, respectively; however, based on the weight
of available evidence, valuation allowances for the full amounts have been
recorded.
F-14
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) INTANGIBLE ASSETS - Intangible assets consist of the following at
December 31, 1999 and 1998:
1999 1998
----------- -----------
Goodwill $20,232,202 $19,014,827
Less accumulated amortization 10,603,087 4,040,626
----------- -----------
Goodwill, net $ 9,629,115 $14,974,201
=========== ===========
Purchased technology $11,000,000 $11,000,000
Capitalized software 3,467,671 2,501,100
Other intangible assets 3,677,889 3,566,828
----------- -----------
18,145,560 17,067,928
Less accumulated amortization 8,117,673 3,649,717
----------- -----------
Purchased technology, capitalized software
and other intangible assets, net $10,027,887 $13,418,211
=========== ===========
Amortization of goodwill was $6,561,000 in 1999, $4,030,000 in 1998,
and $66,000 in 1997.
Amortization of purchased technology, capitalized software and other
intangible assets was $4,857,000 in 1999, $3,358,000 in 1998, and $286,000 in
1997. In addition, as a result of ProxyMed's periodic review for impairment,
ProxyMed wrote off previously capitalized software costs of $83,000 in 1999 due
to project cancellations and changes in technologies relating to certain
products for resale.
(6) EQUITY SECURITIES
(a) SALES OF COMMON STOCK - In 1999, ProxyMed sold 250,000 shares
of common stock at $12.00 per share in a private placement,
resulting in net proceeds of $2,932,327 after costs of
$67,673. As part of the sale, ProxyMed issued five-year
warrants to the investors for the purchase of an aggregate of
120,000 shares of common stock for $10.00 per share and issued
a five-year warrant to the placement agent for the purchase
of 35,000 shares of common stock at $13.31 per share.
During 1998, private placement sales of common stock totaling
3,013,416 shares were consummated, including 2,063,636 shares
to Bellingham Industries Inc., resulting in net proceeds of
$29,118,505. As of December 31, 1999, warrants issued to
Bellingham for the purchase of 100,000 shares of common stock
at an exercise price of $7.56 per share remain outstanding
through March 2003 and underwriter warrants for the purchase
of 89,237 shares of common stock at $12.10 per share remain
outstanding through June 2003.
F-15
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) PREFERRED STOCK - In December 1999, ProxyMed sold 15,000
shares of 6% Series B non-voting, non-redeemable convertible
preferred stock 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, can 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 must 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. At December 31, 1999, accrued
dividends were $22,192. As part of this sale, warrants to
purchase 800,000 shares of common stock were issued at an
exercise price of $12.05 per share. If the preferred stock had
been converted to common stock as of the beginning of 1999,
net loss per share from continuing operations would have been
$(1.04) and total net loss per share would have been $(1.12)
for 1999.
ProxyMed has remaining 1,985,000 authorized but unissued
shares of preferred stock, par value $.01 per share, which is
entitled to rights and preferences to be determined at the
discretion of the Board of Directors.
The value of stock options and warrants issued in connection
with the sale of common stock and non-redeemable preferred
stock are netted against the proceeds within stockholders'
equity, and have no impact on earnings.
(c) OTHER WARRANTS - At December 31, 1999, there are 760,490
warrants exercisable at prices ranging from $3.50 to $12.05 at
various times through June 2007 issued in connection with
prior equity and other business transactions consummated by
ProxyMed.
F-16
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) DEBT OBLIGATIONS
ProxyMed has an accounts receivable-based revolving line of credit
agreement of up to $5,000,000. Borrowings are based on 85% of eligible accounts
receivable, repayable on July 30, 2000, collateralized by a lien on all of our
assets, and bear interest at the prime rate plus 2% payable monthly (10.5% at
December 31, 1999). As of December 31, 1999, ProxyMed had $1,000,000 outstanding
and approximately $3,200,000 available for borrowing under this credit facility.
As a result of its acquisition of Clinical MicroSystems, ProxyMed was
obligated to pay $500,000 and $750,000 in April 1999 and 2000, respectively.
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 25,000
shares of common stock.
(8) INVENTORY
Inventory consists of the following at December 31, 1999 and 1998:
1999 1998
---------- ----------
Materials, supplies and component parts $1,025,349 $1,050,692
Work in process 352,870 129,423
Finished goods 463,836 742,978
---------- ----------
$1,842,055 $1,923,093
========== ==========
F-17
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1999
and 1998:
ESTIMATED
1999 1998 USEFUL LIVES
---------- ---------- -------------
Furniture, fixtures and equipment $1,452,155 $1,164,789 5 to 7 years
Computer hardware and software 3,799,571 2,450,406 3 to 5 years
Service vehicles 223,202 126,408 5 years
Leasehold improvements 606,151 558,496 Life of lease
Revenue earning equipment 556,736 415,344 5 years
---------- ----------
6,637,815 4,715,443
Less accumulated depreciation 2,315,872 1,185,488
---------- ----------
Property and equipment, net $4,321,943 $3,529,955
========== ==========
Depreciation expense was $1,146,000 in 1999, $759,000 in 1998, and
$415,000 in 1997.
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following at
December 31, 1999 and 1998:
1999 1998
---------- ----------
Accounts payable $1,554,529 $1,814,623
Accrued payroll and related costs 939,309 643,636
Accrued expenses related to acquisitions 618,259 1,036,319
Other accrued expenses 1,150,935 899,815
---------- ----------
Total accounts payable and accrued expenses $4,263,032 $4,394,393
========== ==========
Accrued expenses related to acquisitions consists of unpaid amounts for
professional fees (legal, accounting and investment banking costs), employee
relocation costs, travel costs incurred during the acquisition process,
contractual lease obligations for duplicate facilities closed as a result of the
acquisitions, and similar direct costs of consummating the acquisitions
discussed in Note 2. The 1998 amount also includes accrued distributions to the
former shareholders of Key Communications for S Corporation income tax
obligations as discussed in Note 2. Differences between amounts accrued and
amounts subsequently paid have not been significant.
F-18
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) INCOME TAXES
The significant components of the deferred tax asset account is as
follows at December 31, 1999 and 1998:
1999 1998
------------ ------------
Net operating losses - Federal $ 16,089,000 $ 10,973,000
Net operating losses - State 2,467,000 1,683,000
Depreciation and amortization 5,014,000 1,659,000
In-process research and development technology 2,945,000 3,119,000
Other - net 913,000 742,000
------------ ------------
Total deferred tax assets 27,428,000 18,176,000
Less valuation allowance (27,428,000) (18,176,000)
------------ ------------
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 $47,321,000 as of December 31, 1999, begin to
expire in 2008.
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 each of the three years ended December
31, 1999 due to the following:
Federal income tax benefit at statutory rate 35.0 %
State income tax benefit 3.5
Increase in valuation allowance (38.5)
------
-- %
======
F-19
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEAR ENDING DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash paid for interest $ 208,501 $ 267,468 $ 3,230
============ ============ ============
Warrants issued for acquisition of PreScribe technology $ -- $ -- $ 731,938
============ ============ ============
Common stock issued for payment of long-term debt $ 250,000 $ -- $ --
============ ============ ============
Acquisition of businesses:
Contingent common stock issued for prior year acquisition $ 500,000 $ 500,000 $ --
============ ============ ============
Common stock issued for businesses acquired $ 181,563 $ 5,345,332 $ 2,056,452
Debt issued for businesses acquired -- -- 1,649,555
Other acquisition costs accrued 174,000 328,433 1,131,759
Details of acquisitions:
Working capital components, other than cash (206,408) (1,378,851) (688,757)
In-process research and development technology -- -- (8,467,098)
Property and equipment (38,546) (1,432,331) (485,517)
Goodwill (999,549) (15,226,365) (4,641,746)
Purchased technology, capitalized software
and other intangibles (111,060) (11,000,000) (473,574)
Notes and loans payable -- 3,429,860 9,375
------------ ------------ ------------
Net cash used in acquisitions $ (1,000,000) $(19,933,922) $ (9,909,551)
============ ============ ============
(13) CONCENTRATION OF CREDIT RISK
Substantially all of ProxyMed's accounts receivable are due from
physicians and various healthcare suppliers (pharmacies, laboratories and
insurance companies). Collateral is not required. Approximately 11% of
ProxyMed's 1999 revenues were from one customer for the sale, lease and service
of communication devices; approximately 17% of the 1998 revenues were from one
customer for the sale of two non-exclusive source code licenses and related
services; and, approximately 25% of 1997 revenues were from one customer for the
sale of our laboratory order and results reporting software system.
F-20
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) STOCK OPTIONS
ProxyMed has various stock option plans for executives, directors and
other key personnel, under which both incentive stock options and non-qualified
options may be issued. Under such plans, options to purchase up to 1,887,250
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. ProxyMed also has
a stock option plan for outside directors under which options to purchase up to
303,000 shares of common stock may be granted at prices and with vesting periods
as may be determined by the Board of Directors or the Compensation Committee
thereof. In addition, as of December 31, 1999, options for the purchase of
1,126,951 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, 1999:
OPTIONS WEIGHTED AVERAGE
AVAILABLE OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING OF OPTIONS
---------- ---------- ---------
Balance, January 1, 1997 4,249 1,438,650 $ 4.59
Options authorized 457,200 -- --
Options granted (291,368) 291,368 $ 8.51
Options exercised -- (87,900) $ 6.22
Options expired/forfeited -- (14,000) $ 7.04
---------- ----------
Balance, December 31, 1997 170,081 1,628,118 $ 4.59
Options authorized 184,500 -- --
Options granted (389,000) 389,000 $ 7.80
Options exercised -- (319,166) $ 4.08
Options expired/forfeited 57,083 (123,583) $ 9.50
---------- ----------
Balance, December 31, 1998 22,664 1,574,369 $ 5.79
Options authorized 1,373,500 -- --
Options granted (1,455,250) 1,455,250 $ 11.52
Options exercised -- (154,859) $ 5.22
Options expired/forfeited 223,833 (269,057) $ 9.15
---------- ----------
Balance, December 31, 1999 164,747 2,605,703 $ 8.68
========== ==========
F-21
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information regarding outstanding and
exercisable options as of December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- -----------------------------
Range of exercise Number Weighted average remaining Weighted average Number Weighted average
prices outstanding contractual life (years) exercise price exercisable exercise price
- ----------------- ----------- -------------------------- ---------------- ----------- ----------------
$3.17 - 6.50 625,168 1.04 $3.67 615,067 $3.64
$6.51 - 10.50 1,073,118 7.29 $8.64 433,262 $7.51
$10.51 - 14.50 907,417 5.54 $12.17 152,584 $11.82
--------- ---------
2,605,703 1,200,913
========= =========
The following table summarizes information regarding options
exercisable as of December 31:
1999 1998 1997
--------- --------- ---------
Number exercisable 1,200,913 1,159,146 1,213,751
Weighted average exercise price $ 6.07 $ 5.03 $ 4.40
ProxyMed applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
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 $(23,331,295) and $(1.30) for 1999, $(12,760,615) and $(0.82) for 1998, and
$(19,269,832) and $(1.82) for 1997, respectively. The weighted average grant
date fair value of options granted ($4.65 in 1999, $3.26 in 1998, and $3.13 in
1997) was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:
1999 1998 1997
------- ------- -------
Risk-free interest rate 5.74% 5.19% 6.33%
Expected life 7.3 years 8.4 years 5.3 years
Expected volatility 74.5% 73.9% 74.7%
Expected dividend yield 0.0% 0.0% 0.0%
F-22
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) EMPLOYEE BENEFIT PLANS
ProxyMed has two 401(k) retirement plans, including one plan that was
acquired in its merger with Key Communications, for substantially all employees
who meet certain minimum lengths of employment and minimum age requirements.
Contributions are made by employees based on up to 15% of their annual
compensation. For the plan acquired from Key Communications, ProxyMed makes
matching contributions of up to 5% of participant's salary or $1,000, whichever
is greater. These matching contributions are vested after 5 years of employment.
Estimated matching contributions of $131,000 for the year ended December 31,
1999 and $100,000 for the period May 1 to December 31, 1998 have been expensed.
(16) COMMITMENTS AND OTHER
(a) LEASES - ProxyMed leases certain premises, operating and
office equipment, and vehicles under operating leases which
expire on various dates through 2005. The leases for the
premises contain renewal options, and require ProxyMed to pay
such costs as property taxes, maintenance and insurance. At
December 31, 1999, future minimum lease payments under
noncancelable operating leases with initial or remaining lease
terms in excess of one year (net of payments to be received
under subleases) are as follows: $1,044,000 in 2000;
$1,052,000 in 2001; $995,000 in 2002; $663,000 in 2003;
$397,000 in 2004; and $154,000 thereafter.
Total rent expense for all operating leases amounted to
$1,116,000 in 1999, $857,000 in 1998, and $221,000 in 1997.
(b) DUE FROM OFFICERS - Included in other assets at December 31,
1999 and 1998 is a demand loan in the amount of $350,000, plus
accrued interest at 7-3/4% per annum, due from the chairman of
ProxyMed's Board of Directors. The chairman has agreed to
collateralize the loan pursuant to pledges of securities,
including shares of ProxyMed's common stock, satisfactory to
ProxyMed's Board of Directors.
Additionally, included in stockholder's equity at December 31,
1998, is a promissory note in the amount of $259,800, plus
accrued interest at 5% per annum, from a ProxyMed officer.
This note, collateralized by 60,000 shares of ProxyMed's
common pursuant to a stock pledge agreement, was repaid in
1999.
F-23
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 PERIOD COSTS AND EXPENSES OTHER ACCOUNTS (1) DEDUCTIONS (2) END OF PERIOD
- ------------- -------------------- ------------------- ------------------- ------------- -------------
1999 $ 521,319 553,337 2,227 414,070 $ 662,813
========= ======= ======= ======= =========
1998 $ 204,920 314,292 333,579 331,472 $ 521,319
========= ======= ======= ======= =========
1997 $ -- 92,958 138,630 26,668 $ 204,920
========= ======= ======= ======= =========
(1) Includes amounts acquired through acquisitions
(2) Primarily write-off of bad debts
F-24
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.26 Employment Agreement between ProxyMed and John B. Okkerse, Jr.,
Ph.D. dated November 26, 1999.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.