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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 ___________ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Mark One) þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004or o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ________ to ________ Commission File Number000-22052 PROXYMED, INC. (Exact name of registrant as specified in its charter)
 Florida
    
    65-0202059(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 1854 Shackleford Court, Suite 200, Atlanta, Georgia
(Address of principal executive offices)
    
    30093
(Zip Code)
 Registrants telephone number, including area code: (770)-806-9918 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to 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. þ Yes o No Indicate by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K 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. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). þ Yes o No The aggregate market value of the voting and non-voting common equity held by non-affiliates
of the registrant computed using $17.07 per share, the closing price of the registrants common
stock on the Nasdaq National Market as of the last business day of the registrants most recently
completed second fiscal quarter, was $90,445,875. As of March 11, 2005, 12,626,567 shares of the registrants common stock were issued and
outstanding. Documents Incorporated by Reference: Portions of the registrants definitive Proxy Statement
for its Annual Meeting of Shareholders to be held on or about June 1, 2005, are incorporated by
reference into Part III of this Annual Report on Form 10-K.




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PART I ITEM 1. BUSINESS ProxyMed,
Inc. (ProxyMed), incorporated in Florida in 1989, is an electronic healthcare
transaction processing services company providing connectivity, cost-containment services and
related value-added products to physician offices, payers, medical laboratories, pharmacies and
other healthcare institutions. Our broad existing connectively to
payer and providers positions us as the second largest independent
medical claims clearinghouse in the industry. We maintain an open electronic network for electronic transactions
with no equity ownership in businesses engaged in the front-end (i.e., physician practice
management software system vendors and other physician desk top vendors) or in the back-end (i.e.,
payers, laboratories and pharmacies). Our business strategy is to leverage our leadership position
in connectivity services in order to establish ProxyMed as the premier provider of automated
financial, clinical, cost containment and business outsourcing solutions, and administrative
transaction services primarily between healthcare providers and payers, clinical laboratories and
pharmacies. With our neutral position, we believe that we can better attract both front-end and
back-end partners who may be more comfortable doing business with a non-competitive partner. We
provide two reportable segments that are separately managed: Transaction
Services (formerly known as Electronic healthcare transaction processing) and Laboratory
Communication Solutions. Transaction Services includes transaction, cost containment and other
value-added services principally between physicians and insurance companies, and physicians and pharmacies. Laboratory Communication
Solutions includes the sale, lease and service of communication devices principally to laboratories
and through June 30, 2004, the contract manufacturing of printed circuit boards commencing in March 2004, the operations of PlanVista are included in our Transaction Services segment. A more complete description of the products and services of each of our segments begins on
page 5 below. For information regarding the results of operations of each of our segments, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Note 5 to the Consolidated Financial Statements included in
this Annual Report. Our electronic transaction processing services support a broad range of financial, clinical,
and administrative transactions. To facilitate these services, we are completing the conversion of
all of our non-clinical EDI clients to Phoenix, our secure, proprietary national electronic information
network, which provides physicians and other healthcare providers with direct connectivity to one
of the industrys largest list of payers. Our cost containment and business process outsourcing solutions, included in the Transaction
Services segment, is directed toward the medical insurance and managed care industries.
Specifically, we provide integrated national Preferred Provider Organization (PPO) network
access, electronic claims repricing, and network and data management to healthcare payers,
including self insured employers, medical insurance carriers, PPOs and Third Party Administrators
(TPAs). Our corporate headquarters is located in Atlanta, Georgia, and our products and services are
provided from various operational facilities located throughout the United States. We also operate
our clinical computer network and portions of our financial and real-time production computer
networks from a secure, third-party co-location site also located in Atlanta, Georgia. We believe we are uniquely positioned in our marketplace to make a contribution that our
competitors do not. Our differentiators include our ability to integrate cost containment
solutions, including bill negotiation and provider network recruitment, with electronic transactions
and network management into one new offering: Enterprise Solutions for Payers (ESP). Another
differentiator is our presence in the clinical laboratory market. With the nations largest
clinical laboratories as long-time customers, we have worked in partnership with them to 2




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develop customized laboratory
communication tools and services. Also, our prescription services

business operates
the nations largest and longest-established electronic and fax gateway infrastructure with
extensive connectivity to major pharmacies and Pharmacy Benefit Managers (PBMs). Our Changing Market Payers using electronic healthcare transactions (EDI) fit into two traditional categories:
participating and non-participating. Participating (par) payers, including commercial (private)
payers as well as a number of Blue Cross and Blue Shield plans
traditionally pay companies like ProxyMed a fee
for delivering electronic transactions to them. This allows ProxyMed to offer the transactions
free to submitting providers. We believe that this allows payers to save anywhere from 50 cents
to more than $2 over the cost of handling a paper transaction, and up to $5 over the cost of a
phone call. This market approach is a win-win for providers and payers to date, as payer
subsidies encourage providers to submit transactions electronically. Providers submitting
electronically can benefit from fewer processing delays for payment. In contrast, non-participating (non-par) payers, traditionally government payers such as
Medicare and Medicaid and some Blue Cross and Blue Shield plans, do not pay transaction fees. In
most cases, providers pay the cost of transmitting their non-par claims or other transactions to
these payers when processed through a clearinghouse. ProxyMed provider solutions are focused on self-service tools, and improved service levels.
ProxyMed has invested millions of dollars in its processing platform called Phoenix, which will
support modern self-service and drill down tool capability. Our suite of new Web-based
self-service tools will provide revenue management and claims tracking, and is expected to be
available in the first half of 2005. These new tools allow Providers to access details of
individual claims to confirm receipt by the payer, and any error information for rejected claims. Over
the course of 2004, ProxyMed made substantial progress on the integration of all products and services into
one suite of services residing on one platform, Phoenix. This integration enhanced our ability to
support multiple technologies that our providers and payers use. This suite of products covers
platforms as old as DOS but also includes solutions for those that have the latest in Internet
platforms. Industry Growth According to the Centers for Medicare and Medicaid Services (CMS), health spending growth
actually slowed in 2003, the first deceleration in seven years. United States healthcare
expenditures grew 7.7% in 2003 to $1.7 trillion, which is down from
9.3% growth in 2002.
CMS projects that national health expenditures will reach $3.4 trillion by 2013.  
    Per capita, health spending increased in 2003 by $353 to $5,670
    Health spending accounted for 15.3% of GDP in 2003
    Health spending outpaced growth in the overall economy by 3 percentage points 3




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According to Modern HealthcaresBy the Numbers (December 20, 2004), 22% of the nations
healthcare dollars went to physician and clinical services, with 7% going to administrative costs.
As one of the most transaction-oriented industries in the country, analysts report that healthcare
generates over 35 billion financial and clinical transactions each year, including new prescription
orders, refill authorizations, laboratory orders and results, medical insurance claims, insurance
eligibility inquiries, encounter notifications, and referral requests and authorizations. Current
healthcare information technology spending has been projected at $41.6 billion for 2004, and is
predicted to continue growing steadily at 7% annually through 2006. Even with healthcare
information technology spending at these levels, we believe that the healthcare industrys use of
technology lags behind many other transaction-intensive industries, with the vast majority of these
healthcare transactions being performed manually and on paper. For physician offices, payers, laboratories and pharmacies to meet the financial, clinical and
administrative demands of an evolving managed care system, we believe that they will need to
process many of these types of transactions electronically. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) (see Healthcare and
Privacy Related Legislation and regulation below)
establishes electronic standards for eight major transaction types, including claims, eligibility
inquiries and claims status inquiries. ProxyMeds secure, proprietary systems provide an
electronic link between healthcare payers and healthcare providers
such as laboratories, hospitals, and physician office practices for these transactions. Key Competitive Strengths We believe we have competitive advantages in three critical areas:  1)
    Our solutions are encompassing. We seek to resolve our customers
business challenges by looking at their entire business process, leveraging each area
to help them realize a positive result to their bottom line. We use our market
leadership position in cost containment services, payer, provider and clinical
connectivity, and business process outsourcing, to develop and promote comprehensive
products and services that actually escalate our customers success.2)
    Our connectivity is extensive. Our broad existing connectivity to
payers and providers positions us as the second largest independent medical claims clearinghouse in
the industry with 94% of our annual transaction volume sent directly to the designated
payer rather than being routed through other transaction centers. We have almost
150,000 providers connected directly or indirectly using at least one of our existing
solutions, and an additional 260,000 contracted through our network
management service. To reach these direct and partnered providers, we have licensing
and connectivity agreements with many national and regional companies, such as practice
management system vendors, billing services, and electronic healthcare companies, and
with physician offices directly. These relationships offer us an opportunity to
cross-sell our products and services to our existing provider customer base. Our EDI
services support a broad range of financial transactions (such as claims, patient
statements, claims status reports, eligibility verification, explanations of benefits
(EOB) and electronic remittance advices (ERA)); clinical transactions (such as laboratory
results, new prescription orders and prescription refills); and administrative
transactions (such as referrals and pre-certifications). These connections allow
information to reliably move back and forth from the provider office to the appropriate
healthcare institution (payer, laboratory and pharmacy) facilitating diagnosis,
treatment and payment. We are also the largest provider of intelligent laboratory
results reporting devices and the largest provider of retail pharmacy
clinical connectivity.3)
    Our PPO network is national in scope. We believe that our PPO network, which is comprised of both directly contracted providers and those accessed through our regional network partners, is one of the top three in the nation in terms of number of providers (physicians, hospitals and ancillary providers) contracted. In terms of managed care lives accessing our network, we are currently ranked 6th.   4




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Barriers to Entry We have expended considerable time, effort and expense developing the infrastructure,
relationships, and interoperability of our back-end connectivity for both financial and clinical
transactions. We believe that the cost and time demands of development and maintenance of the
connections from both a technical and relationship perspective represent a barrier to entry for
would-be competitors. Current Products and Services In our Transaction Services segment, we offer products and services for payers (both
government and commercial insurance companies), providers (physicians
and hospitals) and
clinical institutions (pharmacies, clinical laboratories, others). Through our acquisition of
PlanVista on March 2, 2004, we now provide medical cost containment and business process
outsourcing solutions for the medical insurance and managed care industries. These new products
are the foundation for our suite of solutions to our payer customers. These customers include
healthcare payers such as self-insured employers, medical insurance carriers, third party
administrators, HMOs (Health Maintenance Organizations), and other entities that pay claims on
behalf of health plans. Our payer-focused solutions also include network and data management
business process outsourcing services for providers, including individual providers, PPOs
(Preferred Provider Organizations), and other provider groups. Our
provider-focused suite of solutions include EDI services designed to interconnect with
diverse technologies and connection capabilities. This suite of products covers platforms as old
as DOS but also includes solutions for those that have the latest in Internet platforms. Our
solutions are available through our suite of Windowsâ-based1 products, through our
Internet portal, ProxyMed.net, and through various direct network connection programs. Each of
these entry points connects providers to our network and then routes transactions to their
contracted payer, laboratory and pharmacy partners. Our provider solutions include claims submission and reporting, insurance eligibility
verification, claims status inquiries, referral management, laboratory test results reporting and
prescription refills, all available today through ProxyMed.net. We continue to expand our
offerings through our portal to include new financial and clinical transactions such as claims
response management, electronic remittance advices, encounters and new prescriptions. All of our
existing Web-based applications can be private-labeled and are being marketed through our channel
partners to increase distribution opportunities. Transaction Services Payer Services Through our acquisition of PlanVista, we provide medical cost containment
and business process outsourcing solutions for the medical insurance and managed care industries.
These new products are part of the foundation for our suite of solutions to our payer customers.
At the top of the suite is our new ESPwhich helps payers
realize multiple
expense reduction goals while keeping the electronic transactions flowing from their providers on a
low cost basis. These customers include healthcare payers such as self-insured employers, medical
insurance carriers, TPAs, HMOs, and other entities that pay claims on behalf
of health plans. We also provide network and data
management business process outsourcing services for healthcare providers, including individual
providers, PPOs, and other provider
groups.   1
    
    Windows is a registered trademark of
Microsoft Corporation. 5




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ClaimPassXL® is our Internet claims repricing system and allows us
to shift claims repricing submissions from paper or fax to the Internet, which reduces claims
processing costs and reduces claims processing costs significantly. Faster turnaround of claims repricing
will become more important to payers as state insurance regulators increase their scrutiny of
claims payment turnaround times. National Preferred Provider Network (NPPN)-NPPN is a nationwide physician network comprised
of PPOs, independent physician associations, and individually contracted providers that agree to
offer discounts on medical services. These providers and provider groups participate in NPPN to
increase patient flow and benefit from NPPNs prompt, efficient claims repricing services.
Healthcare payers access NPPN to benefit from the discounts offered by participating providers.
The size of NPPN and the level of NPPN discounts provide our payer customers with significant
reductions in medical claims costs. NPPN access agreements generally require our customers to pay us a percentage of the cost
savings generated by NPPN discounts. In the medical cost containment industry, this payment
arrangement is called a percentage of savings revenue model. A typical percentage of savings
customer maintains arrangements with more than one PPO network. Most of these payer customers
utilize NPPN as an additional network to contain costs when a covered person obtains medical
services from a provider outside of the payers primary PPO network. When we receive a provider
bill for medical services that are covered by NPPN discount arrangements, we electronically
review the bill and reprice it to conform to the negotiated discounted rate, which is typically
lower than the invoiced amount. We derive the balance of our NPPN operating revenue from payer customers that
pay a flat fee per month based on the number of enrolled members. These customers generally access
the NPPN as their primary PPO network. More than 80% of our participating providers have been part
of NPPN for more than three years, with some relationships spanning more than nine years since
the beginning of NPPNs inception in 1994. Electronic Claims Repricing- In connection with our NPPN access business, we provide
electronic claims repricing services that benefit both our payer clients and our participating
providers. A participating provider submits a claim at the full, undiscounted provider rate. The
provider sends the claim directly to us or to the payer which then forwards the bill to us.
Because there is a wide variety of provider systems for submitting claims, we accept claims by
traditional methods such as mail and fax, as well as through the Internet and by EDI. We convert
paper and faxed claims to an electronic format, and then electronically reprice the claims by
calculating the reduced price based on our NPPNs negotiated discount. We return the repriced
claims file to the payer electronically, in most cases within three business days. Network and Data Management -We use our information system capabilities to
provide network and data management services for the payers that access NPPN. For some network
access payers, we act as the payers mailroom for receipt of all provider claims, converting paper
and fax claims to an electronic format, identifying the correct network fee schedule applicable to
each claim, and electronically repricing the claim accordingly. We prepare detailed reports
regarding repricing turnaround times and the savings that each payer realizes, itemized by the
total number of claims incurred, number of claims discounted, and the average discount. Payers can
use this information to help design health plans that effectively control costs, enhance member
benefits, and yield a more favorable loss ratio (ratio of paid medical claims compared to collected
premiums). We integrate several components of certain licensed reporting software to provide both
payer clients and participating PPOs with quick access to claims data, allowing them to produce a
variety of analytical reports. We generally do not charge our NPPN access customers any additional
fee for our standard network and data management services. 6




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Bill Review and Negotiation- We offer optional medical bill review and negotiation services
to our payer clients. Many of our percentage of savings clients send us all claims that fall
outside their primary PPO network arrangements. We offer payer customers the opportunity to
realize cost savings on these out-of-network claims through our affiliations with bill review and
negotiation companies. ProxyMed can electronically transmit non-NPPN claims to experienced
professionals at the contracted bill review and negotiation companies. These professionals use
proprietary medical software to analyze each claim to detect any incorrect charges or billing
irregularities. Once that phase of the analysis is completed, the detailed charges are compared to
a proprietary database to determine the competitiveness of the charges in the providers geographic
area. The bill negotiator then contacts the provider to discuss the findings, and in many cases is
able to reduce the claim amount. The reviewer obtains signed agreements from each provider to
prevent the provider from later contesting the reduction or billing the patient for the balance.
The bill review and negotiation vendor then returns the electronic file to us, and we forward it to
the payer along with the payers other repriced claims. Payers pay us a percentage of the savings
that are generated by the bill review and negotiation service. Business Process Outsourcing- ProxyMed traditionally provided claims repricing and network
management services only with respect to claims that NPPN participating providers submitted to one
of our network access payer customers. Through our network and data management outsourcing
business, we have expanded our scope to offer payers and providers services that are independent of
our network access business. PayerServ- Healthcare payers typically contract with more than one PPO network. While
historically most payers claim systems and applications could handle simple percentage discount
repricing calculations for a single network, we believe that most are not well suited for current
PPO contract terms requiring detailed, often complex, repricing calculations. Each of the networks
with which a payer contracts may have different discount methodologies and rates, greatly adding to
a payers administrative burden and increasing the complexities of processing and repricing of
claims. Through
PayerServ, ProxyMed uses its existing technology and management expertise
to help payers manage all of their network relationships, whether or not they also access NPPN. A
payer can outsource its network and data management obligations to us, and we will assume the
responsibility for moving, tracking, and repricing healthcare claims among all of the PPO networks
with which we have contracts. By maintaining provider fee schedule and demographic information for
all of the providers in a payers provider configuration, we eliminate bottlenecks in the payers
claim work flow, expedite claims repricing, and improve accuracy. The
PayerServ services may include acting as the payers mailroom for receipt of
all provider claims, converting paper and fax claims to an electronic format, identifying the
correct network fee schedule applicable to each claim, and electronically repricing the claim
accordingly. ProxyMed can also provide reporting and other network management services with
respect to all of the payers networks. We can prepare customized reports for payers that capture
information regarding repricing turnaround time, cost management, demographics, case management,
provider services, diagnoses and procedures. Our PayerServ customers benefit from
reduced operating expenses, streamlined network management, HIPAA-compliant procedures, and
electronic repricing with rapid turnaround times. We do not require customers to pay upfront
network loading fees and monthly maintenance fees, which are features of many of our competitors
systems. PayerServ customers typically pay us for claims repricing, claims, and network and
data management services on a per claim basis. For each PayerServ customer, ProxyMed analyzes the
customers service requirements, including claims work flow, claims volume and types, and PPO
network configurations. Then, based on our proprietary pricing model, we determine the pricing for
each claim transaction. PlanServ- PlanServ uses the same technology and management expertise that supports our
PayerServ business to offer claims repricing and network data management services to PPOs. Through
PlanServ, our PPO 7




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participants generally maintain relationships with payers that are independent from the PPOs
affiliation with our NPPN. By outsourcing repricing functions to us, a PPO can achieve advanced
electronic capabilities for its payer clients without incurring the high cost of systems
development. PPOs that take advantage of the PlanServ offerings do not have to distribute their
rates to their payers, manually reprice claims, or be concerned with HIPAA requirements related to
claims repricing. The PPOs payer clients benefit from reduced turnaround times on repriced claims
and escape the burden of loading the PPOs rates. PlanServ products also include Web hosting
capabilities, featuring customized, private label Web access that enables a participating PPOs
customers to reprice claims electronically through the Internet. PlanServ
also offers our PPO customers management reporting products that capture important
claims data, including repricing turnaround times, claim volume, and savings amounts. PPO
customers can use this information to negotiate better physician and facility discounts. We
believe that obtaining and analyzing information is increasingly important to PPOs because this
information is necessary for them to properly establish their discount levels. We also provide
PlanServ customers with database administration. Like PayerServ, PlanServ generally charges
customers a per claim fee, which is calculated based on the extent of the customers service
requirements, including claims work flow and number of payers. Desktop
We offer several Windows and Unix* based desktop products, including claims
submission through ProxyClaim and claims tracking through ProxyTracker. We also offer a
non-computer based solution in our ProxyAccessTerminal point-of-service device that allows for a
low cost, stand-alone solution for electronic eligibility verification. Online For providers who prefer to use Internet based services, ProxyMed developed and has
been operating our provider transaction services Web portal, ProxyMed.net,for over four years.
ProxyMed.netsavailable Web-based financial and administrative transactions now include:  
    claims submission and reporting;
    eligibility verification;
    claims status inquiries;
    ERA;
    referral management; and
    pre-certifications. Real-Time Our real-time suite of solutions provides a quick and easy way to streamline the
patient registration process, insuring more accurate payment information through pre-certification,
and to check status of claims. Our real-time suite includes:  
    eligibility verification and benefits inquiry;
    referral authorization and pre-certifications;
    claim Status Inquiry. B2B In addition to working directly with providers, ProxyMed offers software developers,
large customers and partners an Application Programming Interface
(API) to connect to the ProxyMed
real-time transaction platform and directly submit XML or X12 based transactions. This service is
sold as ProxyMeds business-to-business (B2B) offering. The platform which supported the B2B
offering was based on a proprietary XML transaction format and is HIPAA compliant.   8




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Prescription Services We offer both new prescription ordering and refill
management through our PreScribe®family of products.
There are currently over 4,000 physician
clients using PreScribe®. PreScribe®and Phoenix support the largest and oldest electronic and
fax gateway infrastructure with connectivity to over 37,000 pharmacies nationwide. We also offer a
private-label version of our Web-based refill prescription application. Laboratory Communication Solutions Our Laboratory Communication Solutions segment is an integral part of ProxyMeds connectivity
to the healthcare industry. We engineer, build, and provide communication devices for clinical
laboratories throughout the United States. We believe our devices are installed in over 100,000 physician
offices nationwide, providing unmatched service and reliability in the way they deliver patient lab
reports. This direct connectivity into the physician office provides a critical link in the
patient diagnosis and treatment cycle. Product and Services Development Our goal is to drive all of our customers to our portal where they can access all of our
products and services. For both of our segments, Transaction Services
and Laboratory Communication Solutions, we are currently augmenting
ProxyMed.net, our new online portal. These additions include customer-based products and services, along with multi-functional self-service tools. We
are uniquely positioned in the clinical laboratory industry with the
onset of our new Pilot and Navigator
solutions. Pilot was released in the first
quarter of 2005 and provides enhanced reporting processes for results delivery to clinical
laboratories. This product allows labs to customize report delivery, and to export results to their
EMR (Electronic Medical Record) and POMIS (Practice Office Management Information System). They can
review their results via Internet or dial-up. Pilots companion product, Navigator, provides the
supportability function of fleet monitoring, usability data, and uptime management for remote
printer devices. Navigator is scheduled for release in the second quarter of 2005. The total amount capitalized for purchased technology, capitalized software and other
intangible assets as of December 31, 2004, was approximately $52.3 million, net of amortization. 9




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Marketing We have a direct sales force and customer support staff that serves payers, providers,
clinical laboratories and pharmacies. In addition, since we do not compete for the physician
desktop and allow for private branding of our value-added products and services, we are able to
leverage the marketing and sales efforts of our partners by giving them even greater added value to
drive our revenues and transactions. 10




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We utilize the following distribution channels for our products and services to maximize
connectivity between physician offices, payers, laboratories, pharmacies and other healthcare
providers: Channel
    
    FocusDirect
    
    We have a direct sales force of account executives, inside
telemarketers, account managers and customer care representatives
who serve our providers, payers, laboratories and pharmacies. We
license access to our proprietary network, Phoenix, and provide
intelligent laboratory results reporting devices for
communications between providers and clinical laboratories.Partners
    
    We work with the vendors of POMIS and pharmacy office
management systems so that they may enable their existing
applications to process transactions through us between
providers and payers, laboratories and pharmacies. We also
license these customers to offer our products and services under
their own private label. In addition, we connect with other
electronic transaction processing networks so that
the participants on both networks can communicate with each other
in National Council of Pharmacy Drug Program (NCPDP) standard,
HIPAA approved formats, and the HL-7 standard format for
laboratories.Internet
    
    We provide comprehensive suites of products for financial,
clinical and administrative transaction processing services
through our portal, ProxyMed.net, which may be easily accessed by
any payer, provider or business partner with an Internet
connection. We are currently in development to customize those
products by customer, so that every solution a payer will want to
use will be available on one easy-to-use site. There will also be
a customized portal for providers and partners.
 Competition Transaction
Services- We face competition from many healthcare information systems companies
and other technology companies. Many of our competitors are significantly larger and have greater
financial resources than we do and have established reputations for success in implementing
healthcare electronic transaction processing systems. Other companies, including WebMD
Corporation, NDCHealth Corporation, Per-Se Technologies, and other healthcare related entities have
targeted this industry for growth, including the development of new technologies utilizing
Internet-based systems. While our ability to compete has been enhanced by our acquisition of
PlanVista, we cannot assure that we will be able to compete successfully with these companies or
that these or other competitors will not commercialize products, services or technologies that
render our products, services or technologies obsolete or less marketable. Preferred Provider Network- The PPO industry is highly fragmented. According to the
American Association of Preferred Provider Organizations, as of March 2003 there were more than
1,000 PPOs in the United States. A few companies, such as First
Health Group Corporation, Preferred Medical Claims/eHealth Solutions, Concentra, Inc., Beech Street Corporation, Coalition America, Inc., and
Multiplan, Inc., offer provider networks and claim volumes of meaningful size. The remainder of
the competitive landscape is diverse, with major insurance companies and managed care organizations
such as Blue Cross and Blue Shield plans, Aetna, WellPoint Health Networks, Inc., UnitedHealth Group, Humana
Health Care Plans, private healthcare systems, and CIGNA 11




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Healthcare also offering proprietary preferred provider networks and services. In addition,
the number of independent PPOs has decreased as managed care organizations and large hospital
chains have acquired PPOs to administer their managed care business and increase enrollment. We
expect consolidation to continue as the participants in the industry seek to acquire additional
volume and access to PPO contracts in key geographic markets. This consolidation may give
customers greater bargaining power and lead to more intense price competition. Electronic Claims Repricing- The claims repricing service market is also fragmented. Our
repricing competitors provide some or all of the services that ProxyMed currently provides. Our
competitors can be categorized as follows:  
    large managed care organizations and third party administrators
with in-house claims processing and repricing systems, such as Blue
Cross and Blue Shield plans, UnitedHealth Group, and Wellpoint Health
Networks; and
    healthcare information technology companies providing
enterprise-wide systems to the payer market, such as McKesson
Corporation, and Perot Systems Corporation. The market for claims repricing services is competitive, rapidly evolving, and subject to
rapid technological change. We believe that competitive conditions in the healthcare information
industry in general will lead to continued consolidation as larger, more diversified organizations
are able to reduce costs and offer an integrated package of services to payers and providers. We
compete on the basis of the strength of our electronic claims
repricing technology, the size of our network and the level of our
network discounts, our
percentage of savings pricing model, and the diversity of services we offer through our business
processing outsourcing products and other new initiatives. Many of our current and potential
competitors have greater financial and marketing resources than we have. Furthermore, we believe
that the increasing acceptance of managed care in the marketplace, the adoption of more
sophisticated technology, legislative reform, and the consolidation of the industry will result in
increased competition. There can be no assurance that we will continue to maintain our existing
customer base, or that we will be successful with any new products that we have introduced or will
introduce. Healthcare and Privacy Related Legislation and Regulation We
and our customers are subject to extensive and frequently changing federal and state
healthcare laws and regulations. Political, economic and regulatory influences are subjecting the
healthcare industry in the United States to fundamental change. Potential reform legislation may
include:  
    mandated basic healthcare benefits;
    controls on healthcare spending through limitations on the
growth of private health insurance premiums and Medicare and Medicaid reimbursement;
    the creation of large insurance purchasing groups;
    fundamental changes to the healthcare delivery system;
    enforcement actions of Federal and State privacy laws;
    Medicare or Medicaid prescription benefit plans;
    State licensing requirements; or
    patient protection initiatives. 12




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HIPAA Several state and federal laws govern the collection, dissemination, use and confidentiality
of patient healthcare information. The federal Health Insurance Portability and Accountability Act
of 1996 was signed into law on August 21, 1996. HIPAA was designed to improve the
efficiency and effectiveness of the healthcare system by standardizing the interchange of
electronic data for certain administrative and financial transactions and to protect the
confidentiality of patient information. Multiple regulations have been and will continue to be,
promulgated from this revolutionary legislation. Privacy Compliance HIPAAs Privacy Rule imposes extensive requirements on healthcare providers, healthcare
clearinghouses, and health plans. These Covered Entities must implement standards to protect and
guard against the misuse of individually identifiable health information. Certain functions of
ProxyMed have been or may be deemed to constitute a clearinghouse as defined by the Privacy Rule.
However, in many instances, ProxyMed also functions as a Business Associate of its health plan
and provider customers. Among other things, the Privacy Rule requires us to adopt written privacy
procedures, adopt sufficient and reasonable safeguards, and provide employee training with respect
to compliance. Although we have undertaken several measures to ensure compliance with the privacy regulation
and believe that we are in compliance, the privacy regulations are broad in scope, and will require constant vigilance for ongoing
compliance. We also may be subject to state privacy laws, which may be more stringent than HIPAA in some
cases. Transaction and Code Sets Compliance HIPAA also mandates the use of standard transactions for electronic claims and other certain
healthcare transactions. The U.S. Department of Health and Human Services published
regulations to govern eight of the most common electronic transactions involving health
information. As a clearinghouse, we must comply with these
regulations. However, covered entities,
including ProxyMed and our physician and payer customers, are permitted to continue to process
non-compliant transactions after October 16, 2003 so long as that covered entity is compliant with
the contingency planning guidelines provided by the Center for Medicare and Medicaid Services. Security Compliance HIPAAs Security Rule imposes standards for the security of electronic protected health
information. The effective date for the Security Rule is
April 20, 2005. We have long-standing implemented physical, technical and administrative
safeguards for the protection of electronic protected health information. However, additional
assessments and product and systems remediation is expected to occur before the compliance date.
The Security Rule has also introduced the concept of an addressable implementation standard which
will require ongoing vigilance to ensure that employed safeguards are sufficient given current
technology capabilities and threats and reasonable industry expectations. 13




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Identifiers On January 24, 2004, rules on implementation of a national provider identification number were
published. This rule mandates the use of a single identifier for all healthcare providers
throughout the United States by 2007. Because our customers use a variety of identification
numbers today, we anticipate some modification to our transaction handling formats and processes to
handle a new single identifier. Alterations to our systems will require some development cost, and
we could lose customers if we are not ready on time to handle the national provider identifier. Gramm-Leach-Bliley Some of ProxyMeds customers may also be subject to the federal
Gramm-Leach-Bliley Act, relating to certain disclosures of nonpublic personal health information
and nonpublic personal financial information by insurers and health plans. Internet Privacy and Regulation Another area in which regulatory developments may impact the way we do business is privacy and
other federal, state and local regulations regarding the use of the Internet. We offer a number of
Internet-related products. Internet user privacy and the extent to which consumer protection and
privacy laws apply to the Internet is an area of uncertainty in which future regulatory, judicial
and legislative developments may have a significant impact on the way we do business, including our
ability to collect, store, use and transmit personal information. Internet activity has come under
heightened scrutiny in recent years, including several investigations in the healthcare industry by
various state and federal agencies, including the Federal Trade Commission. Patient/Consumer Protection Initiatives State and federal legislators and regulators have proposed initiatives to protect consumers
covered by managed care plans and other health coverage. These initiatives may result in the
adoption of laws related to timely claims payment and review of claims determinations. These laws
may impact the manner in which we perform services for our clients. Provider Contracting and Claims Regulation Some state legislatures have enacted statutes that govern the terms of provider network
discount arrangements and/or restrict unauthorized disclosure of such arrangements. Legislatures
in other states are considering adoption of similar laws. Although we believe that we operate in a
manner consistent with applicable provider contracting laws, there can be no assurance that we will
be in compliance with laws or regulations to be promulgated in the future, or with new
interpretations of existing laws. Many of our customers perform services that are governed by numerous other federal and state
civil and criminal laws, and in recent years have been subject to heightened scrutiny of claims
practices, including fraudulent billing and payment practices. Many states also have enacted
regulations requiring prompt claims payment. To the extent that our customers reliance on any of
the services we provide contributes to any alleged violation of these laws or regulations, then we
could be subject to indemnification claims from its customers or be included as part of an
investigation of its customers practices. Federal and state consumer laws and regulations may
apply to us when we provide claims services and a violation of any of these laws could subject us
to fines or penalties. 14




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Licensing Regulation We are subject to, and in compliance with, the licensing requirements of the State of Illinois
for the services we provide through PlanVista. Some other states require our PPO
business to formally register and file an annual or one-time accounting of networks and providers
with which we contract. Given the rapid evolution of healthcare regulation, it is possible that we
will be subject to future licensing requirements in any of the states where we currently perform
services, or that one or more states may deem our activities to be analogous to those engaged in by
other participants in the healthcare industry that are now subject to licensing and other
requirements, such as third party administrator or insurance regulations. Moreover, laws governing
participants in the healthcare industry are not uniform among states. As a result, we may have to
undertake the expense and difficulty of obtaining any required licenses, and there is a risk that
we would not be able to meet the licensing requirements imposed by a particular state. It also
means that we may have to tailor our products on a state-by-state basis in order for our customers
to be in compliance with applicable state and local laws and regulations. Summary We anticipate that Congress and state legislatures will continue to review and assess
alternative healthcare delivery systems and payment methods, as well as Internet and healthcare
privacy legislation, and that public debate of these issues will likely continue in the future.
Because of uncertainties as to these reform initiatives and their enactment and implementation, we
cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted or
what impact they may have on us. While we believe our operations are in material compliance with applicable laws as currently
interpreted, the regulatory environment in which we operate may change significantly in the future,
which could restrict our existing operations, expansion, financial condition or opportunities for
success. Additional current HIPAA and privacy compliance information can be found on our websites at
www.proxymed.com and at www.planvista.com. Intellectual Property and Technology In large part, our success is dependent on our proprietary information and technology. We
rely on a combination of contracts, copyright, trademark and trade secret laws and other measures
to protect our proprietary information and technology. We have rights under a number of patent
applications filed by us or our acquired entities, in addition to rights under various trademarks
and trademark applications. We have a number of copyright registrations covering our various
software and proprietary products. As part of our confidentiality procedures, we generally enter
into nondisclosure agreements with our employees, distributors and customers, and limit access to
and distribution of our software, databases, documentation and other proprietary information. We
cannot assure that the steps taken by us will be adequate to deter misappropriation of our
proprietary rights or that third parties will not independently develop substantially similar
products, services and technology. Although we believe our products, services and technology do
not infringe on any proprietary rights of others, as the number of software products available in
the market increases and the functions of those products further overlap, we and other software and
Internet developers may become increasingly subject to infringement claims. These claims, with or
without merit, could result in costly litigation or might require us to enter into royalty or
licensing agreements, which may not be available on terms acceptable to us. 15




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Employees As of December 31, 2004, we employed 498 employees. We are not and never have been a party to
a collective bargaining agreement. We consider our relationship with our employees to be good. Available Information The Companys Internet address is
www.proxymed.com. We make available free of
charge on or through our Internet website our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material
was electronically filed with, or furnished to, the Securities and Exchange Commission. ITEM 2. PROPERTIES Our significant offices are located as followed: Business
    
    
    
    
    
    ApproximateSegment
    
    Location
    
    Description
    
    Square FootageTransaction Services
    
    Atlanta, Georgia
    
    Corporate headquarters/operations
office/data center
    
    
    31,200Santa Ana, California
    
    Operations office/data center
    
    
    16,900Sioux Falls, South
Dakota
    
    Operations office/data center
    
    
    3,700Richmond, Virginia
    
    Operations office/data center
    
    
    3,000Tampa, Florida
    
    Operations office
    
    
    8,200Middletown, New York
    
    Operations office/data center
    
    
    26,900Fort Lauderdale, Florida
    
    Operations office
    
    
    20,500Laboratory
Communication
Solutions
    
    New Albany, Indiana
    
    Operations office/warehouse
    
    
    42,000Moorestown, New Jersey
    
    Operations office/depot service facility
    
    
    4,000
 We also maintain portions of our Phoenixnetwork at a secure, third-party co-location
center in Atlanta, Georgia. In addition, we also lease several mini-warehouses.
Our leases and subleases generally contain renewal options and require us to pay
base rent, plus property taxes, maintenance and insurance. We consider our present facilities
adequate for our operations. However, we will be moving our Laboratory Services operations
office/warehouse in Indiana to a new location commencing in the summer of 2005. We will be
subleasing approximately 32,000 square feet for this new location. 16




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ITEM 3. LEGAL PROCEEDINGS In December of 2001, Insurdata Marketing Services, Inc. (IMS) filed a lawsuit against
HealthPlan Services, Inc. (HPS), a former subsidiary of PlanVista, for
unspecified damages in excess of $75,000. The complaint alleges that HPS failed to pay commissions
to IMS pursuant to an arbitration award rendered in 1996. On January 10, 2005, the court granted summary judgment
in favor of IMS on the issue of liability, and denied our opposing motion. We filed an appeal
on the issue of liability, and continue to contest vigorously the amount of damages claimed by IMS. We
have determined potential exposure to be in the range of
$0.6 million to $1.6 million and we have accrued
$0.6 million as of December 31, 2004. In early 2000, four named plaintiffs filed a class action against Fidelity Group, Inc.
(Fidelity), and (HPS) for unspecified damages. The complaint stems from the failure of a Fidelity insurance
plan, and alleges unfair and deceptive trade practices; negligent undertaking; fraud; negligent
misrepresentation; breach of contract; civil conspiracy; and RICO violations against Fidelity, and
its contracted administrator, HPS. Two principals of the Fidelity plan have been convicted of
insurance fraud and sentenced to prison in a separate proceeding. The class has been certified and
the case is proceeding in discovery. We are contesting the plaintiffs claims vigorously, but are
unable to predict the outcome of the case or any potential liability. In 2004, we filed a tax appeal in the State of New York contesting a Notice of Deficiency sent
by the State of New York to PlanVista. The notice involved taxes claimed to be due
on a deconsolidated basis for the tax years ending December 31, 1999 through December 31, 2001 in
an amount of approximately $2.8 million. We contend that taxation on a consolidated basis is
appropriate, and are vigorously pursuing our appeal. However, we are unable to determine whether we will be successful or whether we will be obligated to pay some or all of the alleged
deficiencies. From time to time, we are party to other legal proceedings in the course of business. We,
however, do not expect such other legal proceedings to have a material adverse effect on our
financial condition, operating results and liquidity. 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, 2004. 17




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PART II ITEM 5. MARKET FOR
REGISTRANTS COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 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 our common stock for
the periods indicated. High
    
    
    Low2005:First Quarter
    
    
    
    
    
    $
    10.74
    
    
    $
    8.25(through March 11, 2005)2004:First Quarter
    
    
    
    
    
    $
    20.00
    
    
    $
    16.65Second Quarter
    
    
    
    
    
    
    20.10
    
    
    
    16.19Third Quarter
    
    
    
    
    
    
    17.20
    
    
    
    8.77Fourth Quarter
    
    
    
    
    
    
    11.38
    
    
    
    6.782003:First Quarter
    
    
    
    
    
    $
    11.45
    
    
    $
    7.25Second Quarter
    
    
    
    
    
    
    13.21
    
    
    
    7.08Third Quarter
    
    
    
    
    
    
    16.40
    
    
    
    12.01Fourth Quarter
    
    
    
    
    
    
    17.64
    
    
    
    14.55
 On
March 11, 2005, the last reported sale price of the common stock was $8.47 per share. As of
March 11, 2005, we estimate that there were approximately 327 registered holders of record of the
common stock. We believe that many of ProxyMeds holders of record are in street name and are
not included in this number. We have never paid any dividends on our common stock; however, in prior years, we have paid
dividends on our Series B and Series C Preferred Stock in cash and/or in shares of our common stock
pursuant to the terms of the Articles of Incorporation, as amended. We intend to retain any
earnings for use in our operations and the expansion of our business, and do not anticipate paying
any dividends on the common or preferred stock in the foreseeable future. The payment of dividends
on our common stock is within the discretion of our Board of Directors, subject to our Articles of
Incorporation, as amended. Any future decision with respect to dividends on common stock will
depend on future earnings, future capital needs and our operating and financial condition, among
other factors. 18




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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 leading up to the period ended December 31, 2004, and has been
derived from our audited consolidated financial statements. 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. year ended December
31,in thousands except for share and per
share amounts
    

2004(1)
    
    

2003(2)
    
    
    2002
    
    
    2001
    
    
    2000STATEMENT OF OPERATIONS DATA:Net Revenues
    
    $
    90,246
    
    
    $
    71,556
    
    
    $
    50,182
    
    
    $
    43,230
    
    
    $
    33,441Operating income (loss)
    
    $
    (1,974
    )
    
    $
    (3,642
    )
    
    $
    1,340
    
    
    $
    (6,712
    )
    
    $
    (23,460
    )Income (loss) from continuing operations
    
    $
    (3,800
    )
    
    $
    (5,000
    )
    
    $
    1,950
    
    
    $
    (6,798
    )
    
    $
    (26,927
    )Income (loss) from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    241Net income (loss) applicable to common shareholders
    
    $
    (3,800
    )
    
    $
    (5,000
    )
    
    $
    1,338
    
    
    $
    (19,060
    )
    
    $
    (48,052
    )PER SHARE DATA:Basic and diluted net loss per share of common stock:Income (loss) from continuing operations
    
    $
    (0.33
    )
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    )
    
    $
    (37.03
    )Income (loss) from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.19Net income (loss)
    
    $
    (0.33
    )
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    )
    
    $
    (36.84
    )Diluted weighted average common shares outstanding
    
    
    11,617,601
    
    
    
    6,783,742
    
    
    
    6,396,893
    
    
    
    2,162,352
    
    
    
    1,304,342DIVIDEND DATA:Dividends on cumulative preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,665
    
    
    $
    1,275
 December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000BALANCE SHEET DATA:Working
capital (deficiency)(3)
    
    $
    (1,664
    )
    
    $
    10,512
    
    
    $
    8,749
    
    
    $
    9,393
    
    
    $
    12,156Convertible notes
    
    $
    13,137
    
    
    $
    13,137
    
    
    $
    13,400
    
    
    $
    
    
    
    $
    Other long-term obligations
    
    $
    1,069
    
    
    $
    3,518
    
    
    $
    2,581
    
    
    $
    442$
    
    
    
    729Total assets
    
    $
    184,403
    
    
    $
    73,130
    
    
    $
    88,704
    
    
    $
    35,882
    
    
    $
    27,666Stockholders equity
    
    $
    135,082
    
    
    $
    45,778
    
    
    $
    50,735
    
    
    $
    22,873
    
    
    $
    22,377
 (1) includes operations of PlanVista from March 2, 2004   19




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FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
FINANCIAL CONDITION OR BUSINESS As discussed under the caption, Cautionary Statements Pursuant to the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995 in Item 7, certain statements in the
Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this report that are not related to historical results are forward looking statements.
Forward-looking statements present our expectations or forecasts of future events. You can
identify these statements by the fact that they do not relate strictly to historical or current
facts. They frequently are accompanied by words such as anticipate, estimate, expect,
project, intend, plan, believe, and other words and terms of similar meaning. Actual
results may differ materially from those projected or implied in the forward-looking statements.
Subsequent written and oral forward looking statements attributable to the Company or to persons
acting on our behalf are expressly qualified in their entirety by the cautionary statements and
risk factors set forth below and elsewhere in this report and in other reports filed by us with the
Securities and Exchange Commission. We disclaim any obligation to update any forward-looking
statements to reflect events or circumstances after the date of this report. Risks Related to Acquisitions Our business will suffer if we fail to successfully integrate into our business the customers,
products, and technology of the companies we acquire. We have undertaken several acquisitions in the past few years as part of a strategy to expand
our business, and we may continue in the future to acquire businesses, assets, services, products,
and technologies from other persons or entities. The anticipated efficiencies and other benefits
to be derived from these acquisitions and future acquisitions may not be realized if we are unable
to successfully integrate the acquired businesses into our operations, including customers,
personnel, product lines, and technology. We are in the process of integrating into our
operations, the customers, products, personnel and technology of our prior acquisitions, including
MedUnite and PlanVista. There is no guarantee that we will be able to successfully integrate our
past acquisitions, including PlanVista and MedUnite, or any future acquired businesses into our
operations. Integration of acquired businesses can be expensive, time consuming, and may strain
our resources. Integration may divert managements focus and attention from other business
concerns and expose us to unforeseen liabilities and risks. We may also lose key employees,
strategic partners, and customers as a result of our inability to successfully integrate in a
timely manner or as a result of relationships the acquired businesses may have with our competitors
or the competitors of our customers and strategic partners. Some challenges that we face in
successfully integrating past and future acquired businesses into our operations include:  
    conflicts or potential conflicts with customers, suppliers, and strategic partners;
    integration of platforms, product lines, networks, and other technology;
    the migration of new customers and products to our existing network;
    the ability to cross-sell products and services to our new and existing customer base;
    retention of key personnel;
    consolidation of accounting and administrative systems and functions;
    coordinating new product and process development;
    increasing the scope, geographic diversity and complexity of operations;
    difficulties in consolidating facilities and transferring processes and know-how; and
    other difficulties in the assimilation of acquired operations, technologies or products. 20




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Businesses we acquire may have undisclosed liabilities or contingent liabilities that are
indeterminable and which may have a negative impact on our results of operations and require
unanticipated expense. In pursuing our acquisition strategy, our investigations of the acquisition candidates may
fail to discover certain undisclosed liabilities of the acquisition candidates, or may determine
that certain contingent liabilities are indeterminable. If we acquire a company having undisclosed
liabilities, as a successor owner we may be responsible for such undisclosed liabilities. If we
acquire a company with liabilities that are indeterminable at the time of the acquisition, we may
be required to make subsequent payments that could have a material adverse effect on our business.
We try to minimize our exposure to such liabilities by conducting appropriate due diligence, by
requiring audited financial statements, by obtaining indemnification from each seller of the
acquired companies where possible, by deferring payment of a portion of the purchase price as
security for the indemnification or by acquiring only specified assets. However, we cannot insure
that we will be able to obtain indemnifications or that they will be enforceable, collectible or
sufficient in amount, scope or duration to fully offset any undisclosed liabilities arising from
our acquisitions. PlanVista did not indemnify us in connection with the merger. In connection with the MedUnite acquisition, we have only limited indemnification
rights that may not be sufficient in amount or scope to offset losses resulting from unknown and
undisclosed liabilities. Furthermore, the introduction of new products and services from acquired
companies may have a greater risk of undetected or unknown errors, bugs, or liabilities than our
historic products. We may lose customers as a result of acquisitions. Acquisitions may cause disruptions, including potential loss of customers and other business
partners, in the business of ProxyMed or the acquired company, which could have material or adverse
effects on our business and operations. In addition, our customers, licensors and other business partners, in response to an
acquisition or merger, may adversely change or terminate their relationships with us, which could
have a material adverse effect on us. Certain of our current or potential customers may cancel or
defer requests for our services. In addition, our customers may expect preferential pricing as a
result of an acquisition or merger. An acquisition or merger may also adversely affect our ability
to attract new customers. Risks Related to Our Industry Government regulation and new legislation may have a negative impact on our business and results of
operations. As
discussed in Item 1 under the caption, Healthcare and
Privacy Related Legislation and Regulation, the
healthcare industry is highly regulated and is subject to extensive and frequently changing federal
and state healthcare laws. Several state and federal laws govern the collection, dissemination,
use and confidentiality of patient healthcare information. Although we believe that we are in
compliance, the privacy regulations are broad in scope, and will require constant vigilance for
ongoing compliance. We cannot guarantee that we will be
in compliance in the future. 21




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HIPAA also mandates the use of standard transactions, standard identifiers, security and other
provisions for electronic claims transactions. However, CMS announced that it would not take
enforcement action against covered entities, such as ProxyMed and its physician and payer
customers, that continue to process non-compliant transactions after October 16, 2003 so long as
that covered entity is making good faith efforts to become compliant, and it is operating under the
contingency planning guidelines provided by CMS.
Approximately 98% of
our outbound transactions sent to payers are in a HIPAA-compliant format. However, in contrast,
approximately 85% of our inbound transactions from our provider customers are being received in a
legacy format, and are being translated by us on behalf of these customers. Our contracts with our customers, strategic partners, providers, payers and other healthcare
entities mandate or will mandate that our products and services be HIPAA compliant. If our
products and services are not in compliance with HIPAA or any other alternative guidelines issued
by the CMS on or before the deadline and on an ongoing basis thereafter, our customers, strategic
partners, and other healthcare providers with whom we contract may terminate their contracts with
us or sue us for breach of contract. Additionally, our revenues may be reduced as some of our
non-compliant payer partners may be forced to accept paper-based transactions for which we may not
be the recipient for processing. We may be also subject to penalties for non-compliance by federal
and state governments, and patients who believe that their confidential health information has been
misused or improperly disclosed may have certain causes of actions under applicable state privacy
or HIPAA-like laws against us, our partners or customers. The deadline for compliance with HIPAA standards on security is April 20, 2005. While we
believe that we will be in compliance by the deadline, there is no assurance that we will be. Any
failure to be in compliance on and after the deadline could result in regulatory penalties being
assessed against us, and weaken demand for our affected services. There are a significant
number of state initiatives regarding healthcare services. If we are
unable to comply with the standards set by the states in which we operate, we or our operations
could be harmed. In
addition to HIPAA, we are required to comply with a number of individual state
privacy laws, which may not be superseded by HIPAA. These laws are often complex and may conflict
with one another. In our transaction services segment, we contract with
multiple (PPO) networks. These networks are typically governed by
the laws and regulation of the states in which they operate, in addition to federal ERISA
legislation. Over the last few years, a number of states have been actively changing their laws
and regulations governing PPOs, and this trend may continue. It is difficult to determine when
ERISA preemption of state PPO law applies. Our failure to comply with existing state laws or any
new laws in the future could jeopardize our ability to continue business in the affected states,
which would reduce our revenues. In addition, compliance with additional regulation could be
expensive and reduce our income. 22




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We are dependent on the growth of the Internet and electronic healthcare information markets. Many of our products and services are geared toward the Internet and electronic healthcare
information markets. The perceived difficulty of securely transmitting confidential information
over the Internet has been a significant barrier to conducting e-commerce and engaging in sensitive
communications over the Internet. Our strategy relies in part on the use of the Internet to
transmit confidential information. We believe that any well-publicized compromise of Internet
security may deter people from using the Internet to conduct transactions that involve transmitting
confidential healthcare information. Risks Related to Our Business General: We may not be able to retain key personnel or replace them when they leave. We
are currently engaged in a search for a replacement to Michael
Hoover, who had been our Chief Executive Officer (CEO) for the last four years. There is no guarantee that our
search will be successful or that a new CEO will bring us to positive earnings per share.
Although we have entered into employment agreements with other senior executives, the loss of any
of their services could cause our business to suffer. Our success is also dependent upon our
ability to hire and retain qualified operations, development and other personnel. Competition for
qualified personnel in the healthcare information services industry is intense, and we cannot
assure that we will be able to hire or retain the personnel necessary for our planned operations. We may not prevail in ongoing litigation and may be required to pay substantial damages. Our business entities are party to various legal actions as either plaintiff or defendant in
the ordinary course of business. (See Part I, Item 3
Legal Proceedings and Note 18(a) to Notes
to the Consolidated Financial Statements.) We cannot assure the ultimate outcome of these actions.
If we are not successful in that litigation, we could be subject to monetary damages that could
reduce our cash flows and results of operations. In addition, we will continue to incur additional
legal costs in connection with pursuing and defending such actions. The Company has senior debt that matures on May 31, 2005. If
we are unable to refinance our senior debt prior to maturity, the
lender could foreclose, the effect on our operations and stock price
could be significantly negative and we may be unable to continue as a
going concern. The refinancing
we contemplate will have a floating interest rate and if the rate increases significantly, it could
diminish our cash. Transaction Services Segment: Changes that reduce payer compensation for electronic claims may reduce our revenue and margins. Several payers recently notified us that they are terminating existing arrangements under
which they paid us for electronic claims we submitted to them on behalf of our submitter customers.
If we are unable to shift the cost of these claims to the submitting providers and vendors, or to
enter into new payment arrangements with the payers for the affected claim volume, then our revenue
will be reduced. As electronic transaction
processing penetrates the healthcare industry more extensively, we
will
face increasing pressure to reduce our prices which potentially may cause us to no longer be competitive. As electronic transaction processing extensively penetrates the healthcare market or becomes
highly standardized, it is possible that competition among electronic transaction processors will
focus increasingly on pricing. This competition is putting intense pressure on us to reduce our
pricing in order to retain market share. If we are unable to reduce our costs sufficiently to
offset declines in our prices, or if we are unable to introduce new, innovative service offerings
with higher prices and margins, our results of operations could decline. 23




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Consolidation in the healthcare industry may give our customers greater bargaining power and lead
us to reduce our prices. Many healthcare industry participants are consolidating to create integrated healthcare
delivery systems with greater market power. As provider networks and managed care organizations
consolidate, competition to provide products and services such as those we provide will become more
intense, and the importance of establishing and maintaining relationships with key industry
participants will become greater. These industry participants may try to use their market power to
negotiate price reductions for our products and services. If we are forced to reduce prices, our
margins will decrease, unless we are able to achieve corresponding reductions in expenses. Our business will suffer if we are unable to successfully integrate acquired IT platforms or if our
existing Phoenix platform is unstable or unable to accommodate our clients needs. Our business is dependent on the successful integration of operating platforms we have
acquired to provide a high quality service at a competitive cost to our customers. To the extent
that we are unable to consolidate those acquired platforms without significant disruption to our
customers, our business or our operations could be harmed. Additionally, if our Phoenixplatform
that is the backbone of our EDI business is unstable or does not provide satisfactory outcomes to a
significant number of clients, our business and our operations will be harmed. If we are unable to
convert a significant number of our customers to ProxyMed.net, our business or operations could be
harmed. Our business and future success may depend on our ability to cross-sell our products and services. Our ability to generate revenue and growth partly depends on our ability to cross-sell our
products and services to our existing customers and new customers resulting from acquisitions. Our
ability to successfully cross-sell our products and services including our ESP initiative is one of the most significant factors influencing our growth. There is
no guarantee that we will be successful in cross-selling our products and services, and our failure
in this area would likely have an adverse effect on our business. We depend on connections to insurance companies and other payers, and if we lose these connections,
our service offerings would be limited and less desirable to healthcare providers. Our business is enhanced by the substantial number of payers, such as insurance companies,
Medicare and Medicaid agencies, to which we have electronic connections. These connections may
either be made directly or through a clearinghouse. We have attempted to enter into suitable
contractual relationships to ensure long-term payer connectivity; however, we cannot assure that we
will be able to maintain our links with all these payers on terms satisfactory to us. In addition,
we cannot assure that we will be able to develop new connections, either directly or through
clearinghouses, on satisfactory terms. Lastly, some third-party payers provide systems directly to
healthcare providers, bypassing us and other third-party processors. Our failure to maintain
existing connections with payers and clearinghouses or to develop new connections as circumstances
warrant, or an increase in the utilization of direct links between providers and payers, could
cause our electronic transaction processing system to be less desirable to healthcare participants,
which would slow down or reduce the number of transactions that we process and for which we are
paid. We have important business relationships with other companies to market and sell some of our
clinical and financial products and services. If these companies terminate their relationships
with us, or are less successful in the future, we will need to add this emphasis internally, which
may divert our efforts and resources from other projects. 24




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For the marketing and sale of some of our products and services, we entered into important
business relationships with physician office management information system vendors, with electronic
medical record vendors, and with other distribution partners. These business relationships, which
have required and may continue to require significant commitments of effort and resources, are an
important part of our distribution strategy and generate substantial recurring revenue. Most of
these relationships are on a non-exclusive basis, and we cannot assure that our electronic commerce
partners and other strategic partners, most of whom have significantly greater financial and
marketing resources than we do, will not develop and market products and services in competition
with us in the future or will not otherwise discontinue their relationship with us. Also, our
arrangements with some of our partners involve negotiated payments to the partners based on
percentages of revenues generated by the partners. If the payments prove to be too high, we may be
unable to realize acceptable margins, but if the payments prove to be too low, the partners may not
be motivated to produce a sufficient volume of revenues. The success of our important business
relationships will depend in part upon our partners own competitive, marketing and strategic
considerations, including the relative advantages of alternative products being developed and
marketed by such partners. If any such partners are unsuccessful in marketing our products, we
will need to place added emphasis on these aspects of our business internally, which may divert our
planned efforts and resources from other projects. A significant amount of our revenues in our Transaction Services segment is from one party. Loss
of this relationship may adversely affect our profitability. NDCHealth
Corporation (NDCHealth), one of the shareholders of MedUnite, represents 7.9% of our 2004
consolidated revenues and 10% of our Transaction Services revenues.
The relationship with NDCHealth is
an important one and provides us with a base of physicians who utilize our services. Loss of this
relationship without any ability to contact these physicians directly may significantly reduce our
revenues and operating profits. The adoption of electronic processing of clinical transactions in the healthcare industry is
proceeding slowly; thus, the future of our business is uncertain. Our strategy anticipates that electronic processing of clinical healthcare transactions,
including transactions involving prescriptions and laboratory results, will become more widespread
and that providers and third-party institutions increasingly will use electronic transaction
processing networks for the processing and transmission of data. The rate at which providers adopt
the use of electronic transmission of clinical healthcare transactions (and, in particular, the use
of the Internet to transmit them) continues to be slow. While government legislation or regulation
could be a catalyst for the use of the electronic processing of clinical healthcare transactions,
we cannot assure that continued or accelerated conversion from paper-based transaction processing
to electronic transaction processing in the healthcare industry, using proprietary healthcare
management systems or the Internet, will occur. An error by us in the
process of providing clinical connectivity, transmitting prescription
and laboratory data incorrectly, could result in substantial injury
to a patient, and our liability insurance may not be adequate in a catastrophic situation. Our business exposes us to potential liability risks that are unavoidably part of being in the
healthcare electronic transaction processing industry. Since some of our products and services
relate to the prescribing and refilling of drugs and the transmission of medical laboratory results, an error by any party in the process could result in substantial injury to a patient. As
a result, our liability risks are significant. 25




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We cannot assure that our insurance will be sufficient to cover potential claims arising out
of our current or proposed operations, or that our present level of coverage will be available in
the future at a reasonable cost. A partially or completely uninsured claim against us, if
successful and of sufficient magnitude, would have significant adverse financial consequences. Our
inability to obtain insurance of the type and in the amounts we require could generally impair our
ability to market our products and services. Our businesses have many competitors. We face competition from many healthcare information systems companies and other technology
companies. Many of our competitors are significantly larger and have greater financial resources
than we do and have established reputations for success in implementing healthcare electronic
transaction processing systems. Other companies have
targeted this industry for growth, including the development of new technologies utilizing
Internet-based systems. We cannot assure you that we will be
able to compete successfully with these companies or that these or other competitors will not
commercialize products, services or technologies that render our products, services or technologies
obsolete or less marketable. Our PPO and provider arrangements provide no guarantee of long-term relationships. The majority of our contracts with PPOs and providers can be terminated without cause,
generally on 90 days notice. For our Transaction Services business, the loss of any one
provider may not be material, but if large numbers of providers chose to terminate their contracts,
our revenues and net income could be materially adversely affected. The termination
of any PPO contract would render PlanVista unable to provide its customers with network access to
that PPO, and therefore would adversely affect our ability to reprice claims and derive
revenues. Furthermore, as a network of networks, we rely on its participating PPOs and
provider groups to ensure participation by such providers.
Our PPO contracts generally do
not provide us with a direct recourse against a participating provider that chooses not to
honor its obligation to provide a discount, or chooses to discontinue its participation in NPPN.
Although in most cases we are able to replace lost contracts with new contracts, termination of
provider contracts or other changes in the manner in which these parties conduct their business are
outside of our control and could negatively affect our ability to
provide services to our
customers. Some providers have historically been reluctant to participate in secondary networks. Our
percentage of savings business model sometimes allows a payer to
utilize our network discounts in circumstances where NPPN is not the payers primary network. In these
circumstances, NPPN participating providers are not traditionally given the same assurances of
patient flow that they receive when they are part of a primary network. Historically, some
providers have been reluctant to participate in network arrangements that do not guarantee a high
degree of patient steerage. Although we think that the steerage
provided by our payers as
a whole and the speed and efficiency with which we provide claims
repricing services makes NPPN affiliation an attractive option for
providers, there can be no assurance that our business model will not discourage providers from commencing or maintaining an affiliation with
NPPN. 26




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Our cost containment accounts receivable are subject to adjustment. We generally record revenue for our services when the services are performed, less
amounts reserved for claim reversals and bad debts. The estimates for claim reversals and bad
debts are based on judgment and historical experience. Many of the claims are not fully
adjudicated for over 90 days. To the extent that actual claim reversals and bad debts associated
with our business exceed the amounts reserved, such difference could have a material
adverse impact on our results of operations and cash flows. Laboratory Services Segment: Our Laboratory Services Communications Segment has a high customer concentration. We
currently have over 56% of our sales to two customers. If either or
both of those customers chose to do business with a competitor or chose to handle the business on
their own, the loss of the associated revenue could severely harm our business. Risks Related to Our Technology Evolving industry standards and rapid technological changes could result in our products becoming
obsolete or no longer in demand. Rapidly changing technology, evolving industry standards and the frequent introduction of new
and enhanced Internet-based services characterize the market for our products and services. Our
success will depend upon our ability to enhance our existing services, introduce new products and
services on a timely and cost-effective basis to meet evolving customer requirements, achieve
market acceptance for new products or services and respond to emerging industry standards and other
technological changes. We cannot assure that we will be able to respond effectively to
technological changes or new industry standards. Moreover, we cannot assure that other companies
will not develop competitive products or services, or that any such competitive products or
services will not cause our products and services to become obsolete or no longer in demand. 27




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We depend on uninterrupted computer access for our customers; any prolonged interruptions in our
operations could cause our customers to seek alternative providers of our services. Our success is dependent on our ability to deliver high-quality, uninterrupted computer
networking and hosting, requiring us to protect our computer equipment and the information stored
in servers against damage by fire, natural disaster, power loss, telecommunications failures,
unauthorized intrusion and other catastrophic events. To mitigate this risk, we have moved the
majority of our production computer networks to a secure, third-party co-location site located in
Atlanta, Georgia. This site has back-up site capability and a program to manage technology to
reduce risks in the event of a disaster, including periodic back-ups of our computer programs and
data. While
we still continue to operate production networks in our Atlanta, Middletown, Sioux
Falls and Richmond facilities, any damage or failure resulting in prolonged interruptions in our
operations could cause our customers to seek alternative providers of our services. In particular,
a system failure, if prolonged, could result in reduced revenues, loss of customers and damage to
our reputation, any of which could cause our business to suffer. While we carry property and
business interruption insurance to cover operations, the coverage may not be adequate to compensate
us for losses that may occur. Computer network systems like ours could suffer security and privacy breaches that could harm our
customers and us. We currently operate servers and maintain connectivity from multiple facilities. Despite our
implementation of standard network security measures, our infrastructure may be vulnerable to
computer viruses, break-ins and similar disruptive problems caused by customers or other users.
Computer viruses, break-ins or other security problems could lead to interruption, delays or
cessation in service to our customers. These problems could also potentially jeopardize the
security of confidential information stored in the computer systems of our customers, which may
deter potential customers from doing business with us and give rise to possible liability to users
whose security or privacy has been infringed. The security and privacy concerns of existing and
potential customers may inhibit the growth of the healthcare information services industry in
general, and our customer base and business in particular. A significant security breach could
result in loss of customers, loss of revenues, damage to our reputation, direct damages, costs of
repair and detection and other unplanned expenses. While we carry professional liability insurance
to cover such breaches, the coverage may not be adequate to compensate us for losses that may
occur. The protection of our intellectual property requires substantial resources. We rely largely on our own security systems and confidentiality procedures, and employee
nondisclosure agreements for certain employees, to maintain the confidentiality and security of our
proprietary information, including our trade secrets and internally developed computer
applications. If third parties gain unauthorized access to our information systems, or if anyone
misappropriates our proprietary information, this may have a material adverse effect on our
business and results of operations. In addition, our technology has not been patented nor have we
registered any copyrights with respect to such technology. Trade secrets laws offer limited
protection against third party development of competitive products or services. Because we lack the
protection of patents or registered copyrights for our internally-developed software and software
applications, we are more vulnerable to misappropriation of our proprietary technology by third
parties or competitors. The failure to adequately protect our technology could adversely affect
our business. 28




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We may be subject to trademark and service mark infringement claims in the future. As our competitors healthcare information systems increase in complexity and overall
capabilities, and the functionality of these systems further overlap, we could be subject to claims
that our technology infringes on the proprietary rights of third parties. These claims, even if
without merit, could subject us to costly litigation and could require the resources, time, and
attention of our technical, legal, and management personnel to defend. The failure to develop
non-infringing technology or trade names, or to obtain a license on commercially reasonable terms,
could adversely affect our operations and revenues. If our ability to expand our network infrastructure is constrained, we could lose customers and
that loss could adversely affect our operating results. We must continue to expand and adapt our network and technology infrastructure to accommodate
additional users, increased transaction volumes, and changing customer requirements. We may not be
able to accurately project the rate or timing of increases, if any, in the volume of transactions
we process, reprice or otherwise service or be able to expand and upgrade our systems and
infrastructure to accommodate such increases. We may be unable to expand or adapt our network
infrastructure to meet additional demand or our customers changing needs on a timely basis, at a
commercially reasonable cost or at all. Our current information systems, procedures and controls
may not continue to support our operations while maintaining acceptable overall performance and may
hinder our ability to exploit the market for healthcare applications and services. Service lapses
could cause our users to switch to the services of our competitors. Risks Related to Our Stock While we generated positive earnings in 2002, we incurred losses in 2003 and 2004. There is no
assurance that we will generate positive earnings in the future and this could have a detrimental
effect on the market price of our stock. In the last two years we have incurred substantial losses, including losses of $3.8 million
for the fiscal year ended December 31, 2004, and $5.0 million in the fiscal year ended December 31,
2003. As of December 31, 2004 and December 31, 2003, we had an accumulated deficit of $104.1
million and $100.3 million, respectively. Continued shortfalls could deplete our cash reserves,
making it difficult for us to obtain credit at a favorable rate, or continue investing in
infrastructure we need to compete in the future. Continued shortfalls may also cause our share
price to decline and make us a target for acquisitions. A qualified opinion on internal controls related to the Sarbanes Oxley legislation could have an
adverse affect on our stock price. Our certification that we have sufficient internal controls in place today is no guarantee that
we will maintain those controls in the future or that those controls will be effective in ensuring
the accuracy of the financial reports. We may issue additional shares that could adversely affect the market price of our common stock. Certain events over which you have no control could result in the issuance of additional
shares of our common stock or series C preferred stock, which would dilute your ownership
percentage in ProxyMed and could adversely affect the market price of our common stock. We may
issue additional shares of common stock or preferred stock for many reasons including:  
    to raise additional capital or finance acquisitions; 29




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
    upon the exercise or conversion or an exchange of outstanding options,
warrants and shares of convertible preferred stock; or
    in lieu of cash payment of dividends. In addition, the number of shares of common stock that we are required to issue in connection
with our outstanding warrants may increase if certain anti-dilution events occur (such as, certain
issuances of common stock, options and convertible securities). The trading price of our common stock may be volatile. The stock market, including the Nasdaq National Market, on which the shares of our common
stock are listed, has from time to time experienced significant price and volume fluctuations that
may be unrelated to the operating performance of particular companies. In addition, the market
price of our common stock, like the stock prices of many publicly traded companies in the
healthcare industry, has been and may continue to be highly volatile. 30




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ITEM 7.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Overview Managements discussion and analysis of financial condition and results of operations (MD&A)
is provided as a supplement to our consolidated financial statements and notes thereto included in
Part IV of this Form 10-K and to provide an understanding of our consolidated results of
operations, financial condition, and changes in financial condition. Our MD&A is organized as
follows:  
    Introduction This section provides a general description of our business, summarizes
the significant acquisitions we completed in the last three years, and provides a brief
overview of our operating segments.
    Results of Operations This section provides our analysis and outlook for the line
items on our consolidated statement of operations on both a company-wide and segment
basis.
    Liquidity and Capital Resources This section provides an analysis of our liquidity
and cash flows, as well as our discussion of our debts and other commitments.
    Critical Accounting Policies and Estimates This section discusses those accounting
policies that are considered to be both important to our financial condition and results
of operations, and require us to exercise subjective or complex judgments in their
application. In addition, all of our significant accounting policies, including our
critical accounting policies, are summarized in Note 1 to our consolidated financial
statements.
    New Accounting Pronouncements This section includes a discussion of recently
published accounting authoritative literature that may have an impact on our historical or
prospective results of operations or financial condition. Introduction We believe we are the nations second largest independent provider-based electronic healthcare
transaction services company. We provide connectivity and cost containment services and related
value-added products to physicians, payers, pharmacies, medical laboratories, and other healthcare
providers and suppliers. Our services support a broad range of financial, clinical and
administrative transactions, and are HIPAA-certified through Edifecs. To facilitate these
services, we are completing the conversion of all our non-clinical EDI clients to
Phoenix,
our secure proprietary national electronic information network, which provides
physicians and other healthcare providers with direct connectivity to
one of the industrys largest
lists of payers. Our corporate headquarters is located in Atlanta, Georgia and our products and services are
provided from various operational facilities located throughout the United States. We also operate
our clinical computer network and portions of our financial and real-time production computer
networks from a secure, third-party co-location site also located in Atlanta, Georgia. Our primary strategy is focused on leveraging our leading position as an independent back-end
connectivity provider to physician offices. Through strategic relationships and partnerships
with front-end solution 31




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providers, our goal is to drive more healthcare transactions through Phoenix
while remaining neutral in the battle for the physicians desktop. Additionally, we expect that
there will be opportunities to increase revenues by cross-selling our existing products and
services to our current customer base of physicians and other healthcare providers, as well as
revenue opportunities from the development of new services from our development efforts, including
Internet-based transaction services. We remain committed to developing additional capabilities and
value-added products and services, and to expanding our back-end connectivity network. In
conjunction with this philosophy, we have recently introduced PCATand ProxyEnroll, our new
web-based service tools for support and enrollment. We have also added new services offerings for
our payer customers through our acquisition of PlanVista Corporation (PlanVista)
for claims repricing services. Acquisitions On December 31, 2002, we acquired all
of the outstanding stock of MedUnite, Inc. (MedUnite)
for $10 million in cash and the issuance of an aggregate of $13.4 million principal amount of 4% convertible
promissory notes. In addition, we paid approximately $6.7 million in transaction and exit related
costs (which were originally estimated at $8.3 million). Interest on the convertible promissory
notes is payable in cash on a quarterly basis. The convertible
promissory notes (now currently
payable at a maturity value of $13.1 million after a claim setoff against
the escrow in December
2003) are payable in full on December 31, 2008, and
are convertible into an aggregate of 716,968
shares (originally 731,322 shares before the claim setoff) of our
common stock if our
revenues resulting from business with the former MedUnite
owners exceed certain thresholds over a three and one-half year
period from the date of acquisition. On
March 2, 2004, we acquired PlanVista, a company that provides medical cost containment and
business process outsourcing solutions for the medical insurance and managed care industries, as
well as services for healthcare providers, including individual providers, preferred provider
organizations and other provider groups for 3,600,000 shares of our common stock issued to
PlanVista shareholders valued at $59.8 million (based on the average closing price of our common
stock for the day of and the two days before and after
December 8, 2003, the date of the
announcement of the definitive agreement). We also assumed debt and other liabilities of
PlanVista, totaling $46.4 million and paid $1.3 million in acquisition-related costs. Additionally, we raised $24.1
million in a private placement sale of 1,691,227 shares of our common stock to General Atlantic Partners, Commonwealth
Associates and other parties to partially fund repayment of certain of PlanVistas debts and other
obligations outstanding at the time of the acquisition. The merger enables us to offer a new suite
of products and services, provide new end-to-end services, increase sales opportunities with
payers, strengthen business ties with certain customers, expand technological capabilities, reduce
operating costs and enhance our public profile. Upon completion of the acquisition, each share of PlanVistas outstanding common stock was
cancelled and converted into 0.08271 shares of our common stock and each
holder of PlanVista series C preferred stock received 51.5292 shares of our common stock in
exchange for each share of PlanVista series C preferred stock, representing approximately 23% of
our common stock on a fully converted basis, and the holders of our outstanding stock, options and
warrants retained approximately 77% of ProxyMed following the transaction. PlanVistas operations
are included in our Transaction Services segment commencing March 2004. 32




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Sale of Assets On June 30, 2004, we sold certain assets and liabilities of
our Laboratory Communication
Solutions segment that were used in our non-core contract manufacturing business to a new entity
owned by a former executive of ProxyMed for $4.5 million in cash. Under terms of the sale
agreement, we received $3.5 million in cash at closing and received the balance of $1.0 million in
cash in July and August 2004 following the presentation of the final accounting. As part of the
disposition, we agreed to purchase certain component parts from the new owner for use in our
Laboratory Communication Solutions business on a non-exclusive basis at a fixed price deemed to be
at fair market value by management. These parts were valued at $0.4 million at June 30, 2004. As
of December 31, 2004, this remaining commitment had been reduced to less than $0.1 million.
Additionally, we agreed to sublease a portion of our current facilities through July 2005 and
provide certain administrative services to the new entity. As a result of the transaction, we recorded a loss on sale of assets of $0.1 million in the
year ended December 31, 2004. This loss includes the value of options to purchase 10,000 shares of
the our common stock granted to the former executive at an exercise price of $16.00 in July 2004. Operating Segments We currently operate in two reportable segments that are separately managed: Transaction Services (formerly known as Electronic healthcare transaction processing) and
Laboratory Communication Solutions. Transaction Services includes transaction, cost containment and other value-added services principally between physicians and insurance companies and physicians and pharmacies; and Laboratory Communication Solutions includes the sale, lease and service of
communication devices principally to laboratories and, through
June 30, 2004, the contract manufacturing of printed circuit boards. Commencing in March 2004, the operations of Plan Vista are included in our Transaction Services segment. As a result of a re-alignment of our corporate overhead functions in the second quarter of 2004, we now report these expenses as part of our Transaction Services segment. Accordingly, our
 corporate expenses in the comparable periods have been combined with our Transaction Services segment to facilitate a better comparison between periods in this section. 33




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Results of Operations Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Net Revenues.Consolidated net revenues for 2004 increased by $18.7 million, or 26%, to $90.2
million from consolidated net revenues of $71.6 million for 2003. Net revenues classified by our
reportable segments are as follows: In thousands
    
    2004
    
    
    2003Transaction Services
    
    $
    71,304
    
    
    $
    46,673Laboratory Communication Solutions
    
    
    18,942
    
    
    
    24,883$
    90,246
    
    
    $
    71,556
 Net revenues in our Transaction Services segment for 2004 increased by $24.6 million, or
53%, over 2003. This increase is primarily due to the acquisition of PlanVista (increase of $26.9
million), offset by declines in volumes of electronic claims, statements and other real-time
transactions processed (decrease $2.1 million) and additional revenue reserves required due to a
degradation in the aging of outstanding traditional accounts
(increase of $0.7 million). While core
transaction growth was down 1.4% compared to the prior year (see below), revenue dollars have grown
significantly due to the higher per transaction revenue attributable to our cost containment
transactions compared to our traditional core transactions. For 2004, approximately 79% of our revenues came from our Transaction Services segment
compared to 65% from this segment for 2003. Laboratory Communication Solutions segment net revenues for 2004 decreased by $5.9 million, or
24%, from 2003 primarily as a result of the asset sale discussed earlier in this report (decrease
of $5.6 million). A summary of the number of transactions we processed for the periods presented is as follows: In thousands
    
    2004
    
    
    2003Core transactions (1)
    
    
    194,558
    
    
    
    197,284Additional core transactions
    
    
    64,775
    
    
    
    50,502Encounters
    
    
    29,172
    
    
    
    25,529Total transactions
    
    
    288,505
    
    
    
    273,315
   (1)
    
    Includes 4.5 million cost containment transactions in the 2004 period
from ProxyMeds acquisition of PlanVista Core transactions represent all transactions except for encounters. Additionally, as a
result of a continued review of our business, we have made changes to our transaction counts to
insure that our transactions are counted on the same methodology for all purposes, whether internal
or external. Previously, we had excluded certain transactions primarily associated with an
outsourcing contract due to the nature of the business model for those transactions. These
transactions are included above as additional core transactions in 2003 and 2004. 34




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Cost Containment transactions represent the number of claims sent by our payer clients to be
re-priced through our provider network. Encounters are an administrative reporting transaction for payers but do not generate
revenue for the provider who must submit them. Accordingly, rather than submitting on a routine
basis, most providers choose to periodically catch up on their submissions, creating monthly and
quarterly swings in both the number of encounters we process and what percentage of our transaction
mix they represent. Since encounters are at a significantly lower price point than claims, these
swings make it difficult to analyze our quarter-over-quarter growth in our business. In addition,
we do not expect our encounter volume to grow on an annual basis, as payers are not expanding the
capitated service model that is the foundation of encounters. Therefore, we believe that breaking
out encounters shows more clearly our growth in core transactions. Cost of Sales.Consolidated cost of sales decreased as a percentage of net revenues to 38%
for 2004 from 45% for 2003. Cost of sales classified by our reportable segments is as follows: In thousands
    
    2004
    
    
    2003Transaction Services
    
    $
    22,401
    
    
    $
    15,893Laboratory Communication Solutions
    
    
    11,811
    
    
    
    16,528$
    34,212
    
    
    $
    32,421
 Cost of sales in our Transaction Services segment consists of transaction fees, provider
network outsourcing fees, services and license fees, third-party electronic transaction processing
costs, certain telecommunication and co-location center costs, revenue sharing arrangements with
our business partners, third-party database licenses, and certain travel expenses. Cost of sales
in this segment increased by $6.5 million, or 41%, for 2004 compared to 2003. As a percentage of
revenues, cost of sales decreased to 31% in the 2004 compared to 34% in 2003 primarily due to a
change in the mix of transaction types from higher cost patient statements to lower cost claim
transactions. offset by the addition of higher margin medical cost containment services from our
acquisition of PlanVista (increase of $8.8 million). Cost of sales in our Laboratory Communication Solutions segment includes hardware, third party
software, consumable materials, direct manufacturing labor and indirect manufacturing overhead.
Cost of sales for this segment for 2004 decreased $4.8 million, or 29%, from 2003. These decreases
are primarily due to the sale of our contract manufacturing assets. Cost of sales as a percentage
of revenues in this segment was 62% for 2004 compared to 66% for the 2003 year. Selling, General and Administrative Expenses.Consolidated SG&A increased for 2004 by $12.2
million, or 34%, to $48.0 million from consolidated SG&A of $35.8 million for 2003. Consolidated
SG&A expenses as a percentage of consolidated revenues increased to 53% in 2004 from 50% in 2003.
SG&A expenses classified by our reportable segments are as follows: In thousands
    
    2004
    
    
    2003Transaction Services
    
    $
    43,625
    
    
    $
    30,283Laboratory Communication Solutions
    
    
    4,398
    
    
    
    5,526$
    48,023
    
    
    $
    35,809
 Transaction Services segment SG&A expenses for the year ended December 31, 2004 increased
by $13.3 million, or 44% over 2003. The primary cause of the increase was the addition of SG&A
expenses from PlanVista for ten months in the 2004 period (increase of $10.5 million).
Additionally, while we achieved significant reductions in expenses from our MedUnite acquisition
over the course of 2003, these savings have 35




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been offset by increased expenditures related to our ongoing efforts to comply with the
Sarbanes-Oxley Act of 2002 during 2004 (increase of $1.7 million). Laboratory Communication Solutions segment SG&A expenses for 2004 decreased by $1.1 million,
or 20% from 2003 and segment SG&A expenses as a percentage of segment net revenues increased to 23%
in 2004 from 22% in 2003. The decreases in dollars are primarily due to a reduction in expenses
related to the sale of our contract manufacturing assets on June 30, 2004. Depreciation and Amortization.Consolidated depreciation and amortization increased by $3.4
million to $9.8 million for 2004 from $6.3 million for 2003. This increase was primarily due to
approximately $3.5 million for the amortization of intangible assets acquired in the PlanVista
acquisition in the transaction services segment; offset by a decrease
in depreciation expense in the Laboratory Communication Solutions
segment due to the sale of our manufacturing assets. Depreciation and amortization classified by our reportable segments is as follows: In thousands
    
    2004
    
    
    2003Transaction Services
    
    $
    8,719
    
    
    $
    4,754Laboratory Communication Solutions
    
    
    823
    
    
    
    1,369Corporate
    
    
    221
    
    
    
    193$
    9,763
    
    
    $
    6,316
 Loss
on Disposal of Assets.In 2004, we recorded a consolidated loss
of disposal asset $47,000. This
loss is related to the disposition of contract
manufacturing assets in our Laboratory
Communication Solutions segment that were sold to a new entity formed by a former executive on June
30, 2004 of $68,000; and $5,000 of miscellaneous items offset by $26,000 in gains on vehicles and other equipment sold. As a result
of the consolidation of the ProxyMed and MedUnite offices in Atlanta in February 2003, we recorded
$0.1 million in losses during 2003 primarily related to the disposition of certain assets owned and
leased that were acquired in the acquisition of MDP Corporation in 2001. Litigation settlement.In December 2004, we settled an outstanding preacquisition contingency
related to PlanVista for $0.2 million, net of insurance reimbursement. Operating Income (Loss).As a result of the foregoing, the consolidated operating loss for
2004 was $2.0 million compared to an operating loss of $3.6 million for 2003. Operating loss
classified by our reportable segments is as follows: In thousands
    
    2004
    
    
    2003Transaction Services
    
    $
    (2,815
    )
    
    $
    (920
    )Laboratory Communication Solutions
    
    
    1,938
    
    
    
    1,119Corporate
    
    
    (1,097
    )
    
    
    (3,841
    )$
    (1,974
    )
    
    $
    (3,642
    )
 Other Income (Expense), net.During 2004, we settled a long-term liability assumed in the
acquisition of MedUnite for $0.8 million. The liability was being carried at its present value of
$0.9 million. The resulting gain of $0.1 million is reflected as other income. Additionally, in
conjunction with our distribution and marketing agreement with PlanVista for claims repricing
services signed in June 2003, we received a warrant to purchase up to 15% of PlanVista common stock
that expired in December 2003. The warrant was initially valued at $0.5 million and recorded as an
asset. Upon expiration of the warrant in December 2003, we recorded an impairment loss in the
amount of $0.5 million (representing the original value of the warrant) for the 2003 year. 36




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##### 



Interest Expense, net.Consolidated net interest expense for the 2004 was $1.9 million
compared to $0.9 million for the same period last year. This increase in expense is primarily due
to the assumption of debt in conjunction with the PlanVista acquisition (increase of $1.2 million).
Interest expense for the future is expected to be at levels above those in 2004 due to the senior
debt assumed from PlanVista. Net Loss. As a result of the foregoing, consolidated net loss for 2004 was $3.8 million
compared to consolidated net loss of $5.0 million for 2003. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Net Revenues.Consolidated net revenues for 2003 increased by $21.4 million, or 43%, to $71.6
million from consolidated net revenues of $50.2 million for 2002. Net revenues classified by our
reportable segments are as follows: In thousands
    
    2003
    
    
    2002Transaction Services
    
    $
    46,673
    
    
    $
    22,439Laboratory Communication Solutions
    
    
    24,883
    
    
    
    27,743$
    71,556
    
    
    $
    50,182
 Net revenues in our Transaction Services segment (formerly known as Electronic
healthcare transaction processing) increased $24.2 million or 108% over the 2002 period. This
increase was driven by internal growth and more significantly by transactions generated by
MedUnite (increase of $18.0 million). Total healthcare transactions grew 139.4% from 114.2 million transactions in the 2002 period
to 273.3 million transactions in 2003. Core transaction growth was up 121.4% from the 2002 period.
The increase in transaction volume was primarily attributable to the MedUnite acquisition and
internal growth in both claims and statements processed. A summary of the number of
transactions we processed for the periods presented is as follows: In thousands
    
    2003
    
    
    2002Core transactions
    
    
    197,284
    
    
    
    89,123Additional core transactions
    
    
    50,502
    
    
    
    Encounters
    
    
    25,529
    
    
    
    25,045Total transactions
    
    
    273,315
    
    
    
    114,168
 37




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##### 



Laboratory Communication Solutions segments net revenues decreased by 10% from the 2002
period. As the sluggish economy continued throughout 2003, we experienced a slowdown in contract
manufacturing sales and sales of communication devices at our smaller labs and hospital labs.
Additionally, beginning in 2004, we lost a customer in our contract manufacturing business that
represented approximately 13% of this segments 2003 revenues. Cost of Sales.Consolidated cost of sales decreased from 52% of net revenues in 2002 to 45%
in 2003. Cost of sales classified by our reportable segments is as follows: In thousands
    
    
    2003
    
    
    2002Transaction Services
    
    
    $
    15,893
    
    
    $
    8,793Laboratory Communication Solutions
    
    
    
    16,528
    
    
    
    17,223$
    32,421
    
    
    $
    26,016
 Cost of sales in our Transaction Services segment consists of transaction fees, services
and license fees, third-party electronic transaction processing costs, certain telecommunication
and co-location center costs, revenue sharing arrangements with our business partners, third-party
database licenses, and certain labor and certain travel expenses. Cost of sales as a percentage of
revenues in this segment was 34% in the 2003 period compared to 39% in the same period last year
primarily due to a change in the mix of transaction types from higher cost patient statements to
lower cost sales of data and claims and real-time transactions (such as eligibility verification)
through additional transactions acquired from MedUnite. In 2003, we reclassified direct labor and manufacturing overhead from selling, general and
administrative expenses to cost of tangible products sold to better reflect the production of
tangible products. All prior periods have a similar reclassification. As a result, cost of sales
in the Laboratory Communication Solutions segment includes hardware, third-party software,
consumable materials, direct manufacturing labor and indirect manufacturing overhead. Cost of
sales as a percentage of revenues in this segment increased to 66% for 2003 compared to 62% for
2002 primarily due to a change in the mix from lower cost leases to higher cost contract
manufacturing. Selling, General and Administrative Expenses.Consolidated SG&A increased for 2003 by $15.7
million, or 78%, to $35.8 million from consolidated SG&A of $20.2 million for 2002. Consolidated
SG&A expenses as a percentage of consolidated revenues increased to 50% for 2003 compared to 40% in
2002. SG&A expenses classified by our reportable segments are as follows: In thousands
    
    
    2003
    
    
    2002Transaction Services
    
    
    $
    26,645
    
    
    $
    11,430Laboratory Communication Solutions
    
    
    
    5,526
    
    
    
    6,128Corporate
    
    
    
    3,638
    
    
    
    2,594$
    35,809
    
    
    $
    20,152
 SG&A expenses in the Transaction Services segment increased 133% during 2003 over the
same period last year, primarily due to the incremental expenses incurred in the operations of
MedUnite, costs related to our HIPAA compliance efforts, implementation staffing and
sales/marketing programs implemented since last year. Segment SG&A expenses as a percentage of
segment net revenues increased to 57% for 2003 compared to 51% in 2002 due to the higher expense
run rate in the MedUnite operations earlier in the 2003 period compared to our 38




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existing business. While we incurred significant SG&A costs related to the MedUnite
operations in the first quarter of 2003, we were successful at significantly reducing the monthly
operating expenses in the second and third quarters of 2003 and thus achieving much improved
results in the second half of the year. We were successful in eliminating or renegotiating
substantial telecommunication expenses and duplicative contact management, human resources and
customer relationship management systems. However, this improvement was somewhat offset as the
development projects related to the integration of MedUnite were moved into production resulting in
a decrease in the amount of capitalized development related to our real-time and
Phoenix platforms. By the end of the 2003 period based on our unaudited fourth
quarter results, SG&A expenses in this segment were 51% of segment revenues and indicative of the
run rate we expected for a combined operation. SG&A expenses in our Laboratory Communication Solutions segment decreased by 10% in the 2003
period from the same period last year primarily due to cost cutting measures implemented in the
third quarter of 2002. Segment SG&A expenses as a percentage of segment net revenues remained the
same at 22% for both periods. Corporate SG&A expenses increased 40% for the 2003 period compared to the same period of last
year due to increased insurance premiums, professional fees and personnel costs. We expect our
Corporate SG&A expenses to increase in 2004 as a result of our compliance efforts related to the
Sarbanes-Oxley Act of 2002 and financial systems consolidation plans for 2004. Depreciation and Amortization.Consolidated depreciation and amortization increased by $3.7
million to $6.3 million for 2003 from $2.6 million for 2002. This increase was primarily due to
$1.5 million for the amortization of intangible assets acquired in the MedUnite acquisition, which
includes amortization of ProxyMed.net, our real-time network based on the technology platform
acquired from MedUnite, and the amortization of the customer relationships acquired from MedUnite.
Amortization of intangible assets related to additional capitalized software development increased
in late 2003 as we placed the Phoenix platform into production and commenced the
amortization of this asset. Depreciation and amortization classified by our reportable segments is
as follows: In thousands
    
    2003
    
    
    2002Transaction Services
    
    $
    4,754
    
    
    $
    1,581Laboratory Communication Solutions
    
    
    1,369
    
    
    
    857Corporate
    
    
    193
    
    
    
    198$
    6,316
    
    
    $
    2,636
 Loss on Disposal of Assets.As a result of the consolidation of the ProxyMed and MedUnite
offices in Atlanta during 2003, we recorded $0.1 million in net losses primarily related to the
disposition of certain assets owned and leased that were acquired in the acquisition of MDP
Corporation in 2001. Write-off of Impaired and Obsolete Assets.As a result of our periodic review for impairment,
we wrote off $0.5 million in customer relationships related to our 2002 acquisitions of KenCom and
MDIP and $0.1 million in capitalized software during the 2003 period. During 2002, we wrote off
$38,000 in capitalized programming costs in connection with the development of our real-time
transaction processing applications as a result of acquiring the same functionality in the software
platforms acquired from MedUnite. These write-offs are expected to lower amortization expense by
$0.1 million in 2004. Impairment charges classified by our reportable segments are as follows: 39




---



##### 



In thousands
    
    2003
    
    
    2002Transaction Services
    
    $
    193
    
    
    $
    38Laboratory Communication Solutions
    
    
    348
    
    
    
    $
    541
    
    
    $
    38
 Operating Income (Loss).As a result of the foregoing, consolidated operating loss for
2003 was $3.6 million compared to operating income of $1.3 million for 2002. Operating income
(loss) classified by our reportable segments is as follows: In thousands
    
    2003
    
    
    2002Transaction Services
    
    
    (920
    )
    
    $
    597Laboratory Communication Solutions
    
    
    1,119
    
    
    
    3,535Corporate
    
    
    (3,841
    )
    
    
    (2,792
    )$
    (3,642
    )
    
    $
    1,340
 Other Income (Expense), net.In conjunction with our distribution and marketing agreement
with PlanVista for claims re-pricing services signed in June 2003, we received a warrant to
purchase up to 15% of PlanVista common stock that expired in December 2003. The warrant was
initially valued at $0.5 million and recorded as an asset. Upon expiration of the warrant in
December 2003, we recorded an impairment loss in the amount of $0.5 million (representing the
original value of the warrant) for the 2003 year. Interest income (expense), net.Consolidated net interest expense was $0.9 million compared
to net interest income of $0.3 million for 2002. This increase in expense is primarily due to
interest related to ProxyMeds convertible debt issued to the former owners of MedUnite and the
financing of certain liabilities of MedUnite during the 2003 period, and lower interest income
earned on a smaller investment base at lower interest rates. Net Income (Loss). As a result of the foregoing, consolidated net loss for 2003 was $5.0
million compared to net income of $2.0 million for 2002. Deemed Dividends and Other Charges.We did not incur deemed dividends and other charges
during 2003. During 2002, we incurred deemed dividends and other charges of $0.6 million as a
result of non-cash accounting charges for the conversion of 31,650 preferred shares into 242,510
shares of common stock by our Series C preferred shareholders in 2002 pursuant to our offer to
convert their shares commencing in December 2001. Net Income (Loss) Applicable to Common Shareholders.As a result of the foregoing, we
reported net loss applicable to common shareholders of $5.0 million for 2003 compared to a net
income applicable to common shareholders of $1.3 million for 2002. Liquidity and Capital Resources In 2004, net cash provided by operating activities totaled $1.8 million, and included $4.0
million to pay certain acquisition-related expenses of PlanVista outstanding as of the effective
date of the acquisition. Cash provided by investing activities totaled $0.7 million and consisted
primarily of $0.8 million in net cash acquired from PlanVista and $4.5 million received from the
sale of our contract manufacturing assets, offset by $0.9 million in costs related to the
acquisitions of PlanVista and MedUnite and $4.3 million in capital expenditures and capitalized
software. Cash provided by financing activities totaled $4.5 million and consisted of 40




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a $24.1 million private placement of our common stock, proceeds from the exercise of stock options and warrants
for $8.8 million, and offset by $28.3 million in repayments of notes payable, other long-term
debt, and payments related to capital leases (including $27.4 million for the retirement of debts
and other obligations of PlanVista upon the consummation of the acquisition). In 2003, net cash provided by operating activities totaled $1.5 million. Cash used for
investing activities totaled $9.6 million and consisted primarily of payments of costs related to
the acquisition of MedUnite, capital expenditures and capitalized software. Cash used in financing
activities totaled $3.0 million mainly due to repayments of notes payable, other long-term debt,
and payments related to capital leases. We had cash and cash equivalents totaling $12.4 million as of December 31, 2004 compared to
$5.3 million at December 31, 2003. These available funds will be used for operations, strategic
acquisitions, the further development of our products and services, repayment of debt and other
general corporate purposes. We continue to evaluate other acquisition opportunities and strategic
alternatives that may add synergies to our product offerings and business strategy. On March 2, 2004, we acquired PlanVista through the issuance of 3,600,000 shares of our common
stock (valued at $59.8 million). In addition, we raised an additional $24.1 million in a private
placement sale of our common stock and drew down $4.4 million on our asset-based line of credit.
These funds, along with available cash resources, were used to satisfy $27.4 million of PlanVistas
debt and other obligations outstanding as of the effective time of the acquisition. We do not have any material commitments for any other capital expenditures; however, we have
budgeted approximately $4.0 million for capital expenditures and capitalized development for 2005. In 2004, we spent $3.4 million towards hardware and software costs primarily related to our
technical infrastructure and administrative systems. We have also spent $0.9 million towards
capitalized development of our internal systems. Furthermore, in 2004, we have incurred costs of
approximately $1.7 million in connection with the implementation of our internal control procedures
mandated by the Sarbanes-Oxley Act of 2002 and with our financial system consolidation efforts. We have also spent the better part of two years on HIPAA compliance efforts, which has
resulted in significant costs. We now have over 98% of our total transaction volume migrated to a
HIPAA compliant connection to our payer customers. However, on our submitter customer side, 85% of
our providers continue to submit their transactions to us in legacy formats and rely on us to help
meet HIPAA format requirements. Our continued efforts on the submitter side for HIPAA compliance
will force us to continue to spend additional funds in the future. At the time of our acquisition of PlanVista, there existed several pending and threatened
preacquisition contingencies. We settled and/or had dismissed the majority of these cases before
December 31, 2004 resulting in payments of approximately $0.7 million in 2004 and a net payment of
$0.2 million in January 2005. As of the filing of this report, two significant preacquisition
contingencies remain unresolved. One of these cases is a class action suit for which we cannot
estimate any range of settlement at this time. The other case is still in mediation and we have
estimated a minimum settlement of $0.6 million for which we have accrued this amount at December
31, 2004. In December 2003, we closed on a $12.5 million asset-based line of credit with our commercial
bank. Borrowing under such facility is subject to eligible cash, accounts receivable, and
inventory and other conditions. Borrowings bear interest at the prime rate plus 0.5% or at LIBOR
plus 2.25% (or LIBOR plus 0.75% in the case of borrowings against eligible cash only). As a result
of our acquisition of PlanVista, we drew down $4.4 million against this line at the end of February
2004 (which was repaid in early March 2004). In
2002, cash provided by operating activities was $2.8 million.
During this period, we paid $9.1 million for our acquisition of
Medunite and paid $5.3 million for two other acquisitions; paid
$0.7 million for purchase of certain customer relationships;
paid in full our $7.0 million promissory note related to a 2001
acquisition; and paid $2.0 million for fixed assets and
capitalized software. These activities were principally financed
through a private placement of our common stock valued at
$25.0 million in April 2002, proceeds of $0.5 million from
the exercise of B warrants, and available cash resources. 41




---



##### 



outstanding as of March 31, 2004 that we repaid in April 2004. With extensions granted by the
commercial bank, this line of credit will expire on April 30, 2005. As of March 8, 2005, we have executed a term sheet with the bank to expand and
extend its current line of credit. The bank will receive first lien security on all ProxyMed
assets including all subsidiaries. We expect to repay the note the
Company assumed as part of the
PlanVista acquisition through the proceeds of this expanded line of credit and its current cash
balances prior to the due date of the assumed note. As noted above, with our acquisition of PlanVista, we utilized the $24.1
million in proceeds raised from our private placement, drew $4.4 million on our line of credit and
used available cash to satisfy $27.4 million of PlanVistas debt and other obligations and expenses
outstanding as of the effective time of the acquisition. As a result of the acquisition, we
acquired a cash flow positive company with $20.4 million in senior debt due in May 2005 (originally
at an interest rate of 6% until December 2004 when the interest rate increased to 10%). The
Company is currently negotiating financing with a bank to provide
funds to be used with existing cash balances to make the May 31,
2005 $17.4 million payment related to the debt assumed in the
PlanVista Acquisition. If the Company is unable to arrange this
financing and is unable to make this balloon payment, the Company may
be unable to continue as a going concern. The following table represents our contractual cash obligations due over the next several
years. Operating leases are shown net of any sublease agreements. In thousands
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Interest on convertible notes (1)
    
    $
    526
    
    
    $
    525
    
    
    $
    525
    
    
    $
    526
    
    
    $
    Interest on senior and other debt
    
    
    744
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible notes (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,137
    
    
    
    Senior debt
    
    
    18,394
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Notes payable (2)
    
    
    1,678
    
    
    
    206
    
    
    
    
    
    
    
    
    
    
    
    Litigation settlement (3)
    
    
    175Capital lease obligations (2)
    
    
    5
    
    
    
    6
    
    
    
    1
    
    
    
    
    
    
    
    Operating leases
    
    
    1,624
    
    
    
    1,415
    
    
    
    1,418
    
    
    
    1,013
    
    
    
    781Total
    
    $
    23,146
    
    
    $
    2,152
    
    
    $
    1,944
    
    
    $
    14,676
    
    
    $
    781
   (1)
    
    Assumes no conversion of convertible notes(2)
    
    Includes principal and interest(3)
    
    Net of insurance reimbursement We believe that we have sufficient cash and cash equivalents on hand to fund our future
operational requirements and capital expenditures, and a sufficient level of capital in order to
fund specific research and development projects or to pursue smaller additional strategic
acquisitions. We expect to refinance the PlanVista debt, by obtaining a new senior line of credit
in order to satisfy this debt on or before maturity. If we require additional funding in the
future to satisfy any of our outstanding future obligations, or further our strategic plans, there
can be no assurance that any additional funding will be available to us, or if available, that it
will be available on acceptable terms. If we are successful in obtaining additional financing, the
terms of the financing may have the effect of significantly diluting or adversely affecting the
holdings or the rights of the holders of our common stock. We believe that if we are not
successful in obtaining additional financing for further product development or strategic
acquisitions, such inability may adversely impact our ability to successfully execute our business
plan and may put us at a competitive disadvantage. 42




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##### 



Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based on
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of our consolidated
financial statements requires us to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or
conditions, but we believe that any variation in results would not have a material effect on our
financial condition. We evaluate our estimates on an ongoing basis. We believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements. For a detailed
discussion on the application of these and other accounting policies, see Note 1 in the Notes to
Consolidated Financial Statements beginning on Page F-8. Revenue Recognition  Revenue is derived from our Transaction Services and Laboratory
Communication Solutions segments. In our Transaction Services segment, we provide transaction and value-added services
principally between healthcare providers and insurance companies, and physicians and pharmacies.
Such transactions and services include EDI claims submission and reporting, insurance eligibility
verification, claims status inquiries, referral management, electronic remittance advice, patient
statement processing, encounters, and cost containment transaction services including claims
repricing and bill renegotiation. In our Laboratory Communication Solutions segment, we sell, rent
and service intelligent remote reporting devices and provide lab results reporting through our
software products. Transaction Services revenues are derived from insurance payers, pharmacies and submitters
(physicians and other entities including billing services, practice management software vendors,
and claims aggregators). Such revenues are recorded on either a per transaction fee basis or on a
flat fee basis (per physician, per tax ID, etc.) and are recognized in the period the service is
rendered. Agreements with payers or pharmacies are for one to three years on a non-exclusive
basis. Agreements with submitters are for one year, renew automatically, and are generally
terminable thereafter upon 30 to 90 days notice. Transaction fees vary according to the type of
transaction and other factors, including volume level commitments. Revenue from Medical Cost Containment business in our Transaction Services segment is
recognized when the services are performed and are recorded net of their estimated allowance.
These revenues are primarily in the form of fees generated from the discounts we secure for the
payers that access our provider network. We enter into agreements with healthcare payer customers
that require them to pay a percentage of the cost savings generated from our network discounts with
participating providers. These agreements are generally terminable upon 90 days notice. Revenue
from a percentage of savings contract is generally recognized when the related claims processing
and administrative services have been performed. The remainder of the revenue from our Medical
Cost Containment business is generated from customers that pay a monthly fee based on eligible
employees enrolled in a benefit plan covered by our health benefits payers clients. Also in our Transaction Services segment, certain transaction fee revenue is subject to
revenue sharing pursuant to agreements with resellers, vendors or gateway partners and is recorded
as gross revenues in accordance with EITF No. 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent. Such 43




---



##### 



revenue sharing amounts are based on a per transaction amount or a percentage of revenue basis and
may involve increasing amounts or percentages based on transaction or revenue volumes achieved. Revenue from certain up-front fees charged primarily for the development of EDI for payers and
the implementation of services for submitters in our Transaction Services segment is amortized
ratably over three years, which is the expected life of the customer in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB No. 104). Revenue from support and maintenance contracts on our products in both our Transaction
Services and Laboratory Communication Solutions segments is recognized ratably over the contract
period, which does not exceed one year. Such amounts are billed in advance and established as
deferred revenue. In our Laboratory Communication Solutions segment, revenue from sales of inventory and
manufactured goods is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable and collectibility is probable in accordance with SAB
No. 104. Revenues from maintenance fees on laboratory communication devices are charged on an annual or
quarterly basis and are recognized ratably over the service period. Service fees may also be
charged on a per event basis and are recognized after the service has been performed. Revenue from the rental of laboratory communication devices is recognized ratably over the
applicable period of the rental contract. Such contracts require monthly rental payments and are
for a one to three year term, then renewing to a month to month period after the initial term is
expired. Contracts may be cancelled upon 30 days notice. A significant amount of rental revenues
are derived from contracts that are no longer under the initial non-cancelable term. At the end of
the rental period, the customer may return or purchase the unit for fair market value. Upon sale
of the 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. Goodwill  We adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets effective January 1, 2002. Under SFAS No.
142, goodwill is reviewed at least annually for impairment. SFAS No. 142 requires that goodwill be
tested for impairment at the reporting unit level at adoption and at least annually thereafter,
utilizing a fair value methodology versus an undiscounted cash flow method required under
previous accounting rules. In accordance with our adoption of SFAS No. 142, we completed our most
recent annual test at December 31, 2004 utilizing cash-flow
based market comparables in assessing fair value for
our goodwill impairment testing and we concluded that there was no
impairment of our goodwill. To the extent that future cash flows
differ from those projected in our analysis, fair value of our
goodwill may be affected and may result in an impairment change. Capitalized Software Development and Research and Development  Costs incurred
internally and fees paid to outside contractors and consultants during the application development
stage of our internally used software products are capitalized. Costs of upgrades and major
enhancements that result in additional functionality are also capitalized. Costs incurred for
maintenance and minor upgrades are expensed as incurred. All other costs are expensed as incurred
as research and development expenses and are included in selling, general and administrative
expenses. Application development stage costs generally include software configuration, coding,
installation to hardware and testing. Once the project is completed, capitalized costs are
amortized over their remaining estimated economic life. Our judgment is used in determining
whether costs meet the criteria for immediate expense or capitalization. We periodically review
projected cash flows and other criteria in assessing the impairment of any internal-use capitalized
software and take impairment charges as needed. Purchased
Technology and Other Intangibles Assets  Purchased technology and other intangible
assets are amortized on a straight line basis over their estimated useful lives of 4.6 to 12
years. The carrying values of purchased 44




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technology and intangible assets are reviewed if the facts and circumstances indicate that they may
be impaired. This review indicates whether assets will be recoverable based on future expected cash
flows, and, if not recoverable, whether there is an impairment of
such assets. Reserve
for Doubtful Accounts/Revenue Allowances/Bad Debt Estimates  We rely on estimates to determine
revenue allowances, the bad debt expense and the adequacy of the reserve for doubtful accounts receivable. These
estimates are based on our historical experience and the industry in which we operate. If the
financial condition of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. Additionally, in our Medical Cost
Containment business, we evaluate the collectibility of our accounts receivable based on a
combination of factors. In circumstances where we are aware of a specific customers inability to
meet its financial obligations to us, we record a specific reserve for bad debts against amounts
due to reduce the net recognized receivable to the amount we reasonably believe will be collected.
For all other customers, we recognize revenue reserves based on past write-off history,
average percentage of receivables written off historically, and the length of time the receivables
are past due. To the extent historical credit experience is not indicative of future performance
or other assumptions used by management do not prevail, loss experience could differ significantly,
resulting in either higher or lower future provision for losses. 45




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New Accounting Pronouncements In September 2004, the Financial Accounting Standards Board (FASB) issued EITF No. 04-8,
Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on
Diluted Earnings per Share (EITF No. 04-8). EITF No. 04-8 addresses when the dilutive effect of
contingently convertible debt instruments should be included in diluted earnings per share and
requires that contingently convertible debt instruments are to be included in the computation of
diluted earnings per share regardless of whether the market price or other trigger has been met.
EITF No. 04-8 also requires that prior period diluted earnings per share amounts presented for
comparative purposes be restated. EITF No. 04-8 is effective for reporting periods ending after
December 15, 2004. As a result of the issuance of EITF No. 04-8, shares convertible from our $13.1
million convertible notes may be required to be included in the calculation of our earnings per
share in periods of net income; however, the FASB has yet to reach a conclusion as to the effect of
non market price triggers on earnings per share calculations in situations where the instrument
contains only non-market price trigger, such as our convertible
notes, and therefore the impact on the consolidated financial
statements is not determinable at this time. In December 2004, the FASB issued SFAS No. 123R, Shared-Based Payments (Revised 2004).
SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and
supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
and its related guidance. SFAS No. 123R requires public entities to measure the cost of employee
services received in exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). That cost will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments and will be recognized and expensed
over the period which an employee is required to provide service in exchange for the award (usually
the vesting period). Fair value is based on market prices (if those prices are publicly
available). If not available, SFAS 123R does not specifically require the use of a particular
model; however, the most common models are the Black-Scholes model and lattice (binomial) models.
Additionally, modifications to an equity award after the grant date will require a compensation
cost to be recognized in an amount equal to the excess of the fair value of the modified award over
the fair value of the award immediately before the modification. The effective date of SFAS No.
123R is for interim and annual reporting periods beginning after
June 15, 2005. We have not completed the process of evaluating
the impact that will result from adopting FASB Statement
No. 123R and are therefore unable to disclose the impact that
adoption will have on our financial position and results of
operations. 46




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Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform
Act of 1995 Statements contained in Managements Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this report may contain information that includes or is
based upon forward-looking statements within the meaning of the Securities Litigation Reform Act of
1995. Forward-looking statements present our expectations or forecasts of future events. These
statements can be identified by the fact that they do not relate strictly to historical or current
facts. They frequently are accompanied by words such as anticipate, estimate, expect,
project, intend, plan, believe, and other words and terms of similar meaning. In
particular, these include statements relating to: our ability to identify suitable acquisition
candidates; our successful integration of PlanVista and any other future acquisitions; our ability
to successfully develop, market, sell, cross-sell, install and upgrade our clinical and financial
transaction services and applications to new and current physicians, payers, medical laboratories
and pharmacies; our ability to compete effectively on price and support services; our ability to
increase revenues and revenue opportunities; and our ability to meet expectations regarding future
capital needs and the availability of credit and other financing sources. All statements other than statements of historical fact are statements that could be deemed
forward-looking statements, including any projections of earnings, revenues, synergies, accretion,
margins or other financial items; any statements of the plans, strategies and objectives of
management for future operations, including the execution of integration and restructuring plans
and the anticipated timing of filings, approvals and closings relating to the merger or other
planned acquisitions; any statements concerning proposed new products, services, developments or
industry rankings; any statements regarding future economic conditions or performance; any
statements of belief; and any statements of assumptions underlying any of the foregoing. Actual results may differ significantly from projected results due to a number of factors,
including, but not limited to, the soundness of our business strategies relative to perceived
market opportunities; our assessment of the healthcare industrys need, desire and ability to
become technology efficient; market acceptance of our products and services; and our ability and
that of our business associates to comply with various government rules regarding healthcare
information and patient privacy. These and other risk factors are more fully discussed starting on
page 20 and elsewhere in this Form 10-K, which we strongly urge you to read. Forward-looking statements are not guarantees of performance. They involve risks,
uncertainties and assumptions. Our future results and shareholder values may differ materially
from those expressed in the forward-looking statements. Many of the factors that will determine
these results and values are beyond our ability to control or predict. Shareholders are cautioned
not to put undue reliance on any forward-looking statements. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. We expressly disclaim any intent or obligation to update any
forward-looking statements. 47




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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We own no derivative financial instruments or derivative commodity instruments. Revenue
derived from international sales is transacted in U.S. Dollars, and therefore, we do not believe
that we are exposed to material risks related to foreign currency exchange rates. We
have a concentration of credit risk in each of our two operating
segments which is further disclosed in Note 16 to the financial
statements. ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and schedule are included beginning at Page F-1. ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE We have not had any disagreement with our accountants on accounting and financial disclosures
during our two most recent fiscal years or any later interim period. We changed external auditors
from PricewaterhouseCoopers, LLP to Deloitte & Touche LLP effective August 16, 2004. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures: Our management, under the supervision and with the participation of the our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), have evaluated the effectiveness of our
disclosure controls and procedures as defined in Securities and Exchange Commission (SEC) Rule
13a-15(e) as of the end of the period covered by this report. Management has concluded that our
disclosure controls and procedures are effective to ensure that information that we are required to
disclose in reports that we file or submit under the Securities Exchange Act is communicated to
management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required
disclosure and is recorded, processed, summarized, and reported within the time periods specified
in the SECs rules and forms. Changes in Internal Control There
have been no changes to our internal control over financial reporting
that occurred during the fourth quarter of 2004, or subsequently,
that have materially affected, or are reasonably likely to materially
affect our internal control over financial
reporting. Managements Annual Report On Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for us. Our internal control over financial reporting is a process
designed by, or under the 48




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supervision of, our CEO and CFO, and effected by our Board of Directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and
procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of consolidated financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and board of directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the consolidated
financial statements. Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures. Internal control over financial
reporting also can be circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or detected on a
timely basis by internal control over financial reporting. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. However, these inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process safeguards to reduce, though not
eliminate, this risk. Management uses the framework in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission, or COSO, to evaluate the effectiveness of
our internal control over financial reporting. Management assessed our internal control over
financial reporting using the COSO framework as of the end of our fiscal year. Based on our
evaluation under the framework in Internal Control  Integrated Framework, we believe our internal
control over financial reporting as of December 31, 2004 was effective. Managements assessment of the effectiveness of
internal control over financial reporting as of December 31,
2004 has been audited by Deloitte & Touche LLP, an independent
public registered accounting firm, which also audited our 2004
consolidated financial statements. Deloitte & Touche LLPs
attestation report on managements assessment of internal
control over financial reporting is set forth herein. 49




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
ProxyMed, Inc.
Atlanta, Georgia We have audited managements assessment, included in the accompanying Managements Annual Report on
Internal Control over Financial Reporting, that ProxyMed, Inc. and
its subsidiaries (the Company) maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment
and an opinion on the effectiveness of the Companys internal control over financial reporting
based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions. A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on
the criteria established in Internal ControlIntegrated
Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal
ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. 50




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We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended December 31, 2004 of the Company, and our report dated
March 16, 2005 expressed an
unqualified opinion on those consolidated financial statements and
financial statement schedule and included an explanatory
paragraph concerning matters that raise substantial doubt about the Companys ability to continue
as a going concern. /s/ Deloitte & Touche
LLPAtlanta, GAMarch 16, 2005 51




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PART III The information required in Item 10 (Directors and Officers of the Registrant) with the
exception of the information required by Item 401 of Regulation of S-K, Item 11 (Executive
Compensation), Item 12 (Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters), Item 13 (Certain Relationships and Related Transactions), and Item
14 (Principal Accountant Fees and Services) is incorporated by reference to our definitive proxy
statement for the 2005 Annual Meeting of Shareholders to be filed with the SEC. Our directors and executive officers are as follows: Name
    
    Age
    
    PositionWilliam L. Bennett (1)(3)
    
    
    55
    
    
    DirectorEdwin M. Cooperman (2)
    
    
    61
    
    
    DirectorGregory J. Eisenhauer, CFA
    
    
    46
    
    
    Executive Vice President, Chief Financial Officer and TreasurerMichael S. Falk
    
    
    43
    
    
    DirectorJohn Paul Guinan
    
    
    44
    
    
    Executive Vice President and Chief Technology OfficerNancy J. Ham
    
    
    43
    
    
    President and Chief Operating OfficerLonnie W. Hardin
    
    
    50
    
    
    Senior Vice President  Payer ServicesThomas E. Hodapp (1)(2)(3)
    
    
    46
    
    
    DirectorBraden R. Kelly (2)
    
    
    34
    
    
    DirectorJeffrey L. Markle
    
    
    56
    
    
    Senior Vice President and President/Chief Operating Officer  PlanVistaKevin M. McNamara
    
    
    49
    
    
    Chairman of the Board and Interim Chief Executive OfficerDavid E. Oles
    
    
    45
    
    
    Senior Vice President, General Counsel and SecretaryJudson E. Schmid
    
    
    43
    
    
    Executive Vice President and Chief Accounting OfficerEugene R. Terry (1)(3)
    
    
    66
    
    
    DirectorTimothy J. Tolan
    
    
    46
    
    
    Executive Vice PresidentThomas C. Wohlford
    
    
    51
    
    
    Senior Vice President  Submitter Services
   (1)
    
    Member of the Audit Committee, the Chairman of which is Mr. Bennett.(2)
    
    Member of the Compensation Committee, the Chairman of which is Mr. Cooperman.(3)
    
    Member of Nominating Committee, the Chairman of which is Mr. Terry. 52




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William L. Bennettwas appointed as a director of ProxyMed in March 2004 in connection
with ProxyMeds acquisition of PlanVista. From January 1998 to March 2004, Mr. Bennett was the
Vice Chairman of the Board of PlanVista. Mr. Bennett served as the Chairman of the Board from
December 1994 to December 1997 and had been a director since August 1994. Since February 2000, Mr.
Bennett has been a partner and is Director of Global Recruiting and Managing Director of Monitor
Company Group, L.P., a strategy consulting firm and merchant bank. From May 1991 to May 2001, he
was a director of Allegheny Energy, Inc., an electric utility holding company. Until March 1995,
Mr. Bennett served as Chairman and Chief Executive officer of Noel Group, Inc., a publicly traded
company that held controlling interests in small to medium-sized operating companies. Previously,
Mr. Bennett was Co-Chairman and Chief Executive officer of Noel Group, Inc. from November 1991 to
July 1994. Mr. Bennett is a director of Sylvan, Inc., a publicly traded company that produces
mushroom spawn and fresh mushrooms. Edwin M. Coopermanhas served as a director of ProxyMed since July 2000. He is a principal of
T.C. Solutions, a privately-held investment and financial services consulting firm. Previously,
Mr. Cooperman was Chairman of the Travelers Bank Group and Executive Vice President, Travelers
Group, where he was responsible for strategic marketing, the integration of Travelers brands and
products, joint and cross marketing efforts and corporate identity strategies, as well as expanding
the Travelers Bank Groups credit card portfolios. After joining Travelers in 1991, Mr. Cooperman
became Chairman and CEO of Primerica Financial Services Group, which comprises Primerica Financial
Services, Benefit Life Insurance Company and Primerica Financial Services Canada. Previous to
this, Mr. Cooperman served at American Express where he became Chairman and Co-Chief Executive of
Travel Related Services, North America. Mr. Cooperman is also a director of Grannum Value Mutual
Fund. Gregory J. Eisenhauer, CFAjoined ProxyMed in December 2003 and currently serves as Executive
Vice President and Chief Financial Officer of ProxyMed. Before joining ProxyMed, he served as
Executive Vice President, Chief Financial Officer and Secretary for U.S. Healthworks, a national
occupational healthcare services company headquartered in Alpharetta, Georgia. From 1993 to 2002,
Mr. Eisenhauer was with RehabCare Group (NYSE: RHB), a company that grew from $40 million in
revenue to over $500 million in revenue during his tenure, which culminated in Mr. Eisenhauers
appointment as Senior Vice President, Chief Financial Officer and Secretary. Prior to RehabCare,
he was with Sverdrup Corporation and APEX Oil. Mr. Eisenhauer is a Chartered Financial Analyst and
has an MBA in finance from the University of St. Louis and an undergraduate finance degree from the
University of Missouri-Columbia. Michael S. Falkhas served as a director of ProxyMed since July 2000. Mr. Falk is the
co-founder of Commonwealth Associates L.P., a New York-based merchant bank founded in 1988, and
served as Chairman and Chief Executive Officer from 1995 until 2002. Currently, he is Chairman and
Chief Executive Officer of Commonwealth Associates Group Holdings, and a managing partner of
ComVest Investment Partners and various related investment partnerships. He currently serves as a
director of the CARE fund. Mr. Falk is Chairman of Comdial Corporation and was a director of
PlanVista Corporation. Mr. Falk holds a B.A. degree in Economics from Queens College and attended
the Stanford University Executive Program for Smaller Companies. John Paul Guinanjoined ProxyMed in April 1993 and currently serves as Executive Vice
President and Chief Technology 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., 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 53




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POSitive Thinking, Inc., a software development company which specialized in point-of-sale systems.
He received both a B.S. degree in Computer Science and a Juris Doctor degree from the University
of Miami. Nancy J. Hamjoined ProxyMed in October 2000 and currently serves as President and Chief
Operating Officer. Prior to joining ProxyMed in October 2000, Ms. Ham served as General Manager,
Institutional and Connectivity Services of Healtheon/WebMD Corporation from June 1999 to March
2000. She originally joined Healtheon in May 1998 with its acquisition of ActaMed Corporation,
where she had served as Chief Financial Officer and Senior Vice President, Business Development.
Upon the merger with WebMD Corporation, she became General Manager. Before joining ActaMed in
1993, Ms. Ham was a Director, Corporate Finance at Equifax, Inc. from 1992 to 1993, and prior to
that spent five years with GE Capitals Corporate Finance Group. Ms. Ham has a B.A. from Duke
University and a Masters in International Business Studies from the University of South Carolina. Lonnie W. Hardinjoined ProxyMed in
November 1997 and since October 2000 has been serving as Senior Vice
President of Payer Services and from November 1997 to October 2000 as the Senior Vice President of
Field Claims Operations. Prior to joining ProxyMed, Mr. Hardin was employed by US Health Data
Interchange, Inc. from 1991 through 1997, during which time he held the positions of Vice President
- Sales/Marketing and General Manager. Thomas E. Hodapphas served as a director of ProxyMed since July 2000. In 1999, Mr. Hodapp
founded Access Capital Management, a private banking and management firm dedicated to providing
financial and strategic advisory services to select, early stage private healthcare and information
technology companies. From 1992 to 1998, Mr. Hodapp was a Managing Director for Robertson Stephens
& Company, LLC, a leading international investment banking firm, overseeing the firms Healthcare
Managed Care Research Group, with a focus on the managed care, practice management and healthcare
information services industries. From 1988 to 1992, he was with Montgomery Medical Ventures, a
venture firm focused on the biotechnology, medical device and healthcare service fields. MMV I and
II actively managed long-term investments in over 40 early stage companies, many of which the firm
was involved in co-founding. Prior to that, Mr. Hodapp researched the healthcare industry as an
industry analyst with Goldman, Sachs & Company, S.G. Warburg Securities and Volpe & Covington.
Additionally, Mr. Hodapp has been published in a number of major financial and healthcare industry
journals and publications, was a two-time selection to the Wall Street Journal Research Analyst
All-Star Team, and is a frequent speaker at national healthcare investment and strategy forums. Braden R. Kellywas appointed director of ProxyMed in April 2002. Mr. Kelly is a Managing
Member of General Atlantic Partners, LLC, a private equity investment firm that invests in
information, communications and media companies on a global basis, where he has been employed in
various capacities since 1995. Prior to joining General Atlantic, Mr. Kelly was a member of the
Mergers, Acquisitions, and Restructurings Department at Morgan Stanley & Co. He also serves as a
director of Eclipsys Corporation, Tickets.com, HEALTHvision, Inc. and Schaller Anderson, Inc. Mr.
Kelly received his B.A. in Finance and Business Economics from the University of Notre Dame. Jeffrey L. Marklejoined ProxyMed in March 2004 and currently serves as Senior Vice President
of the Company and President/Chief Operating Officer of PlanVista. Before joining ProxyMed, Mr.
Markle served as the President and Chief Operating Officer of PlanVista since May 2001 and served
as a director from July 2001 to April 2002. From July 1999 to May 2001, Mr. Markle was the
Executive Vice President  Medical Cost Management and from June 1998 to June 1999, Mr. Markle was
the Senior Vice President  Medical Loss Management. From 1996 to 1998, Mr. Markle was Vice
President of the US Group Operations for Swiss Re Life & Health, a reinsurance company in Toronto.
From 1994 to 1996, he was Vice President and General Manager of the Canadian Operations of Osten
Kimberly Quality Care, a home healthcare company. From 1991 to 1993, he was Chief Operating
Officer of Medisys Health Group, Inc., a preventive healthcare company in Canada, 54




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and from 1989 to 1991 he was President and Chief Executive Officer of Oaurentian Health
Services, an executive and occupational health services company. Kevin M. McNamarawas appointed as a director of ProxyMed in September 2002 and has served as
Chairman of the Board and Interim Chief Executive Officer since December 2004. Mr. McNamara
currently serves as Chief Financial Officer of HCCA International, Inc., a healthcare management
and recruitment company and expects to become the Chief Financial
Officer of Newquest Holdings, Inc. in April 2005. Newquest is an HMO
based in Nashville, TN that focuses mainly on providing health
coverage to medical beneficiaries. From November 1999 until February 2001, Mr. McNamara served as Chief
Executive Officer and a director of Private Business, Inc., a provider of electronic commerce
solutions that help community banks provide accounts receivable financing to their small business
customers. From 1996 to 1999, Mr. McNamara served as Senior Vice President and Chief Financial
Officer of Envoy. Before joining Envoy, he served as president of NaBanco Merchant Services
Corporation, then one of the worlds largest merchant credit card processors. Mr. McNamara
currently serves on the Board of Directors of Luminex Corporation, a medical device company, Comsys
IT Partners, and information technology staffing company and several private companies. He is a
Certified Public Accountant and holds a B.S. in Accounting from Virginia Commonwealth University
and a Masters in Business Administration from the University of Richmond. David E. Olescurrently serves as Senior Vice President, General Counsel, and Secretary of
ProxyMed. Prior to joining ProxyMed in April 2004, Mr. Oles served as Vice President and Associate
General Counsel of NDCHealth Corporation. From 1998 through 2000, Mr. Oles engaged in the private
practice of law as an associate in the Healthcare group of the law firm of Alston & Bird LLP in
Atlanta, Georgia, and in the healthcare corporate group of Reed Smith Shaw and McClay, LLP from
1996 through 1998. Mr. Oles received his J.D. from Harvard Law School, and his M.B.A. and B.B.A.
from the University of Memphis. Judson E. Schmidjoined ProxyMed in April 1996 and currently serves as Executive Vice
President and Chief Accounting Officer of ProxyMed. From October 2000 to December 2003, he was
ProxyMeds Chief Financial Officer. From April 1996 to October 2000, he was ProxyMeds Vice
President  Corporate Finance and Corporate Controller. From August 1994 to September 1995, Mr.
Schmid was the Corporate Controller for CardioLife Corporation, a privately-held medical provider
of transtelephonic cardiac monitoring services. From September 1990 to August 1994, he was the
Corporate Controller of Sports-Tech International, Inc., a publicly-held developer and supplier of
computer-controlled video editing systems for the sports industry. From September 1985 to
September 1990, he worked as an Audit Supervisor for two public accounting firms, including KPMG.
Mr. Schmid received his undergraduate degree at the University of Florida and his Masters of
Accounting at Florida Atlantic University. Mr. Schmid is a certified public accountant in Florida
(inactive status elected). Mr. Schmid has resigned from ProxyMed and is expected to terminate his
employment at the end of March 2005. Eugene R. Terryhas been a director of ProxyMed since August 1995. Mr. Terry is a pharmacist
and is a principal of T.C. Solutions, a privately-held investment and financial services consulting
firm. Since 2004, Mr. Terry has served as a consultant for MSO Medical, a bariatric surgery
management company. Until 2001, Mr. Terry was a director on the board of In-Home Health, a home
healthcare company acquired by Manor Care, Inc. 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. Mr. Terry is a consultant and Board
member in MSO and also a director of HCM, a prescription auditing firm. Timothy J. Tolanjoined ProxyMed in January 2001 and currently serves as Executive Vice
President. Mr. Tolan previously served as ProxyMeds Executive Vice President of Business
Development beginning in June 2003. Before joining ProxyMed, Mr. Tolan was Vice President of Sales
for ePhysician, Inc from May 2000 until his appointment at ProxyMed. He was Vice President of
Sales  Lab/PBM for Healtheon/WebMD 55




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Corporation from August 1998 through May 2000. Prior to Healtheon/WebMD, Mr. Tolan also held the
position of Vice President of Sales  Eastern Region for CITATION Computer Systems, a laboratory
information system company. Prior to CITATION, Mr. Tolan spent twelve years in the physician
practice management market. Thomas C. Wohlfordjoined ProxyMed as Senior Vice President of Submitter Services as part of
the MedUnite acquisition. Mr. Wohlford was Vice President of Operations at MedUnite since January
2002. Prior to joining MedUnite, Mr. Wohlford was Vice President of Strategic Partnering with
Helus, Inc., a Chicago based e-health company. From 1993 to 1999, Mr. Wohlford held executive
positions with CNA Health Partners (formerly CoreSourceBurgett & Dietrich) and CNA. From 1989 to
1993, Mr. Wohlford was responsible for healthcare cost containment for Georgia-Pacific Corporation.
Prior to joining G-P, he led all network development for Travelers Health Network as Vice
President of Network Development from 1986 to 1989. 56




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##### 



PART IV ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Page(a)
    
    
    (1
    )
    
    The following financial statements are included in Part II,
Item 8:Consolidated
Financial Statements:Report of
Independent Registered Public Accounting Firm
    
    F-2Report of
Independent Registered Public Accounting Firm
    
    F-3Consolidated Balance Sheets  December 31, 2004 and 2003
    
    F-4Consolidated Statements of Operations  Years Ended December 31,
2004, 2003 and 2002
    
    F-5Consolidated Statements of Stockholders Equity  Years Ended
December 31, 2004, 2003 and 2002
    
    F-6Consolidated Statements of Cash Flows  Years Ended December 31,
2004, 2003 and 2002
    
    F-7Notes to Consolidated Financial Statements
    
    F-8  F-48(2
    )
    
    The following schedule for the years 2004, 2003 and 2002 is
submitted herewith:Schedule II  Valuation and Qualifying Accounts -
Years Ended December 31, 2004, 2003 and 2002
    
    F-49(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 60 through 65.
 57




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##### 



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 16, 2005
    PROXYMED, INC.By:
    /s/ Kevin M. McNamaraKevin M. McNamaraInterim Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Kevin M. McNamara and Gregory J. Eisenhauer and each of them, his true and lawful
attorney-in-fact and agents, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. SIGNATURES
    
    TITLE
    
    DATE/s/ Kevin M. McNamara

Kevin M. McNamara
    
    Chairman of the Board and
Interim Chief Executive
Officer (principal
executive officer)
    
    March 16, 2005/s/Gregory J. Eisenhauer

Gregory J. Eisenhauer, CFA
    
    Executive Vice President
and Chief Financial
Officer (principal
financial and accounting
officer)
    
    March 16, 2005/s/ William L. Bennett

William L. Bennett
    
    Director
    
    March 16, 2005/s/ Edwin M. Cooperman

Edwin M. Cooperman
    
    Director
    
    March 16, 2005/s/ Michael S. Falk

Michael S. Falk
    
    Director
    
    March 16, 2005/s/ Thomas E. Hodapp

Thomas E. Hodapp
    
    Director
    
    March 16, 2005/s/ Braden R. Kelly

Braden R. Kelly
    
    Director
    
    March 16, 2005/s/ Eugene R. Terry

Eugene R. Terry
    
    Director
    
    March 16, 2005
 58




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##### 



EXHIBIT INDEX Exhibit No.
    
    Description2.1
    
    
    Agreement and Plan of Merger, dated as of December 5, 2003, by
and among the Registrant, Planet Acquisition Corp. and
PlanVista Corporation (incorporated by reference to Annex A of
the Registration Statement on Form S-4, File No. 333-111024).2.2
    
    
    Agreement and Plan of Merger and Reorganization dated December
31, 2002 between ProxyMed, Inc., Davie Acquisition Corp., and
MedUnite Inc. (incorporated by reference to Exhibit 2.1 of
Form 8-K File No. 000-22052, reporting an event dated December
31, 2002).2.3
    
    
    Asset Purchase Agreement dated July 30, 2002 between ProxyMed,
Inc. and MDIP, Inc. (incorporated by reference to Exhibit 2.1
of Form 8-K File No. 000-22052, reporting an event dated July
31, 2002).2.4
    
    
    Stock Purchase Agreement dated May 6, 2002 between ProxyMed,
Inc. and KenCom Communications & Services, Inc. (incorporated
by reference to Exhibit 2.1 of Form 8-K File No. 000-22052,
reporting an event dated May 6, 2002).2.5
    
    
    Stock and Warrant Purchase Agreement between ProxyMed and
General Atlantic Partners 74, L.P., GAP Coinvestment Partners
II, L.P., GAPCO GmbH & Co., KG and GapStar, LLC (incorporated
by reference to Exhibit 10.1 of Form 8-K, File No. 000-22052,
reporting an event dated March 26, 2002).2.6
    
    
    Asset Purchase Agreement dated June 28, 2004 between ProxyMed,
Inc., and Key Communications Services, Inc., and Key
Electronics, Inc. (incorporated by reference to Exhibit 2.1 of
Form 8-K File No. 000-22052, reporting an event dated July 30,
2004).3.1
    
    
    Articles of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form
SB-2, File No. 333-2678).3.2
    
    
    Bylaws, as amended (incorporated by reference to Exhibit 3.1
of the Registration Statement on Form SB-2, File No.
333-2678).3.3
    
    
    Articles of Amendment to Restated Articles of Incorporation of
the Registrant dated March 1, 2004 (incorporated by reference
to Exhibit 3.1 of Form 8-K File No. 000-22052, reporting an
event dated March 2, 2004).3.4
    
    
    Articles of Amendment to Articles of Incorporation of the
Registrant dated May 22, 2002 (incorporated by reference to
Exhibit 3.4 of Form 10-K for the period ended December 31,
2003).3.5
    
    
    Articles of Amendment to Articles of Incorporation of the
Registrant dated December 21, 2001 (incorporated by reference
to Exhibit 3.1 of Form 8-K File No. 000-22052, reporting an
event dated December 13, 2001).3.6
    
    
    Articles of Amendment to Articles of Incorporation dated
August 21, 2001 (incorporated by reference to Exhibit 2.2 of
Form 8-K, File No. 000-22052, reporting an event dated August
17, 2001).3.7
    
    
    Articles of Amendment to Articles of Incorporation dated July
25, 2001 (incorporated by reference to Exhibit 2.1 of Form
8-K, File No. 000-22052, reporting an event dated August 17,
2001).
 59




---



##### 



Exhibit No.
    
    Description3.8
    
    
    Articles of Amendment to Articles of Incorporation of the
Registrant dated July 7, 2000 (incorporated by reference to
Exhibit 3.8 of Form 10-K for the period ended December 31,
2003).3.9
    
    
    Articles of Amendment to Articles of Incorporation of the
Registrant dated June 15, 2000 (incorporated by reference to
Exhibit 3.4 of Form 10-Q/A for the period ended June 30,
2000).4.1
    
    
    Common Stock Purchase Warrants issued to First Data
Corporation (incorporated by reference to Exhibit 10.1 of Form
8-K, File No. 000-22052, reporting an event dated July 8,
2003).4.2
    
    
    Form of 4% Convertible Promissory Notes dated December 31,
2002 issued in connection with the Agreement and Plan of
Merger and Reorganization dated December 31, 2002 between
ProxyMed, Inc., Davie Acquisition Corp., and MedUnite, Inc.
(incorporated by reference to Exhibit 10.1 of Form 8-K File
No. 000-22052, reporting an event dated December 31, 2002).4.3
    
    
    Form of Common Stock Purchase Warrants issued to General
Atlantic Partners 74, L.P., GAP Coinvestment Partners II,
L.P., GAPCO GmbH & Co., KG and GapStar, LLC (incorporated by
reference to Exhibit 10.2 of Form 8-K, File No. 000-22052,
reporting an event dated March 26, 2002).4.4
    
    
    Form of Exchanged Warrant to Purchase Common Stock of the
Registrant dated May 4, 2000, issued to certain investors
(incorporated by reference to Exhibit 4.1 of Form 8-K, File
No. 000-22052, reporting an event dated May 4, 2000).4.5
    
    
    Form of New Warrant to Purchase Common Stock of the Registrant
dated May 4, 2000, issued to certain investors (incorporated
by reference to Exhibit 4.2 of Form 8-K, File No. 000-22052,
reporting an event dated May 4, 2000).4.6
    
    
    Form of Warrant to Purchase Common Stock of the Registrant
dated December 23, 1999, issued to certain investors
(incorporated by reference to Exhibit 4.1 of Form 8-K, File
No. 000-22052, reporting an event dated December 23, 1999).10.1
    
    
    Amended and Restated Registration Rights Agreement among the
Registrant, General Atlantic Partners 77, L.P., General
Atlantic Partners 74, L.P., GAP Coinvestment Partners II,
L.P., GAP Coinvestments III, LLC, GAP Coinvestments IV, LLC,
GapStar, LLC, GAPCO GmbH & Co. KG, PVC Funding Partners, LLC,
ComVest Venture Partners, L.P., Shea Ventures, LLC, and Robert
Priddy, dated March 2, 2004 (incorporated by reference to
Exhibit 4.1 of Form 8-K, File No. 000-22052, reporting an
event dated March 2, 2004).10.2
    
    
    Stock Purchase Agreement, dated as of December 5, 2003 among
the Registrant, General Atlantic Partners 77, L.P., GAP
Coinvestment Partners II, L.P., GapStar, LLC, GAPCO GmbH & Co.
KG, PVC Funding Partners, LLC, ComVest Venture Partners, L.P.,
Shea Ventures, LLC, and Robert Priddy (incorporated by
reference to Exhibit 2.2 of the Registration Statement on Form
S-4, File No. 333-111024).10.3
    
    
    Registration Rights Agreement among the Registrant General
Atlantic Partners 74, L.P., GAP Coinvestment Partners II,
L.P., GapStar, LLC and GAPCO GmbH & Co. KG dated April 5, 2002
(incorporated by reference to Exhibit 10.3 of Form 8-K, File
No. 000-22052, reporting an event dated March 29, 2003).
 60




---



##### 



Exhibit No.
    
    Description10.4
    
    
    Registration Rights Agreement dated December 31, 2002 among
ProxyMed, Inc. and the holders of the 4% Convertible
Promissory Notes (incorporated by reference to Exhibit 10.2 of
Form 8-K File No. 000-22052, reporting an event dated December
31, 2002).10.5
    
    
    Form of Indemnification Agreement for all Officers and
Directors adopted May 22, 2002 (incorporated by reference to
Exhibit 10.55 of Form 10-K for the period ended December 31,
2002).10.6
    
    
    Registration Rights Agreement dated May 6, 2002 ProxyMed, Inc.
and Deborah M. Kennedy and Colleen Phillips-Norton
(incorporated by reference to Exhibit 10.1 of Form 8-K File
No. 000-22052, reporting an event dated May 6, 2002).10.7
    
    
    Registration Rights Agreement between ProxyMed and General
Atlantic Partners 74, L.P., GAP Coinvestment Partners II,
L.P., GapStar, LLC, and GAPCO GmbH & Co. KG (incorporated by
reference to Exhibit 10.3 of Form 8-K, File No. 000-22052,
reporting an event dated March 26, 2002).10.8
    
    
    Employment Letter between ProxyMed and Jeffrey L. Markle
effective March 2, 2004 (incorporated by reference to Exhibit
10.8 of Form 10-K for the period ended December 31, 2003).*10.9
    
    
    Employment Agreement between ProxyMed and Gregory J.
Eisenhauer dated December 8, 2003 (incorporated by reference
to Exhibit 10.9 of Form 10-K for the period ended December 31,
2003).*10.10
    
    
    Employment Agreement between ProxyMed and Tom Wohlford dated
May 13, 2003 (incorporated by reference to Exhibit 10.10 of
Form 10-K for the period ended December 31, 2003).*10.11
    
    
    Employment Agreement between ProxyMed and A. Thomas Hardy
dated December 31, 2001 (incorporated by reference to Exhibit
10.40 of Form 10-K for the period ended December 31, 2001).*10.12
    
    
    Employment Agreement between ProxyMed and Lonnie W. Hardin
dated March 29, 2001 (incorporated by reference to Exhibit
10.1 of Form 10-Q for the period ended March 31, 2001).*10.13
    
    
    Employment Agreement between ProxyMed and Timothy J. Tolan
dated January 23, 2001 (incorporated by reference to Exhibit
10.30 of Form 10-K for the period ended December 31, 2000).*10.14
    
    
    Amendment to Employment Agreement between ProxyMed and Timothy
J. Tolan effective January 1, 2004 (incorporated by reference
to Exhibit 10.15 of Form 10-K for the period ended December
31, 2003).*10.15
    
    
    Employment Agreement between ProxyMed and Michael K. Hoover
dated July 28, 2000 (incorporated by reference to Exhibit 99.1
of Form 10-Q for the period ended September 30, 2000).*10.16
    
    
    Amendment to Employment Agreement between ProxyMed and Michael
K. Hoover effective January 1, 2004 (incorporated by reference
to Exhibit 10.17 of Form 10-K for the period ended December
31, 2003).*10.17
    
    
    Employment Agreement between ProxyMed and Judson E. Schmid
dated September 29, 2000 (incorporated by reference to Exhibit
99.2 of Form 10-Q for the period ended September 30, 2000).*
 61




---



##### 



Exhibit No.
    
    Description10.18
    
    
    Employment Agreement between ProxyMed and Nancy J. Ham dated
October 2, 2000 (incorporated by reference to Exhibit 99.3 of
Form 10-Q for the period ended September 30, 2000).*10.19
    
    
    Amendment to Employment Agreement between ProxyMed and Nancy
J. Ham effective January 1, 2004 (incorporated by reference to
Exhibit 10.20 of Form 10-K for the period ended December 31,
2003).*10.20
    
    
    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).*10.21
    
    
    Form of bonus letter offered to executive and senior
management on February 26, 2002 (incorporated by reference to
Exhibit 10.54 of Form 10-K for the period ended December 31,
2002).*10.22
    
    
    2002 Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.23 of Form 10-K for the period ended December
31, 2003).*10.23
    
    
    2001 Stock Option Plan (incorporated by reference to Exhibit B
of the Proxy Statement filed on June 22, 2001).*10.24
    
    
    2000 Stock Option Plan (incorporated by reference to Exhibit B
of the Proxy Statement filed on June 12, 2000).*10.25
    
    
    2000-1/2 Stock Option Plan (incorporated by reference to
Exhibit C of the Proxy Statement filed on June 12, 2000).*10.26
    
    
    1997 Stock Option Plan (incorporated by reference to Exhibit A
of the Proxy Statement filed on May 6, 1997).*10.27
    
    
    Amended 1993 Stock Option Plan (incorporated by reference to
Exhibit A of ProxyMeds Proxy Statement for its 1994 Annual
Meeting of Shareholders).*10.28
    
    
    1995 Stock Option Plan (incorporated by reference to Exhibit
3.1 of the Registration Statement on Form SB-2, File No.
333-2678).*10.29
    
    
    Subscription Agreement dated December 21, 2001 for the private
placement issuance of up to $8,000,000 of ProxyMed, Inc.
common stock (incorporated by reference to Exhibit 10.1 of
Form 8-K File No. 000-22052, reporting an event dated December
13, 2001).10.30
    
    
    Placement Agency Agreement dated December 18, 2001 between
ProxyMed, Inc. and Commonwealth Associates, L.P. for the
private placement issuance of up to $8,000,000 of ProxyMed,
Inc. common stock (incorporated by reference to Exhibit 10.2
of Form 8-K File No. 000-22052, reporting an event dated
December 13, 2001).10.31
    
    
    Conversion Agreement for Series C 7% Convertible Preferred
shareholder pursuant to conversion offer dated December 13,
2001 (incorporated by reference to Exhibit 10.3 of Form 8-K
File No. 000-22052, reporting an event dated December 13,
2001).
 62




---



##### 



Exhibit No.
    
    Description10.32
    
    
    Designation and Subscription Amendment Agreement for Series C
7% Convertible Preferred shareholder pursuant to conversion
offer dated December 13, 2001 (incorporated by reference to
Exhibit 10.4 of Form 8-K File No. 000-22052, reporting an
event dated December 13, 2001).10.33
    
    
    Loan and Security Agreement by and between ProxyMed, Key
Communications Service, Inc., MedUnite Inc. and Wachovia Bank,
National Association dated December 4, 2003 (incorporated by
reference to Exhibit 10.34 of Form 10-K for the period ended
December 4, 2003).*10.34
    
    
    Revolver Note dated December 4, 2003, issued in connection
with the Loan and Security Agreement by and between ProxyMed,
Key Communications Service, Inc., MedUnite Inc. and Wachovia
Bank, National Association dated December 4, 2003
(incorporated by reference to Exhibit 10.35 of form 10-K for
the period ended December 31, 2003).*10.35
    
    
    Patent and Trademark Security Agreement effective as of
December 4, 2003 between ProxyMed, Key Communications Service,
Inc., MedUnite Inc. and Wachovia Bank, National Association
(incorporated by reference to Exhibit 10.36 of Form 10-K for
the period ended December 31, 2003).*10.36
    
    
    Independent Contractor Agreement between ProxyMed and Kevin M.
McNamara dated December 21, 2004 (incorporated by reference to
Exhibit 99.1 of Form 8-K File No. 000-22052, reporting an
event dated December 21, 2004.10.37
    
    
    Employment Agreement between ProxyMed and David Edward Oles
dated April 14, 2004 (incorporated by reference to Exhibit
10.10 of Form 10-Q for the period ended March 31, 2004).*10.38
    
    
    Amendment to Employment Agreement between ProxyMed and Judson
E. Schmid dated June 2, 2004 (incorporated by reference to
Exhibit 10.2 of Form 10-Q for the period ended June 30,
2004).*10.39
    
    
    Consulting Agreement between ProxyMed and Philip S. Dingle
dated April 13, 2004 (incorporated by reference to Exhibit
10.3 of Form 10-Q for the period ended June 30, 2004).*10.40
    
    
    Letter Agreement dated July 14, 2004 between ProxyMed and
Gregory J. Eisenhauer (incorporated by reference to Exhibit
10.2 of Form 10-Q for the period ended September 30, 2004).*10.41
    
    
    Purchase Agreement dated June 27, 1997 by and between ProxyMed, Inc.
and Walgreen Co.10.42
    
    
    Letter Agreement dated March 8, 2005 between ProxyMed, Inc. and Nancy
J. Ham10.43
    
    
    Letter Agreement dated March 8, 2005 between ProxyMed, Inc. and
Lonnie J. Hardin10.44
    
    
    Letter Agreement dated March 8, 2005 between ProxyMed, Inc. and
Gregory J. Eisenhauer10.45
    
    
    Letter Agreement dated March 8, 2005 between ProxyMed, Inc. and
Jeffrey L. Markle16
    
    
    Letter Regarding Change in Certifying Accountant dated August
16, 2004 from PricewaterhouseCoopers LLP to the Securities and
Exchange Commission (incorporated by reference to Exhibit 16.1
of Form 8-K File No. 000-22052, reporting an event dated
August 11, 2004).21
    
    
    Subsidiaries of the Registrant.23.1
    
    
    Consent of PricewaterhouseCoopers LLP.23.2
    
    
    Consent of Deloitte & Touche LLP.31.1
    
    
    Certification by Kevin M. McNamara, Interim Chief Executive
Officer, pursuant to Exchange Act Rules 13a-14 and 15d-14.
 63




---



##### 



Exhibit No.
    
    Description31.2
    
    
    Certification Gregory J. Eisenhauer, Chief Financial Officer,
pursuant to Exchange Act Rules 13a-14 and 15d-14.32.1
    
    
    Certification by Kevin M. McNamara, Interim Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification by Gregory J. Eisenhauer, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 * Denotes management contract or compensating plan or arrangement. 64




---



##### 



PROXYMED, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule PAGEConsolidated Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    F-2Report of Independent Registered Public Accounting Firm
    
    
    F-3Consolidated Balance Sheets  December 31, 2004 and 2003
    
    
    F-4Consolidated Statements of Operations - Years Ended December 31, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Stockholders Equity - Years Ended December 31, 2004, 2003 and 2002
    
    
    F-6Consolidated Statements of Cash Flows - Years Ended December 31, 2004, 2003 and 2002
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8  F-48Schedule II  Valuation and Qualifying Accounts - Years Ended December 31, 2004, 2003, and 2002
    
    
    F-49
  F-1




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
ProxyMed, Inc.
Atlanta, Georgia We have audited the accompanying consolidated balance sheet of ProxyMed, Inc. and its subsidiaries
(the Company) as of December 31, 2004, and the related consolidated statements of operations,
stockholders equity, and cash flows for the year then ended. Our audit also included the
financial statement schedule listed in the Index at Item 15(a)(2) for the year ended December 31,
2004. These financial statements and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audit. The financial statements and financial statement
schedule of the Company for the years ended December 31, 2003 and 2002 were audited by other
auditors whose report, dated March 25, 2004, expressed an unqualified opinion on the financial
statements and financial statement schedule and included an explanatory paragraph that described
the adoption of Financial Accounting Standards Board Statement No. 142, Goodwill and Other
Intangible Assetsdiscussed in Note 9 to the financial statements. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of ProxyMed, Inc. and its subsidiaries as of December 31, 2004, and the
results of their operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the information set forth
therein for the year ended December 31, 2004. The accompanying consolidated
financial statements for the year ended December 31, 2004 have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 21 to the financial statements, the
Companys potential inability to pay certain current debt obligations when due raises substantial doubt
about its ability to continue as a going concern. Managements plans concerning these matters are described in Note 12(a). The financial statements do not include any adjustments that might result
from the outcome of this uncertainty. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 16, 2005 expressed an unqualified opinion on
managements assessment of the effectiveness of internal control
over financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over financial
reporting. /s/ Deloitte &
Touche LLP Atlanta, Georgia
March 16, 2005 F-2




---



##### 



REPORT OF INDEPENDENT
REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM To the Board of Directors and
theShareholders of ProxyMed, Inc. In our opinion, the consolidated financial statements
listed in the index appearing under Item 15(a)(l) on
page (57) present fairly, in all material
respects, the financial position of ProxyMed, Inc. and its subsidiaries
(the Company) at December 31, 2003 and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item
15(a)(2) on page (57) 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
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. As discussed in Note 8 to the consolidated financial statements, pursuant to the
adoption of Financial Accounting Standards Board Statement No. 142,
Goodwill and Other Intangible Assets, the
Company changed its method of accounting for goodwill in 2002. /s/ PricewaterhouseCoopers
LLP 
Fort Lauderdale, FloridaMarch 25, 2004 F - 3




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2003
(amounts in thousands except for share and per share data) Assets
    
    2004
    
    
    2003Current assets:Cash and cash equivalents
    
    $
    12,374
    
    
    $
    5,333Accounts receivable  trade, net of allowance for
doubtful accounts of $3,168 and $882 respectively
    
    
    17,591
    
    
    
    10,434Other receivables
    
    
    312
    
    
    
    187Inventory, net
    
    
    1,775
    
    
    
    3,347Other current assets
    
    
    1,399
    
    
    
    1,908Total current assets
    
    
    33,451
    
    
    
    21,209Property and equipment, net
    
    
    4,801
    
    
    
    4,772Goodwill, net
    
    
    93,604
    
    
    
    30,775Purchased technology, capitalized software and
other intangible assets, net
    
    
    52,305
    
    
    
    15,884Restricted cash
    
    
    75
    
    
    
    291Other long-term assets
    
    
    167
    
    
    
    199Total assets
    
    $
    184,403
    
    
    $
    73,130Liabilities and Stockholders EquityCurrent liabilities:Notes payable and current portion of long-term debt
    
    $
    2,178
    
    
    $
    1,712Related
party debt - See Notes 12(a) and 21
    
    
    18,394
    
    
    
    Accounts payable and accrued expenses and other current liabilities
    
    
    13,637
    
    
    
    8,264Deferred revenue
    
    
    691
    
    
    
    721Income taxes payable
    
    
    215
    
    
    
    Total current liabilities
    
    
    35,115
    
    
    
    10,697Convertible notes
    
    
    13,137
    
    
    
    13,137Other long term debt
    
    
    206
    
    
    
    2,057Long-term deferred revenue and other long-term liabilities
    
    
    863
    
    
    
    1,461Total liabilities
    
    
    49,321
    
    
    
    27,352Commitments and contingencies  see Notes 18 and 19Stockholders equity:Series C 7% Convertible preferred stock  $.01 par value
Authorized 300,000 shares; issued 253,265 shares;
outstanding 2,000; liquidation preference $200
    
    
    
    
    
    
    Common stock  $.001 par value. Authorized 13,333,333 shares;
issued and outstanding 12,626,182 and 6,784,118 shares, respectively
    
    
    13
    
    
    
    7Additional paid-in capital
    
    
    239,255
    
    
    
    146,230Unearned compensation
    
    
    (113
    )
    
    
    Accumulated deficit
    
    
    (104,073
    )
    
    
    (100,273
    )Note receivable from stockholder
    
    
    
    
    
    
    (186
    )Total stockholders equity
    
    
    135,082
    
    
    
    45,778Total liabilities and stockholders equity
    
    $
    184,403
    
    
    $
    73,130
 The accompanying notes are an integral part of the consolidated financial statements. F-4




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2004, 2003 and 2002
(amounts in thousands except for share and per share data) 2004
    
    
    2003
    
    
    2002Net revenues:Transaction fees, cost containment
services and license fees
    
    $
    73,538
    
    
    $
    51,813
    
    
    $
    28,455Communication devices
and other tangible goods
    
    
    16,708
    
    
    
    19,743
    
    
    
    21,72790,246
    
    
    
    71,556
    
    
    
    50,182Costs and expenses:Cost of transaction fees, cost containment services
and license fees excluding depreciation and amortization
    
    
    22,626
    
    
    
    15,917
    
    
    
    8,858Cost of laboratory communication devices and other tangible goods
excluding depreciation and amortization
    
    
    11,586
    
    
    
    16,504
    
    
    
    17,158Selling, general and administrative expenses
    
    
    48,023
    
    
    
    35,809
    
    
    
    20,152Depreciation and amortization
    
    
    9,763
    
    
    
    6,316
    
    
    
    2,636Loss on disposal of assets
    
    
    47
    
    
    
    111
    
    
    
    Litigation settlement
    
    
    175
    
    
    
    
    
    
    
    Write-off of impaired and obsolete assets
    
    
    
    
    
    
    541
    
    
    
    3892,220
    
    
    
    75,198
    
    
    
    48,842Operating income (loss)
    
    
    (1,974
    )
    
    
    (3,642
    )
    
    
    1,340Other income (expense), net
    
    
    134
    
    
    
    (496
    )
    
    
    265Interest income (expense), net
    
    
    (1,920
    )
    
    
    (862
    )
    
    
    345Income (loss) before income taxes
    
    
    (3,760
    )
    
    
    (5,000
    )
    
    
    1,950Provision for income taxes
    
    
    40
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (3,800
    )
    
    
    (5,000
    )
    
    
    1,950Deemed dividends and other charges
    
    
    
    
    
    
    
    
    
    
    612Net income (loss) applicable to common shareholders
    
    $
    (3,800
    )
    
    $
    (5,000
    )
    
    $
    1,338Basic weighted average shares outstanding
    
    
    11,617,601
    
    
    
    6,783,742
    
    
    
    6,322,086Basic earnings (loss) per share
    
    $
    (0.33
    )
    
    $
    (0.74
    )
    
    $
    0.21Diluted weighted average shares outstanding
    
    
    11,617,601
    
    
    
    6,783,742
    
    
    
    6,396,893Diluted earnings (loss) per share
    
    $
    (0.33
    )
    
    $
    (0.74
    )
    
    $
    0.21
 The accompanying notes are an integral part of the consolidated financial statements. F-5




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2004, 2003 and 2002
(amounts in thousands except for share and per share data) Series C
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NotePreferred stock
    
    
    Common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    receivableNumber
    
    
    Par
    
    
    Number
    
    
    Par
    
    
    Additional
    
    
    Unearned
    
    
    Accumulated
    
    
    fromof shares
    
    
    value
    
    
    of shares
    
    
    value
    
    
    paid-in capital
    
    
    Compensation
    
    
    deficit
    
    
    stockholder
    
    
    TotalBalances, December 31, 2001
    
    
    34,650
    
    
    $
    
    
    
    
    4,894,433
    
    
    $
    5
    
    
    $
    120,277
    
    
    $
    
    
    
    $
    (97,223
    )
    
    $
    (186
    )
    
    $
    22,873Sales of common stock, net
of expenses of $139
    
    
    
    
    
    
    
    
    
    
    1,569,366
    
    
    
    2
    
    
    
    24,884
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,886Common stock issued for acquired
business
    
    
    
    
    
    
    
    
    
    
    30,034
    
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600Conversions of Series C
preferred stock pursuant
to Conversion Offer
    
    
    (31,650
    )
    
    
    
    
    
    
    242,508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversions of Series C
preferred stock
    
    
    (1,000
    )
    
    
    
    
    
    
    6,666
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exchange of Series B warrants
into common stock
    
    
    
    
    
    
    
    
    
    
    34,500
    
    
    
    
    
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    450Exchange of Series C warrants
into common stock
    
    
    
    
    
    
    
    
    
    
    1,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    4,241
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,950
    
    
    
    
    
    
    
    1,950Balances, December 31, 2002
    
    
    2,000
    
    
    
    
    
    
    
    6,782,938
    
    
    
    7
    
    
    
    146,187
    
    
    
    
    
    
    
    (95,273
    )
    
    
    (186
    )
    
    
    50,735Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    555
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Other, net
    
    
    
    
    
    
    
    
    
    
    625
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,000
    )
    
    
    
    
    
    
    (5,000
    )Balances, December 31, 2003
    
    
    2,000
    
    
    
    
    
    
    
    6,784,118
    
    
    
    7
    
    
    
    146,230
    
    
    
    
    
    
    
    (100,273
    )
    
    
    (186
    )
    
    
    45,778Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    1,558
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    549,279
    
    
    
    
    
    
    
    8,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,750Common stock issued for acquired
Business
    
    
    
    
    
    
    
    
    
    
    3,600,000
    
    
    
    4
    
    
    
    59,756
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,760Sales of common stock, net
    
    
    
    
    
    
    
    
    
    
    1,691,227
    
    
    
    2
    
    
    
    24,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,050Unearned compensation charge for options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    (295
    )
    
    
    
    
    
    
    
    
    
    
    Compensatory option charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    274Compensatory option charge included
in loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68Repayment of note receivable from shareholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    186Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,800
    )
    
    
    
    
    
    
    (3,800
    )Balances, December 31, 2004
    
    
    2,000
    
    
    $
    
    
    
    
    12,626,182
    
    
    $
    13
    
    
    $
    239,255
    
    
    $
    (113
    )
    
    $
    (104,073
    )
    
    $
    
    
    
    $
    135,082
 The accompanying notes are an integral part of the consolidated financial statements. F-6




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002
(amounts in thousands except for share and per share data) 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    (3,800
    )
    
    $
    (5,000
    )
    
    $
    1,950Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    9,763
    
    
    
    6,316
    
    
    
    2,636Provision for doubtful accounts
    
    
    858
    
    
    
    152
    
    
    
    38Provision for obsolete inventory
    
    
    92
    
    
    
    28
    
    
    
    Non-cash interest (income) expense
    
    
    (59
    )
    
    
    54
    
    
    
    Gain on settlement of liability
    
    
    (134
    )
    
    
    
    
    
    
    Write-off of obsolete and impaired assets
    
    
    
    
    
    
    541
    
    
    
    38Compensatory stock options and warrants
and stock compensation awards issued
    
    
    275
    
    
    
    
    
    
    
    Write-off of investment
    
    
    
    
    
    
    496
    
    
    
    Loss on disposal of fixed assets
    
    
    47
    
    
    
    111
    
    
    
    Changes in assets and liabilities, net of
effect of acquisitions and dispositions:Accounts and other receivables
    
    
    548
    
    
    
    (498
    )
    
    
    (1,445
    )Inventory
    
    
    (1,329
    )
    
    
    (601
    )
    
    
    747Other current assets
    
    
    465
    
    
    
    430
    
    
    
    (30
    )Accounts payable and accrued expenses
    
    
    124
    
    
    
    (1,173
    )
    
    
    (1,150
    )Accrued expenses of PlanVista paid by ProxyMed
    
    
    (4,011
    )
    
    
    
    
    
    
    Deferred revenue
    
    
    137
    
    
    
    222
    
    
    
    76Income taxes
    
    
    (418
    )
    
    
    
    
    
    
    Prepaid and
other, net
    
    
    (727
    )
    
    
    440
    
    
    
    (12
    )Net cash provided by operating activities
    
    
    1,831
    
    
    
    1,518
    
    
    
    2,848Cash flows from investing activities:Acquisition of businesses, net of cash acquired
    
    
    782
    
    
    
    
    
    
    
    (14,453
    )Acquisition of assets
    
    
    
    
    
    
    
    
    
    
    (700
    )Short term investments
    
    
    
    
    
    
    
    
    
    
    (15,000
    )Redemption of short term investments
    
    
    
    
    
    
    
    
    
    
    15,000Capital expenditures
    
    
    (3,440
    )
    
    
    (2,601
    )
    
    
    (1,561
    )Capitalized software
    
    
    (909
    )
    
    
    (1,426
    )
    
    
    (445
    )Collection of notes receivable
    
    
    374
    
    
    
    120
    
    
    
    65Proceeds from sale of fixed assets
    
    
    4,526
    
    
    
    395
    
    
    
    Decrease in restricted cash
    
    
    215
    
    
    
    534
    
    
    
    Payments for acquisition-related costs
    
    
    (884
    )
    
    
    (6,623
    )
    
    
    (96
    )Net cash provided by (used in) investing activities
    
    
    664
    
    
    
    (9,601
    )
    
    
    (17,190
    )Cash flows from financing activities:Net proceeds from sale of common stock
    
    
    24,100
    
    
    
    
    
    
    
    24,886Proceeds from exercise of stock options and warrants
    
    
    8,766
    
    
    
    7
    
    
    
    450Draws on line of credit
    
    
    4,900
    
    
    
    
    
    
    
    Repayments of line of credit
    
    
    (4,900
    )
    
    
    
    
    
    
    Payment of note payable related to acquisition of business
    
    
    
    
    
    
    
    
    
    
    (7,000
    )Payment of
related party note payable
    
    
    (2,000
    )
    
    
    
    
    
    
    Payment of notes payable, long-term debt and capital leases
    
    
    (26,320
    )
    
    
    (2,969
    )
    
    
    (217
    )Net cash provided by (used in) financing activities
    
    
    4,546
    
    
    
    (2,962
    )
    
    
    18,119Net increase (decrease) in cash and cash equivalents
    
    
    7,041
    
    
    
    (11,045
    )
    
    
    3,777Cash and cash equivalents at beginning of year
    
    
    5,333
    
    
    
    16,378
    
    
    
    12,601Cash and cash equivalents at end of year
    
    $
    12,374
    
    
    $
    5,333
    
    
    $
    16,378
 The accompanying notes are an integral part of the consolidated financial statements. F-7




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (1) Business and Summary of Significant Accounting Policies  (a)
    Business of ProxyMed  ProxyMed, Inc. (ProxyMed or the Company) is an
electronic healthcare transaction and cost containment processing services company
providing connectivity and related value-added products to physician offices, payers,
medical laboratories, pharmacies and other healthcare providers. ProxyMeds corporate
headquarters are located in Atlanta, Georgia and its products and services are provided
from various operational facilities located throughout the United States. The Company also
operates its clinical computer network and portions of its financial and real-time
production computer networks from a secure, third-party co-location site in Atlanta,
Georgia.(b)
    Principles of Consolidation  The consolidated financial statements include
the accounts of ProxyMed and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.(c)
    Use of Estimates  The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.(d)
    Revenue Recognition Revenue is derived from the Companys Transaction
Services and Laboratory Communication Solutions segments.In its Transaction Services segment, the Company provides transaction and value-added
services principally between healthcare providers and insurance companies, and physicians
and pharmacies. Such transactions and services include Electronic Data Interchange (EDI)
claims submission and reporting, insurance eligibility verification, claims status
inquiries, referral management, electronic remittance advice, patient statement processing,
encounters, and cost containment transaction services including claims repricing and bill
renegotiation. In the Laboratory Communication Solutions segment, the Company sells, rents
and services intelligent remote reporting devices and provides lab results reporting through
its software products.Transaction Services revenues are derived from insurance payers, pharmacies and submitters
(physicians and other entities including billing services, practice management software
vendors, claims aggregators, etc.). Such revenues are recorded on either a per transaction
fee basis or on a flat fee basis (per physician, per tax ID, etc.) and are recognized in the
period the service is rendered. Agreements between the Company and payers or pharmacies are
for one to three years on a non-exclusive basis. Agreements with submitters are generally
for one year, renew automatically, and are generally terminable thereafter upon 30 to 90
days notice. Transaction fees vary according to the type of transaction and other factors,
including volume level commitments. F-8




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  Revenue from Medical Cost Containment business in the Transaction Services segment is
recognized when the services are performed and are recorded net of their estimated
allowances. These revenues are primarily in the form of fees generated from the discounts
the Company secures for the payers that access its provider network. The Company enters
into agreements with its healthcare payer customers that require them to pay a percentage of
the cost savings generated from the Companys network discounts with participating
providers. These agreements are generally terminable upon 90 days notice. Revenue from a
percentage of savings contract is generally recognized when the related claims processing
and administrative services have been performed. The remainder of the Companys revenue
from its Medical Cost Containment business is generated from customers that pay a monthly
fee based on eligible employees enrolled in a benefit plan covered by the Companys health
benefits payers clients.Also in the Transaction Services segment, certain transaction fee revenue is subject to
revenue sharing pursuant to agreements with resellers, vendors or gateway partners and is
recorded as gross revenues in accordance with EITF No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent. Such revenue sharing amounts are based on a per
transaction amount or a percentage of revenue basis and may involve increasing amounts or
percentages based on transaction or revenue volumes achieved.Revenue from certain up-front fees charged primarily for the development of EDI for payers
and the implementation of services for submitters in the Transaction Services segment is
amortized ratably over three years, which is the expected life of the customer, in
accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (SAB No. 104).Revenue from support and maintenance contracts on the Companys products in both the
Transaction Services and Laboratory Communication Solutions segments is recognized ratably
over the contract period, which does not exceed one year. Such amounts are billed in
advance and established as deferred revenue.In the Companys Laboratory Communication Solutions segment, revenue from sales of inventory
and manufactured goods is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the price is fixed or determinable and collectibility is probable in
accordance with SAB No. 104.Revenues from maintenance fees on laboratory communication devices are charged on an annual
or quarterly basis and are recognized ratably over the service period. Service fees may
also be charged on a per event basis and are recognized after the service has been
performed.Revenue from the rental of laboratory communication devices is recognized ratably over the
applicable period of the rental contract. Such contracts require monthly rental payments
and are for a one to three year term, then renewing on a month to month basis after the
initial term is expired. Contracts may be cancelled upon 30 days notice. A significant
amount of rental revenues are derived from contracts that are no longer under the initial
non-cancelable term. At the end of the rental period, the customer may return or purchase
the unit for fair market value. Upon sale of the 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. F-9




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (e)
    Fair Value of Financial Instruments  Cash and cash equivalents, notes and
other accounts receivable, and restricted cash are financial assets with carrying values
that approximate fair value. Accounts payable, other accrued expenses and liabilities,
notes payable, and short-term and long-term debt are financial liabilities with carrying
values that approximate fair value. The notes payable bear interest rates that approximate market rates.(f)
    Cash and Cash Equivalents  The Company considers all highly liquid
investments with original maturities of three months or less to be cash equivalents. Cash
balances in excess of immediate needs are invested in bank certificates of deposit, money
market accounts and commercial paper with high-quality credit institutions. At times, such
amounts may be in excess of FDIC insurance limits. The Company has not experienced any
loss to date on these investments. Cash and cash equivalents used to support collateral
instruments, such as letters of credit, are reclassified as either current or long-term
assets depending upon the maturity date of the obligation they collateralize.(g)
    Reserve for Doubtful Accounts/Revenue Allowances/Bad Debt Estimates  The
Company relies on estimates to determine the bad debt expense and the adequacy of the
reserve for doubtful accounts receivable. These estimates are based on the Companys
historical experience and the industry in which it operates. If the financial condition of
its customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. Additionally, in the Medical Cost
Containment business, the Company evaluates the collectibility of its accounts receivable
based on a combination of factors, including historical collection ratios.In circumstances where the Company is aware of a specific customers inability to meet its
financial obligations, it records a specific reserve for bad debts against amounts due to
reduce the net recognized receivable to the amount it reasonably believes will be collected.
For all other customers, the Company recognizes reserves for bad debts based on past
write-off history and the length of time the receivables are past due. To the extent
historical credit experience is not indicative of future performance or other assumptions
used by management do not prevail, loss experience could differ significantly, resulting in
either higher or lower future provision for losses.(h)
    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 inventory shrinkage are maintained and are periodically reviewed by
management based on our judgment of future realization.(i)
    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 generally over 2 to 7 years.
Leasehold improvements are amortized on the straight-line method over the shorter of the
lease term or the estimated useful lives of the assets.  F-10




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  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 operating expenses for the period. Maintenance and repair of property and
equipment are charged to expense as incurred. Renewals and betterments are capitalized and
depreciated. In accordance with Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for Impairment or Disposition of Long-lived Assets, management
periodically reviews the Companys fixed assets for obsolescence, damage and impairment.
This review indicates whether the assets will be recoverable based on estimated future cash
flows on an undiscounted basis and determines if any impairment has
occurred.(j)
    Intangible AssetsGoodwill Goodwill is reviewed at least annually for impairment. In addition,
SFAS No. 142 requires that goodwill be tested for impairment at least annually
utilizing fair value methodology. We
completed our most recent annual test at December 31, 2004
utilizing cash flow-based market comparables in assessing fair value for our goodwill
impairment testing and we concluded that there was no impairment of
our goodwill. To the extent that future cash flows differ from those
projected in our analysis, fair value of the Companys goodwill
may be affected and may result in an impairment charge.Other Intangibles  Other acquired intangible assets, consisting of customer
relationships and provider networks, are being amortized on a straight-line or accelerated
basis over their estimated useful lives of 4.6 to 12 years.The Company reviews the carrying values of acquired technology and intangible assets if
the facts and circumstances suggest that they may be impaired. This
evaluation indicates whether assets will be recoverable based on
estimated future undiscounted cash flows. If the assets are not
recoverable, an impairment charge is recognized if the carrying value
exceeds the estimated fair value.Purchased Technology and Capitalized Software  The Company has recorded amounts
related to various software and technology that it has purchased or
developed for its own
internal systems use.Internal and external costs incurred to develop internal-use computer software during the
application development stage are capitalized. Application development stage costs
generally include software configuration, coding, installation to hardware and testing.
Costs of upgrades and major enhancements that result in additional functionality are also
capitalized. Costs incurred for maintenance and minor upgrades are expensed as incurred.
All other costs are expensed as incurred as research and development expenses (which are
included in selling, general and administrative expenses). Capitalized internal-use
software development costs are periodically evaluated by ProxyMed for indications that the
carrying value may be impaired or that the useful lives assigned may be excessive. This
evaluation indicates whether assets will be recoverable based on estimated future cash flows
on an undiscounted basis, and if they are not recoverable, an
impairment charge is recognized if the carrying value exceeds the
estimated fair value. F-11




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  Purchased technology and capitalized software are being amortized on a straight-line basis
over their estimated useful lives of 1 to 12 years. Purchased technology and capitalized
software and related accumulated amortization are removed from the accounts when fully
amortized and are no longer being utilized.Research and Development  Software development costs incurred prior to the
application development stage are charged to research and development expense when incurred.
Research and development expense of approximately $2.3 million in 2004, $4.4 million in
2003, and $3.2 million in 2002 was recorded in selling, general and administrative expenses.(k)
    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.(l)
    Net Income (Loss) Per Share  Basic net income (loss) per share is computed by
dividing net income (loss) applicable to common shareholders by the weighted average number
of shares of common stock outstanding during the period. Diluted net income (loss) per
share reflects the potential dilution from the exercise or conversion of securities into
common stock. The following schedule sets forth the computation of basic and diluted net
income (loss) per share for the years ended December 31, 2004, 2003 and 2002: In thousands except for share and per share data
    

2004
    
    
    2003
    
    
    2002Net income (loss) applicable to common shareholders
    
    $
    (3,800
    )
    
    $
    (5,000
    )
    
    $
    1,338Common shares outstanding:Weighted average common shares used in computing
basic net income (loss) per share
    
    
    11,617,601
    
    
    
    6,783,742
    
    
    
    6,322,086Plus incremental shares from assumed conversions:Convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    13,833Stock options
    
    
    
    
    
    
    
    
    
    
    11,464Warrants
    
    
    
    
    
    
    
    
    
    
    49,510
    
    
    
    
    
    
    
    74,807Weighted average common shares used in computing
diluted net income (loss) per share
    
    
    11,617,601
    
    
    
    6,783,742
    
    
    
    6,396,893Net income (loss) per common share:Basic
    
    $
    (0.33
    )
    
    $
    (0.74
    )
    
    $
    0.21Diluted
    
    $
    (0.33
    )
    
    $
    (0.74
    )
    
    $
    0.21
  F-12




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  However, the following shares were excluded from the calculation of net loss per share in
the periods noted because their effects would have been anti-dilutive: 2004
    
    
    2003
    
    
    2002Convertible
preferred stock
    
    
    13,333
    
    
    
    13,333
    
    
    
    Stock options
    
    
    1,812,909
    
    
    
    1,426,670
    
    
    
    811,799Warrants
    
    
    900,049
    
    
    
    1,460,994
    
    
    
    318,7972,726,291
    
    
    
    2,900,997
    
    
    
    1,130,596
  For the year ended December 31, 2002, the shares noted above were excluded from the
calculation of diluted per share results because the exercise price of these options and
warrants was greater than the average market price of the Companys common stock during the
period.Additionally, 238,989 shares issuable upon conversion of $4.4 million in convertible notes
(as a result of meeting the first revenue threshold in the fourth quarter of 2003) issued in
connection with the Companys acquisition of MedUnite in December 2002 are excluded from the
calculation for years ended December 31, 2004 and 2003 because their effect would also be
anti-dilutive.(m)
    Stock-based Compensation  ProxyMed applies Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations in accounting for its stock-based compensation plans. The Company measures
compensation expense related to the grant of stock options and stock-based awards to
employees (including independent directors) in accordance with the provisions of APB No.
25. In accordance with APB No. 25, compensation expense, if any, is generally based on the
difference between the exercise price of an option, or the amount paid for an award, and
the market price or fair value of the underlying common stock at the date of the award or
at the measurement date for variable awards. Stock-based compensation arrangements
involving non-employees are accounted for under SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123) as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure (SFAS No. 148), under which such arrangements
are accounted for based on the fair value of the option or award.Under SFAS No. 123, as amended by SFAS No. 148, compensation cost for the Companys
stock-based compensation plans would be determined based on the fair value at the grant
dates for awards under those plans. The assumptions underlying the fair value calculations
of the stock option grants are presented in Note 15 Management has completed an analysis of
the weighted average duration (or actual life) of their stock options and concluded that as
of 2004, the appropriate estimated life is 6 years. Had the Company adopted SFAS No. 123 in
accounting for its stock option plans, the Companys consolidated net income (loss) and net
income (loss) per share for the years ended December 31, 2004, 2003 and 2002 would have been
adjusted to the pro forma amounts indicated as follows: F-13




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued In thousands except for per share data
    
    2004
    
    
    2003
    
    
    2002Net income (loss) applicable to common
shareholders, as reported
    
    $
    (3,800
    )
    
    $
    (5,000
    )
    
    $
    1,338Deduct: Total stock-based employee pro forma
compensation expense determined under fair
value based method for all awards, net of
related tax effects (1)
    
    
    (2,717
    )
    
    
    (4,378
    )
    
    
    (6,814
    )Addback charges already taken for
intrinsic value of options
    
    
    115
    
    
    
    
    
    
    
    Pro forma net loss
    
    $
    (6,402
    )
    
    $
    (9,378
    )
    
    $
    (5,476
    )Basic net income (loss) per common share:As reported
    
    $
    (0.33
    )
    
    $
    (0.74
    )
    
    $
    0.21Pro forma
    
    $
    (0.55
    )
    
    $
    (1.38
    )
    
    $
    (0.87
    )Diluted net income (loss) per common share:As reported
    
    $
    (0.33
    )
    
    $
    (0.74
    )
    
    $
    0.21Pro forma
    
    $
    (0.55
    )
    
    $
    (1.38
    )
    
    $
    (0.87
    )(1) The following ranges of assumptions were
used in the calculation of pro forma
compensation expense for the periods
presented:Risk-free interest rate
    
    
    3.8%-4.8%
    
    
    
    3.4%-4.4%
    
    
    
    3.9%-5.2%Expected life
    
    6 years
    
    10 years
    
    10 yearsExpected volatility
    
    
    75%-77%
    
    
    
    81%
    
    
    
    81%Dividend yield
    
    
    0%
    
    
    
    0%
    
    
    
    0%
  (n)
    New Accounting Pronouncements  In September 2004, the Financial Accounting
Standards Board (FASB) issued EITF No. 04-8, Accounting Issues Related to Certain
Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share
(EITF No. 04-8). EITF No. 04-8 addresses when the dilutive effect of contingently
convertible debt instruments should be included in diluted earnings per share and requires
that contingently convertible debt instruments are to be included in the computation of
diluted earnings per share regardless of whether the market price or other trigger has been
met. EITF No. 04-8 also requires that prior period diluted earnings per share amounts
presented for comparative purposes be restated. EITF No. 04-8 is effective for reporting
periods ending after December 15, 2004. As a result of the
issuance of EITF No. 04-8, shares convertible from the Companys $13.1 million convertible notes may be required to be
included in the calculation of earnings per share in periods of net income; however, the
FASB has yet to reach a conclusion as to the effect of non market price triggers on
earnings per share calculations in situations where the instrument contains only non-market
price trigger, such as the Companys convertible notes, and
therefore the impact to the Financial Statements is not determinable at this time. F-14




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  In December 2004, the FASB issued SFAS No. 123R, Shared-Based Payments (Revised 2004).
SFAS No. 123R is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and
supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and its related guidance. SFAS No. 123R requires public entities to measure the
cost of employee services received in exchange for an award of equity instruments based on
the grant-date fair value of the award (with limited exceptions). That cost will be
estimated using option-pricing models adjusted for the unique characteristics of those
instruments and will be recognized and expensed over the period which an employee is
required to provide service in exchange for the award (usually the vesting period). Fair
value is based on market prices (if those prices are publicly available). If not available,
SFAS 123R does not specifically require the use of a particular model; however, the most
common models are the Black-Scholes model and lattice (binomial) models. Additionally,
modifications to an equity award after the grant date will require a compensation cost to be
recognized in an amount equal to the excess of the fair value of the modified award over the
fair value of the award immediately before the modification. The effective date of SFAS No.
123R is for interim and annual reporting periods beginning after
June 15, 2005. The Company has not completed the process of evaluating
the impact that will result from adopting FASB Statement
No. 123R and is therefore unable to disclose the impact that
adoption will have on its financial position and results of
operations. (2) Acquisition of Businesses  (a)
    PlanVista On March 2, 2004, the Company acquired all of the capital
stock of PlanVista Corporation, a publicly-held company located in Tampa, Florida and
Middletown, New York that provides medical cost containment and business process
outsourcing solutions, including claims repricing services, for the medical insurance and
managed care industries, as well as services for healthcare providers, including individual
providers, preferred provider organizations and other provider groups, for 3,600,000 shares
of ProxyMed common stock issued to PlanVistas shareholders. In addition, ProxyMed assumed
debt and other liabilities of PlanVista totaling $46.4 million, and incurred $1.3 million in acquisition related
expenses. The value of these shares was $59.8 million based on the average closing price
of ProxyMeds common stock for the day of and the two days before and after the
announcement of the definitive agreement on December 8, 2003 in accordance with EITF No.
99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities
Issued in Purchase Business Combination. Additionally, ProxyMed raised $24.1 million in a
private placement sale of 1,691,227 shares of its common stock to various entities
affiliated with General Atlantic Partners and Commonwealth Associates to partially fund
repayment of PlanVistas debts and other obligations outstanding at the time of the
acquisition. The acquisition enables the Company to offer a new suite of
products and services, provide new end-to-end services, increase sales opportunities with
payers, strengthen business ties with certain customers, expand technological capabilities,
reduce operating costs and enhance its public profile.  F-15




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  The Company had previously entered into a joint marketing agreement with PlanVista for the
sale of PlanVistas services in June 2003. As part of that agreement, PlanVista granted the
Company a warrant to purchase 15% of the number of outstanding shares of PlanVista common
stock on a fully-diluted basis as of the time of exercise for $1.95 per share. The warrant
was exercisable immediately and expired in December 2003. The warrant was accounted for at
its cost under Accounting Principles Board Opinion No. 18, The Equity Method of Accounting
for Investments in Common Stock since it did not meet the conditions necessary to be
accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Upon expiration of the warrant in December 2003, the Company recorded an
impairment loss in the amount $0.5 million (representing the initial value of the warrant,
calculated using a Black Scholes model) which was reflected in other expense in the
Companys consolidated statement of operations for the year ended December 31, 2003.Following consummation of the acquisition, PlanVistas common stock was delisted from the
Over the Counter Bulletin Board, and each share of PlanVistas outstanding common stock was
cancelled and converted into the right to receive 0.08271 of a share of the Companys common
stock and each holder of PlanVista series C preferred stock received 51.5292 shares of the
Companys common stock in exchange for each share of PlanVista series C preferred stock, all
of which represented approximately 23% of the Companys common stock on a fully converted
basis. The holders of the Companys outstanding stock, options and warrants at the date of
the acquisition of PlanVista retained approximately 77% of the Company after the
acquisition. F-16




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  An allocation of the purchase price is as follows. All items are considered final except
for the disputed New York State tax liability as discussed below: In thousandsCommon stock issued
    
    $
    59,760Acquisition-related costs
    
    
    1,328Other adjustments
    
    
    (642
    )Total purchase
price
    
    
    60,446Allocation of purchase price:Cash and cash equivalents
    
    
    (782
    )Accounts receivable, net
    
    
    (9,470
    )Other current assets
    
    
    (381
    )Property and equipment, net
    
    
    (658
    )Customer relationships
    
    
    (24,600
    )Provider network
    
    
    (16,200
    )Technology platforms
    
    
    (1,180
    )Other long-term assets
    
    
    (360
    )Accounts payable and accrued expenses
    
    
    9,612Income taxes payable
    
    
    633Notes payable, debt and other obligations
    
    
    44,889Other long-term liabilities
    
    
    880Goodwill
    
    $
    62,829
  As reported in the Companys Form 10-Q/A for the period ended March 31, 2004, the excess of
the consideration paid over the estimated fair value of net assets acquired in the amount of
$61.0 million was initially recorded as goodwill. Due to adjustments for settled
pre-acquisition contingencies of $0.7 million, potential exposure of other pre-acquisition
contingencies of $0.6 million, adjustments to accrued network fees of $0.4 million and other
net adjustments of $0.1 million recorded after the initial recording of the transaction, the
excess of the consideration paid over the estimated fair value of net assets acquired has
increased by $1.8 million to $62.8 million. Of this amount, the Company has determined that
$20.7 million is tax deductible goodwill.The weighted average useful life of the customer relationships is approximately 12.0 years,
the weighted average useful life of the provider network is 10.0 years, and the weighted
average useful life of the technology platforms is 4.5 years. The valuation of PlanVistas
provider network and technology platforms was based on managements estimates which included
consideration of a replacement cost methodology. The value of the customer relationships
was calculated on a discounted cash flow model.Additionally, the Company reduced the purchase price by
$0.6 million related to the marketing agreement with PlanVista
from June 2003 (shown as other adjustments in the
preceding purchase price allocation table). The results of
PlanVistas operations have been included in the Companys
consolidated financial statements since March 2004 in its Transaction
Services segment.At the time of its acquisition by the Company, PlanVista was involved in various lawsuits
and threatened litigation. To date, a significant number of these cases have been settled
or dismissed and resulted in $0.7 million charged to goodwill and $0.2 million charged to
expense in 2004. As of December 31, 2004, the unresolved pre-acquisition contingencies
include: (i) a lawsuit filed against a former subsidiary of PlanVista for which the Company
intends to vigorously defend itself but for which the Company has determined exposure to be
in a range of $0.6 million to $1.6 million and has accrued $0.6 million at December 31,
2004; (ii) a disputed $2.8 million New York State tax liability; and (iii) a class action suit in which
PlanVista is named defendant for which the Company is still evaluating the merits of the
case and cannot yet draw a conclusion as to the outcome. In the case of the New York
State tax dispute, any settlement paid would be charged to goodwill in accordance with EITF
No. 93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination. F-17




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  The issuance of the 3,600,000 shares of Company common stock to the PlanVista stockholders
was registered under the Securities Act of 1933 pursuant to the Companys registration
statement on Form S-4 (File No. 333-111024) (the Registration Statement) filed with the
SEC and declared effective on February 2, 2004.In connection with this transaction, on March 1, 2004, the Companys shareholders approved
(1) an amendment to the Companys articles of incorporation to increase the total number of
authorized shares of the Companys common stock from 13,333,333 shares to 30,000,000 shares;
(2) the issuance of 1,691,227 shares of the Companys common stock at $14.25 per share in a
private equity offering valued at $24.1 million (to retire debt of PlanVista and pay certain
expenses associated with the merger); (3) the issuance of 3,600,000 shares of the Companys
common stock in connection with the PlanVista merger; and (4) an amendment to the Companys
2002 Stock Option Plan to increase the total number of shares available for issuance from
600,000 to 1,350,000. Additionally, one director of PlanVista was appointed to the
Companys board of directors to fill a vacancy left by a former ProxyMed director who
resigned in February 2003.All officers and employees of PlanVista, with the exception of PlanVistas Chief Financial
Officer, continued employment with the Company. In May 2004, PlanVistas Chief Executive
Officer announced his resignation and effective September 1, 2004, he became a consultant to
the Company. Under the terms of this agreement, he is allowed to continue to vest in the
stock options he received at the time of the acquisition of PlanVista (see Note 15). F-18




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  Additionally, certain officers, directors and employees of PlanVista were granted options to
purchase an aggregate of 200,000 shares of ProxyMed common stock at an exercise price of
$17.74 per share. Of these original options granted, 173,120 were to vest two-thirds on the
first anniversary date of the grant and one-third on the third anniversary date of the
grant. Since the exercise price was less than the market price as of the date of issuance,
the Company is recording periodic non-cash compensation charges over the vesting period of
the options based on the intrinsic value method. For the year ended December 31, 2004, the
Company recorded a non-cash compensation charge of $0.1 million for these options.
Subsequent to the original issuance of these options, 10,608 stock options have been
cancelled due to separation of employment with the Company. In addition, 68,543 granted to
the PlanVistas former Chief Executive Officer as a result of his resignation effective
September 1, 2004 have been modified due to his change in employment status (see Note 15).
The balance of 26,880 options was granted to PlanVistas former Chief Financial Officer in
connection with a consulting arrangement with him. Fifty percent of these options vested
immediately upon the change of control and 25% vest on each of the three month and six month
anniversaries of the change in control. The Company recorded a charge of approximately $0.1
million in compensation expense associated with this grant in the three months ended March
31, 2004 utilizing a Black-Scholes model using the following assumptions: risk-free interest
rate of 1.2%, expected life of 9 months, expected volatility of 42% and no dividend yield.The following unaudited pro forma summary presents the consolidated results of operations of
ProxyMed and PlanVista as if the acquisitions of these businesses had occurred on January 1,
2004 and on January 1, 2003. These pro forma results do not necessarily represent results that would have occurred
if the acquisition had taken place on that date, or of results that may occur in the future. In thousands except for per share data
    
    2004
    
    
    2003Revenues
    
    $
    95,914
    
    
    $
    104,644Cost of sales
    
    $
    35,655
    
    
    $
    40,867Selling, general and administrative expenses
    
    $
    50,373
    
    
    $
    49,282Operating income (loss)
    
    $
    (881
    )
    
    $
    1,429Interest expense, net
    
    $
    (2,227
    )
    
    $
    (2,064
    )Net loss
    
    $
    (3,114
    )
    
    $
    (1,516
    )Basic and diluted net loss
per share of common stock
    
    $
    (0.25
    )
    
    $
    (0.13
    )
 F-19




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (b)
    MedUnite  On December 31, 2002, the Company acquired all of the capital stock
of MedUnite, Inc., a privately-held company founded by seven of the nations largest health
insurers to provide healthcare claims processing services, for $10.0 million in cash, $13.4
million in 4% convertible promissory notes, and acquisition-related and exit costs of $6.7
million (originally estimated at $8.3 million at December 31, 2002). The purchase price
was allocated as follows: AsOriginally
    
    
    AsIn thousands
    
    Reported
    
    
    AdjustedCash paid
    
    $
    10,000
    
    
    $
    10,000Convertible debt issued
    
    
    13,400
    
    
    
    13,137Acquisition-related and exit costs
    
    
    8,321
    
    
    
    6,700Total purchase price
    
    
    31,721
    
    
    
    29,837Allocation of purchase price:Cash
    
    
    (879
    )
    
    
    (879
    )Other current assets
    
    
    (3,805
    )
    
    
    (3,770
    )Property and equipment
    
    
    (1,793
    )
    
    
    (1,913
    )Customer relationships
    
    
    (6,600
    )
    
    
    (6,600
    )Purchased technology
    
    
    (6,000
    )
    
    
    (6,000
    )Other long-term assets, including
restricted cash
    
    
    (1,033
    )
    
    
    (1,033
    )Current liabilities
    
    
    9,515
    
    
    
    9,638Other long-term liabilities
    
    
    1,233
    
    
    
    1,057Goodwill
    
    $
    22,359
    
    
    $
    20,337
  The excess of the consideration paid over the estimated fair value of net assets acquired in
the amount of $20.3 million was recorded as goodwill (originally recorded at $22.4 million
at December 31, 2002), none of which is deductible for income tax purposes (see Note 14).
The weighted average useful life of the customer relationships at acquisition was
approximately 10 years and the weighted average useful life of the purchased technology is
4.2 years. The valuation of MedUnites real-time processing platform was based on
managements estimates which included consideration of utilizing a replacement cost
methodology while the value of the customer relationships was calculated on a discounted
cash flow model. The results of MedUnites operations have been included in the Companys
consolidated financial statements since January 1, 2003 in its Transaction Services segment. F-20




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  The 4% convertible promissory notes are uncollateralized and mature on December 31, 2008.
Interest is payable quarterly in cash in arrears. The notes were convertible into an
aggregate of 731,322 shares of the Companys common stock (based on a conversion price of
$18.323 per share which was above the traded fair market value of the Companys common stock
at December 31, 2002) if the former shareholders of MedUnite achieve certain aggregate
incremental revenue based targets over a baseline revenue of $16.1 million with the Company
over the next three and one-half year period as follows: (i) one-third of the principal if
incremental revenues during the measurement period from January 1, 2003 through June 30,
2004 are in excess of $5.0 million; (ii) one-third of the principal if incremental revenues
during the measurement period from July 1, 2004 through June 30, 2005 are in excess of $12.5
million; and (iii) one-third of the principal if incremental revenues during the measurement
period from July 1, 2005 through June 30, 2006 are in excess of $21.0 million. Amounts in
excess of any measurement period will be credited towards the next measurement period;
however, if the revenue trigger is not met for any period, the ability to convert that
portion of the principal is lost. In the fourth quarter of 2003, the first revenue target
was met.Of the original $13.4 million in principal amount, $4.0 million was held in escrow until
December 31, 2003 as a source for limited indemnification conditions of the acquisition. In
the fourth quarter of 2003, the escrow agent accepted a claim of $0.4 million from ProxyMed.
This claim was settled with the Company via a cash payment of $0.1 million (paid out of
undistributed interest received) and an offset against the escrow of $0.3 million. As such,
the Company recorded an adjustment to goodwill. The escrow was released on December 31,
2003 and convertible notes totaling $3.7 million were distributed to the former shareholders
of MedUnite. The total amount of convertible notes as of December 31, 2004 is $13.1
million. Additionally, as a result of the reduction in principal, the notes are now
convertible into 716,968 shares of the Companys common stock subject to achieving the
revenue triggers.MedUnite had incurred significant losses since its inception and was utilizing cash
significantly in excess of amounts it was generating. As a result, at the time it was
acquired by ProxyMed, there were substantial liabilities and obligations (both known and
unknown at December 31, 2002) associated with the business. Subsequent to the acquisition
by ProxyMed, MedUnites senior management team was terminated along with approximately 20%
of the general workforce in an effort to eliminate duplicative positions and control these
costs. As a result of the workforce reduction, the company paid $2.2 million in severance
which was recorded as an adjustment to goodwill.As a result of the acquisition, all notes payable, convertible notes and related accrued
interest to MedUnites shareholders with a carrying value of $23.4 million (except for a
$2.3 million note payable issued to NDCHealth Corporation (NDCHealth) in August 2001, plus
$0.2 million of accrued interest on this note, and a $2.6 million note payable issued to NDC
on December 31, 2002, together known as the NDCHealth Debt) were cancelled. Additionally,
as part of the acquisition, NDCHealth released MedUnite from $4.0 million of the NDCHealth
Debt and agreed to amend certain existing MedUnite agreements in favor of future
relationships with ProxyMed to be entered into in good faith. The remaining $1.1 million
was included in accrued expenses at December 31, 2002 and ultimately refinanced under the
note payable described below in April 2003. F-21




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  Additionally, during 2003, the Company was successful entering into financing agreements
with certain major vendors of MedUnite as a means to settle $5.4 million in liabilities that
existed at December 31, 2002. In March 2003, the Company restructured $3.4 million in
accounts payable and accrued expenses acquired from MedUnite and outstanding at December 31,
2002 to one vendor by paying $0.8 million in cash and financing the balance of $2.6 million
with an unsecured note payable over 36 months at 8% commencing March 2003. Additionally, in
April 2003, the Company financed a net total of $2.0 million ($2.8 million in accounts
payable and accrued expenses offset by $0.8 million in accounts receivable) existing at
December 31, 2002 from MedUnite to NDCHealth by issuing an unsecured note payable over 24
months at 6%.Prior to its acquisition by ProxyMed, in April 2002, MedUnite had entered into a three-year
information technology services agreement to outsource certain hosting, system maintenance
and operation services. Actual service fees are based on the number of transactions
processed by the software being supported; however, MedUnite was committed to pay a minimum
annual service fee of $1.2 million. The Company cancelled this agreement in May 2003 and
paid a total of $1.1 million in July 2003.At the time MedUnite was acquired by ProxyMed, the Company decided to migrate off of a
software license used to operate MedUnites web portal. At that time, the Company was
liable to purchase software maintenance services from the supplier of that license in the
total amount of $1.8 million through mid-2005. Such amount was included in the
acquisition-related accrual for the MedUnite acquisition at December 31, 2002. However, the
Company reached agreement with the software vendor and settled this obligation for $0.9
million. Payments of $0.7 million were made in 2003 and the balance of $0.2 million was
paid in January 2004. F-22




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (3)
    Sale of AssetsOn June 30, 2004, the Company sold certain assets and liabilities of its Laboratory
Communication Solutions segment that were used in its non-core contract manufacturing
business to an entity formed by a former executive of the Company for $4.5 million in cash.
Under terms of the sale agreement, the Company received $3.5 million in cash at closing and
received the balance of $1.0 million in cash in July and August 2004 upon presentation of
final accounting.The Company believes the divested manufacturing assets were not a component of an entity
because the operations and cash flows could not be clearly distinguished, operationally and
for financial purposes, from the rest of the entity. Accordingly, pursuant to SFAS No. 144,
Accounting for the Impairment or Disposal of Long Lived Assets, failure to meet such a
condition precluded these assets from being presented as discontinued operations.As a result of the transaction, the Company recorded a loss on sales of assets of $0.1
million for the year ended December 31, 2004. This loss includes the value of options to
purchase 10,000 shares of the Companys common stock granted to the former executive at an
exercise price of $16.00 in July 2004 which was originally accrued at June 30, 2004.(4)
    Equity Transactions (a)
    Common Stock On April 5, 2002, the Company sold 1,569,366 shares of
unregistered common stock at $15.93 per share (the Primary Shares) in a private placement
to General Atlantic Partners 74, L.P., GAP Coinvestment Partners II, L.P., Gapstar, LLC,
GAPCO GmbH & Co. KG. (the General Atlantic Purchasers), four companies affiliated with
General Atlantic Partners, LLC (GAP), a private equity investment fund and received net
proceeds of $24.9 million. In addition, the Company also issued two-year warrants for the
purchase of 549,279 shares of common stock exercisable at $15.93 per share (the GAP
Warrants). No placement agent was used in this transaction. The Company granted the
General Atlantic Purchasers and certain of their transferees and affiliates certain demand
and piggy back registration rights starting one year from closing. Additionally, in
connection with the transaction, a managing member of GAP was appointed as a director to
fill a vacancy on the Companys Board of Directors. F-23




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  As a result of the purchase of the Primary Shares, the General Atlantic Purchasers owned
approximately 23.4% of the then outstanding shares of the Companys common stock. At the
Companys Annual Meeting of Shareholders held on May 22, 2002, the shareholders of the
Company approved that the GAP Warrants may be exercised at any time after April 5, 2003, and
prior to April 5, 2004, pursuant to the original terms of the warrant. On March 25, 2004,
GAP exercised these warrants for $8.75 million in cash.In May 2002, the Company issued 30,034 shares of unregistered ProxyMed common stock (valued
at $0.6 million) in its acquisition of KenCom Communications & Services, Inc. (KenCom), a
privately-owned provider of laboratory communication solutions, and paid acquisition related
costs of $52,000. The number of shares of common stock issued was based on the average of
the closing prices of the Companys common stock for the five days immediately preceding the
closing.As more fully discussed in Note 2 (a), on March 2, 2004, the Company issued 3,600,000 shares
of its common stock in its acquisition of PlanVista. Additionally, ProxyMed raised $24.1
million in a private placement sale of 1,691,227 shares its common stock to various entities
affiliated with General Atlantic Partners and Commonwealth Associates to partially fund
repayment of PlanVistas debts and other obligations outstanding at the time of the
acquisition.(b)
    Series B Warrants  In December 2002, 34,500 of Series B Preferred warrants
were converted into an equivalent number of common shares for $0.5 million in cash. Since
December 31, 2002, no Series B Warrants are outstanding.(c)
    Series C Preferred Stock  On December 13, 2001, the Company offered to convert
its then outstanding Series C 7% Convertible Preferred Stock (the Series C Preferred)
into shares of common stock at a reduced conversion price (the Conversion Offer). For a
period of sixty days ending February 11, 2002, the holders of the Series C Preferred shares
were able to convert such shares at a reduced conversion price of $13.05 per share instead
of the original conversion price of $15.00. A deemed dividend charge of $0.6 million was
recorded in the first quarter of 2002 for conversions of 31,650 shares of Series C
Preferred into 242,508 shares of common stock consummated after the 2001 year-end.
Subsequent to the Conversion Offer, 1,000 shares of Series C Preferred were converted into
6,666 shares of common stock. As of both December 31, 2004 and 2003, there were 2,000
unconverted shares of Series C Preferred, which are convertible into 13,333 shares of
common stock.(d)
    Series C Warrants.  In 2002, 8,333 Series C Warrants were converted into 1,190
shares of common stock. As of both December 31, 2004 and 2003, Series C Warrants remain
outstanding to purchase 42,833 of shares of common stock. These remaining Series C
Warrants expire in June 2005. F-24




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (e)
    Other Warrants  In conjunction with a joint marketing agreement entered into
between the Company and a subsidiary of First Data Corporation (FDC), an electronic
commerce and payment services company, in July 2003, the Company issued to FDC a warrant
agreement under which FDC may be entitled to purchase up to 600,000 of the Companys common
stock at $16.50 per share. The ability of FDC to exercise under the warrant agreement is
dependent upon the Company achieving certain revenue-based thresholds under such joint
marketing agreement over a three and one-half year period. Additionally, in connection
with this agreement, four entities affiliated with GAP, current investors in the Company,
received an aggregate of 243,882 warrants, as a result of pre-emptive rights relating to
their investment in the Company in April 2002. The GAP warrant agreements are subject to
the same terms and conditions as those issued to FDC and are exercisable only if FDCs
right to exercise under its warrant agreement is perfected. At the time any of the revenue
thresholds is met, the Company may have to record a charge in its statement of operations
for the value of the FDC warrants. Both the FDC and GAP warrants expire in December 2006.Additionally, at December 31, 2004, there are 13,333 warrants exercisable at $149.40 through
June 2007 issued in connection with a 1997 business transaction consummated by ProxyMed.(f)
    Other  ProxyMed has remaining 1,555,000 authorized but unissued shares of
preferred stock, par value $0.01 per share, which is entitled to rights and preferences to
be determined at the discretion of the Board of Directors. F-25




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (5)
    Segment InformationProxyMed operates in two reportable segments that are separately managed: Transaction Services
(formerly known as Electronic healthcare transaction processing) and Laboratory Communication
Solutions. Transaction Services includes transaction, cost containment and value-added services
principally between healthcare providers and insurance companies (Payer Services and Medical
Cost Containment Services) and physicians and pharmacies (Prescription Services); and Laboratory
Communication Solutions includes the sale, lease and service of communication devices
principally to laboratories and through June 30, 2004, the contract manufacturing of printed
circuit boards (Laboratory Services). As a result of a re-alignment of its Corporate overhead
functions (i.e., executives, finance, legal, human resources, facilities, insurance, etc.) in
the second quarter of 2004, the Company is now reporting these expenses and assets as part of
its Transaction Services segment. International sales were attributable to the manufacturing
assets of the Laboratory Communication Solutions segment that were
sold on June 30, 2004. Due to the bundling of our products and
services, it is impractical to break revenue by product within each
segment. In thousands
    

Year
Ended December 31,2004
    
    
    2003
    
    
    2002Net revenues by operating segment:Transaction Services
    
    $
    71,304
    
    
    $
    46,673
    
    
    $
    22,439Laboratory Communication Solutions
    
    
    18,942
    
    
    
    24,883
    
    
    
    27,743$
    90,246
    
    
    $
    71,556
    
    
    $
    50,182Net revenues by geographic location:Domestic
    
    $
    90,140
    
    
    $
    70,340
    
    
    $
    49,500International (only in Laboratory Communication Solutions) (1)
    
    
    106
    
    
    
    1,216
    
    
    
    682$
    90,246
    
    
    $
    71,556
    
    
    $
    50,182Operating income (loss) by operating segment:Transaction Services
    
    $
    (3,115
    )
    
    $
    (920
    )
    
    $
    597Laboratory Communication Solutions
    
    
    1,938
    
    
    
    1,119
    
    
    
    3,535Corporate
    
    
    (797
    )
    
    
    (3,841
    )
    
    
    (2,792
    )$
    (1,974
    )
    
    $
    (3,642
    )
    
    $
    1,340Depreciation and amortization by operating segment:Transaction Services
    
    $
    8,718
    
    
    $
    4,754
    
    
    $
    1,581Laboratory Communication Solutions
    
    
    823
    
    
    
    1,369
    
    
    
    857Corporate
    
    
    222
    
    
    
    193
    
    
    
    198$
    9,763
    
    
    $
    6,316
    
    
    $
    2,636Capital expenditures and capitalized software by operating segment:Transaction Services
    
    $
    3,957
    
    
    $
    3,345
    
    
    $
    1,291Laboratory Communication Solutions
    
    
    392
    
    
    
    602
    
    
    
    693Corporate
    
    
    
    
    
    
    80
    
    
    
    22$
    4,349
    
    
    $
    4,027
    
    
    $
    2,006
 December 31,Total assets by operating
segment:
    
    2004
    
    
    2003
    
    
    2002Transaction Services
    
    $
    173,061
    
    
    $
    54,052
    
    
    $
    58,957Laboratory Communication Solutions
    
    
    11,342
    
    
    
    12,053
    
    
    
    12,904Corporate
    
    
    
    
    
    
    7,025
    
    
    
    16,843$
    184,403
    
    
    $
    73,130
    
    
    $
    88,704
   (1)
    
    All amounts are transacted in US Dollars F-26




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (6) Investment in Warrant In June 2003, the Company entered into a joint marketing and distribution agreement with
PlanVista to provide the Companys electronic healthcare transaction processing services and
PlanVistas network access and repricing service product as an integrated package to existing
and prospective payer customers. As part of the agreement, PlanVista granted the Company a
warrant to purchase 15% of the number of outstanding shares of PlanVista common stock on a
fully-diluted basis as of the time of exercise for $1.95 per share. The warrant was exercisable
immediately and expired in December 2003. The warrant was being accounted for at its cost under
Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in
Common Stock since it did not meet the conditions necessary to be accounted for under SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. Upon expiration of the
warrant in December 2003, the Company recorded an impairment loss in the amount $0.5 million
(representing the initial value of the warrant and calculated using a Black Scholes model) which
is reflected in other expense in the Companys consolidated statement of operations for the year
ended December 31, 2003. Additionally, the initial value of the warrant of approximately $0.5 million along with
additional amounts of $0.4 million received by the Company under the agreement was being
amortized as a reduction of cost of sales over 36 months. Amortization related to these items
was $0.1 million and $0.2 million for the years ended December 31, 2004 and 2003, respectively.
Upon the consummation of its acquisition of PlanVista on March 2, 2004, the Company wrote off
the $0.6 million of remaining unamortized amount as part of the purchase price of the
acquisition (see Note 2(a)).  (7)
    Inventory Inventory at December 31 consists of the following: In thousands
    
    2004
    
    
    2003Materials, supplies and component parts
    
    $
    651
    
    
    $
    2,021Work in process
    
    
    32
    
    
    
    590Finished goods
    
    
    1,098
    
    
    
    7441,781
    
    
    
    3,355Less: Obsolescence reserve
    
    
    (6
    )
    
    
    (8
    )$
    1,775
    
    
    $
    3,347
 F-27




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (8)
    Property and Equipment Property and equipment at December 31 consists of the following: EstimatedIn thousands
    
    2004
    
    
    2003
    
    
    useful livesFurniture, fixtures and equipment
    
    $
    1,763
    
    
    $
    2,394
    
    
    
    4 to 7 yearsComputer hardware and software
    
    
    10,132
    
    
    
    6,022
    
    
    
    2 to 5 yearsService vehicles
    
    
    139
    
    
    
    211
    
    
    5 yearsLeasehold improvements
    
    
    1,087
    
    
    
    986
    
    
    Life of leaseRevenue earning equipment
    
    
    1,302
    
    
    
    1,243
    
    
    
    3 to 5 years14,423
    
    
    
    10,856Less: accumulated depreciation
    
    
    (9,622
    )
    
    
    (6,084
    )Property and equipment, net
    
    $
    4,801
    
    
    $
    4,772
 Depreciation expense was $3.3 million in 2004, $3.1 million in 2003, and $1.8 million in 2002.
Accumulated depreciation for revenue earning equipment at December 31, 2004 and 2003 was $0.3
million and $0.6 million, respectively. (9) Goodwill and Other Intangible Assets  (a)
    Goodwill  The Company adopted the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets effective January 1, 2002. Under SFAS No. 142, goodwill is
reviewed at least annually for impairment. SFAS No. 142 requires that goodwill be tested
for impairment at the reporting unit level at adoption and at least annually thereafter,
utilizing a fair value methodology versus an undiscounted cash flow method required under
previous accounting rules. In accordance with the adoption of SFAS No. 142, we
completed our annual tests at December 31, 2004 and 2003 utilizing
techniques including a market value analysis. No impairment charges were recorded as a
result of these tests. F-28




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued The changes in the carrying amounts of goodwill, net, for 2004 by operating segment are as
follows: LaboratoryCommunicationIn thousands
    
    Transaction Services
    
    
    Solutions
    
    
    TotalBalance as of December 31, 2003
    
    $
    28,673
    
    
    $
    2,102
    
    
    $
    30,775Goodwill acquired during 2004
    
    
    62,829
    
    
    
    
    
    
    
    62,829Balance as of December 31, 2004
    
    $
    91,502
    
    
    $
    2,102
    
    
    $
    93,604
  (b)
    Other Intangible Assets  The carrying amounts of other intangible assets as of
December 31, 2004 and 2003 by category, are as follows: In thousands
    
    December 31, 2004
    
    
    December 31, 2003Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net
    
    
    Amount
    
    
    Amortization
    
    
    NetCapitalized software
    
    $
    2,661
    
    
    $
    (769
    )
    
    $
    1,892
    
    
    $
    1,193
    
    
    $
    (156
    )
    
    $
    1,037Purchased technology
    
    
    10,342
    
    
    
    (4,738
    )
    
    
    5,604
    
    
    
    9,721
    
    
    
    (3,221
    )
    
    
    6,500Customer relationships
    
    
    34,283
    
    
    
    (4,324
    )
    
    
    29,959
    
    
    
    9,793
    
    
    
    (1,446
    )
    
    
    8,347Provider network
    
    
    16,200
    
    
    
    (1,350
    )
    
    
    14,850
    
    
    
    
    
    
    
    
    
    
    
    $
    63,486
    
    
    $
    (11,181
    )
    
    $
    52,305
    
    
    $
    20,707
    
    
    $
    (4,823
    )
    
    $
    15,884
 As part of its acquisition of MedUnite (see Note 2(b)), the Company recorded $6.6 million in
customer relationships in the laboratory communication solutions
segment, and approximately $1.2 million and $4.8 million for the legacy and real-time
technology platforms, respectively. As part of its acquisition of PlanVista (see Note
2(a)), the Company recorded $24.6 million in customer relationships, $16.2 million for a
provider network, and $1.2 million in technology platforms, respectively. The valuations of
the provider network and technology platforms were based on managements estimates which
included consideration of a replacement cost methodology. The values of the customer
relationships were calculated on a discounted cash flow model. As a result of managements periodic review for impairment in accordance with SFAS No. 144,
the Company wrote off approximately $0.5 million in customer
relationships in the laboratory communication solutions segment and approximately $0.1 million in capitalized
software in the transaction services segment during the year ended December 31, 2003. The impairment
charges were included in write-off of impaired and obsolete assets in the accompanying consolidated statements of operations. F-29




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued Estimates of useful lives of other intangible assets are based on historical experience, the
historical experience of the entity from which the intangible assets were acquired, the
industry in which the Company operates, or on contractual terms. If indications arise that
would materially affect these lives, an impairment charge may be
required and useful lives may be reduced. Intangible
assets are being amortized over their estimated useful lives on either a straight-line or
other basis as follows: Estimateduseful livesCapitalized software
    
    3 - 5 yearsPurchased technology
    
    1 - 12 yearsCustomer relationships
    
    4.6 - 12 yearsProvider network
    
    10 years
  Amortization expense of other intangible assets was $6.5 million, $3.2 million, and $0.8
million for the years ended December 31, 2004, 2003 and 2002, respectively.  As of December 31, 2004, estimated future amortization expense of other intangible assets in
each of the years 2005 through 2009 is as follows: In thousands2005
    
    $
    7,3062006
    
    
    7,1652007
    
    
    6,8022008
    
    
    6,1882009
    
    
    5,094$
    32,555
  (10)
    Restricted CashAt December 31, 2003, restricted cash includes $0.2 million to support a letter of credit
used as collateral for a financed liability insurance policy. Since the letter of credit
expires in February 2005, this collateral (which has been
reduced to $50,000 at
December 31, 2004) is included in other current assets at December 31, 2004. F-30




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (11)
    Accounts Payable and Accrued ExpensesAccounts payable and accrued expenses at December 31 consist of the following:: In thousands
    
    2004
    
    
    2003Accounts payable
    
    $
    2,072
    
    
    $
    2,956Accrued payroll and related costs
    
    
    3,196
    
    
    
    1,860Accrued vendor rebates and network fees payable
    
    
    2,825
    
    
    
    1,198Accrued professional fees
    
    
    1,645
    
    
    
    418Acquisition related costs
    
    
    
    
    
    
    459Other accrued expenses
    
    
    3,899
    
    
    
    1,373Total accounts payable and accrued expenses
    
    $
    13,637
    
    
    $
    8,264
 Other accrued expenses include the current portion of capital leases payable, customer
deposits, estimated property and other non-income based taxes.  (12)
    Debt Obligations  (a)
    Senior Debt  As a result of the acquisition of PlanVista, the Company assumed
and guaranteed a $20.4 million secured obligation to PVC Funding
Partners, LLC, an owner of approximately 20% of the outstanding
common stock of the Company. This obligation is payable in
monthly installments of $0.2 million and matures with a balloon
payment of $17.6 million on
May 31, 2005. It originally bore an interest rate of 6%, payable monthly in cash, which
increased to 10% on December 1, 2004. Under the covenants of the senior debt obligation,
PlanVista (as a wholly-owned subsidiary) is limited in its ability to transfer cash to
ProxyMed (as the parent company). Additionally, the assets of PlanVista were not eligible
collateral for the Companys asset-based line of credit due to covenants of the senior
debt. At December 31, 2004, the balance of this senior debt is $18.4 million. As of March
8, 2005, the Company has executed a term sheet with our current bank to expand and extend its
current line of credit. Wachovia will receive first lien security on all ProxyMed assets
including all subsidiaries. The Company expects to satisfy the
obligation of the note it assumed as part of
the PlanVista acquisition through the proceeds of this expanded line of credit and its
current cash balances prior to the due date of the assumed note. F-31




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (b)
    Convertible Notes  On December 31, 2002, the Company issued $13.4 million in
uncollateralized convertible promissory notes at 4% to the former shareholders of MedUnite
as part of the consideration paid in its acquisition of MedUnite. Interest is payable
quarterly in cash in arrears. The convertible promissory notes are payable in full on
December 31, 2008 unless converted earlier upon the meeting of certain aggregate revenue
triggers by the former shareholders. After an offsetting claim by the Company in October
2003 in the amount of $0.3 million, the outstanding balance of these notes is $13.1
million. Additionally, as a result of the reduction in principal, the notes are now
convertible into 716,968 shares of the Companys common stock subject to achieving the
revenue triggers. The first revenue trigger was met in the fourth quarter of 2003.(c)
    Notes Payable  In February 2003, the Company financed $0.3 million for a
certain liability insurance policy required for the MedUnite acquisition over 24 months at
5.25% to a third-party. As of December 31, 2004, this note had been paid in full, however,
due to timing provisions in the note, it is collateralized by a letter of credit in the
amount of $50,000 which is supported with restricted cash through February 2005 (see Note
10).In March 2003, the Company restructured $3.4 million in accounts payable and accrued
expenses acquired from MedUnite and outstanding at December 31, 2002 to one vendor by paying
$0.8 million in cash and financing the balance of $2.6 million with an unsecured note
payable over 36 months at 8% commencing in March 2003. At December 31, 2004, the balance of
this note payable is $1.1 million.In April 2003, the Company financed a net total of $2.0 million ($2.8 million in accounts
payable and accrued expenses offset by $0.8 million in accounts receivable) existing at
December 31, 2002 from MedUnite to NDCHealth by issuing an unsecured note payable over 24
months at 6%. At December 31, 2004, the balance of this note payable is $0.8 million.As a result of the acquisition of PlanVista, the Company also assumed notes payable to two
former board members of PlanVista. The combined balance of these notes is $0.5 million at
December 31, 2004. One of these board members has been appointed as director of ProxyMed as
a result of the acquisition. These notes bear interest at prime plus 4% and a total of $0.2
million in interest is accrued at December 31, 2004. Both principal and interest were due
on December 1, 2004; however, repayment of principal and accrued interest are expressly
subordinated to prior payment of the Senior Debt which has not yet been paid and is due on
May 31, 2005. F-32




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  The Company also assumed an unsecured note payable that financed a certain liability policy
of PlanVista that was required as part of the acquisition. This note bears interest at 8.5%
and is payable to a third-party. As of December 31, 2004, the balance of this note had been
paid in full.(d)
    Revolving Credit Facility  In December 2003, the Company entered into a $12.5
million asset-based line of credit with its commercial bank maturing the earlier of (1)
December 2004 or (2) six months prior to the maturity date of the senior debt assumed in
the acquisition of PlanVista (which currently matures in May 2005) unless such debt can be
repaid or refinanced. In December 2004, the bank agreed to extend the maturity date of
this line of credit through February 28, 2005. With extensions granted from the commercial
bank, this line of credit has now been extended through April 30, 2005. Borrowings under
such facility are subject to eligible cash, accounts receivable, and inventory and other
conditions and excluded the assets and borrowing capacity of PlanVista. Borrowings will
bear interest at the prime rate plus 0.5% or at LIBOR plus 2.25% (or LIBOR plus 0.75% in
the case of borrowings against eligible cash only.) Interest was payable monthly. Costs
related to this facility totaling $0.1 million were being amortized as interest expense
over a one-year period through November 2004.As of March 8, 2005, the Company has executed a term
sheet with its commercial bank to expand and
extend its current line of credit. However, this is not a commitment
by the bank to lend. The bank will receive first lien security on all
ProxyMed assets including all subsidiaries. The Company expects to
satisfy the obligations of the note it
assumed as part of the PlanVista acquisition through the proceeds of this expanded line of
credit and its current cash balances prior to the due date of the assumed note (see Note
12(a)). However, the Company cannot be assured that this will occur. F-33




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued Debt as of December 31 consists of the following: In thousands
    
    2004
    
    
    2003Related
party debt
    
    $
    18,394
    
    
    $
    Convertible debt
    
    
    13,137
    
    
    
    13,137Notes payable
    
    
    2,384
    
    
    
    3,76933,915
    
    
    
    16,906Less: current maturities
    
    
    (20,572
    )
    
    
    (1,712
    )$
    13,343
    
    
    $
    15,194
  As of December 31, 2004, debt payments over the next several years are as follows. The
amounts assume no conversion of the convertible notes: In thousands2005
    
    $
    20,5722006
    
    
    2062007
    
    
    2008
    
    
    13,137$
    33,915
 F-34




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (13)
    Income TaxesThe income tax provision for the years ended December 31 is as follows: In thousands
    
    2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    40
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    Deferred:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Income tax provision
    
    $
    40
    
    
    $
    
    
    
    $
    
 This
income tax provision differs from the amount computed by applying the statutory federal income tax rate to
the net loss reflected on the Consolidated Statements of Operations in the three years ended
December 31 due to the following: In thousands
    
    2004
    
    
    2003
    
    
    2002Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Federal income tax benefit at statutory rate
    
    $
    (1,278
    )
    
    
    (34.0
    )%
    
    $
    (1,700
    )
    
    
    (34.0
    )%
    
    $
    663
    
    
    
    34.0
    %State income tax benefit
    
    
    (133
    )
    
    
    (3.5
    )
    
    
    (174
    )
    
    
    (3.5
    )
    
    
    80
    
    
    
    4.1Non-deductible items
    
    
    (90
    )
    
    
    (2.4
    )
    
    
    205
    
    
    
    4.1
    
    
    
    21
    
    
    
    1.1Increase (decrease) in valuation allowance
    
    
    1,541
    
    
    
    41.1
    
    
    
    1,669
    
    
    
    33.4
    
    
    
    (764
    )
    
    
    (39.2
    )Total provision
    
    $
    40
    
    
    
    1.2
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
 The significant components of the deferred tax asset account are as follows at December 31,
2004 and 2003: In thousands
    
    2004
    
    
    2003Net operating losses  Federal
    
    $
    69,110
    
    
    $
    35,674Net operating losses  State
    
    
    8,048
    
    
    
    4,155Depreciation and amortization
    
    
    
    
    
    
    5,070Capitalized start up costs
    
    
    3,951
    
    
    
    6,447Other  net
    
    
    3,889
    
    
    
    681Total deferred tax assets
    
    
    84,998
    
    
    
    52,027Less valuation allowance
    
    
    (71,054
    )
    
    
    (52,027
    )Net deferred tax assets
    
    
    13,944
    
    
    
    Deferred tax liabilityDepreciation and amortization
    
    
    (13,944
    )
    
    
    Net deferred tax assets
    
    $
    
    
    
    $
    
 Based on the weight of available evidence, a valuation allowance has been provided to offset
the entire net deferred tax asset amount. F-35




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued Total
net operating loss carryforwards at December 31, 2004 are
$225.2 million, of which $84.4
million and $54.5 million are attributed to the acquisitions of PlanVista and MedUnite,
respectively. These net operating losses will expire between 2013 and 2024. Due to the changes in
ownership control of the Company at various dates, as defined under Internal Revenue Code Section
382, net operating losses are limited in their availability to offset current and future taxable
income. The annual limitations range from $1.9 million to $11.5 million. The
net deferred tax assets increased during 2004 by $17.0 million due to the PlanVista
acquisition. As a result of the change in ownership of MedUnite, the deferred tax asset attributable to
MedUnites acquired net operating loss carryforward was adjusted by approximately $22 million,
which represents the amount of net operating loss that will expire unutilized. Total income tax payments during the year ended December 31, 2004 were $78,000 which includes
$53,600 related to PlanVista pre-acquisition periods. F-36




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (14) Stock Options ProxyMed has various stock option plans for employees, directors and outside consultants,
under which both incentive stock options and non-qualified options may be issued. Under such
plans, options to purchase up to 2,031,017 shares of common stock may be granted. Options may be
granted at prices equal to the fair market value at the date of grant, except that incentive stock
options granted to persons owning more than 10% of the outstanding voting power must be granted at
110% of the fair market value at the date of grant. In addition, as of December 31, 2004, options
for the purchase of 400,407 shares to newly-hired employees remained outstanding. Stock options
issued by ProxyMed generally vest within three or four years or upon a change in control of the
Company, and expire up to ten years from the date granted. Stock option activity was as follows
for the three years ended December 31, 2004: Options
    
    
    
    
    
    
    Weighted averageavailable
    
    
    Options
    
    
    exercise pricefor grant
    
    
    outstanding
    
    
    of optionsBalance, December 31, 2001
    
    
    232,467
    
    
    
    829,771
    
    
    $
    31.22Options authorized
    
    
    608,000
    
    
    
    
    
    
    
    Options granted
    
    
    (330,847
    )
    
    
    330,847
    
    
    $
    16.89Options expired/forfeited
    
    
    65,422
    
    
    
    (76,063
    )
    
    $
    82.29Balance, December 31, 2002
    
    
    575,042
    
    
    
    1,084,555
    
    
    $
    23.27Options authorized
    
    
    
    
    
    
    
    
    
    
    Options granted
    
    
    (443,750
    )
    
    
    443,750
    
    
    $
    13.25Options exercised
    
    
    
    
    
    
    (556
    )
    
    $
    12.00Options expired/forfeited
    
    
    90,521
    
    
    
    (101,080
    )
    
    $
    36.09Balance, December 31, 2003
    
    
    221,813
    
    
    
    1,426,669
    
    
    $
    19.26Options authorized
    
    
    750,000
    
    
    
    
    
    
    
    Options granted
    
    
    (537,253
    )
    
    
    537,253
    
    
    $
    14.96Options exercised
    
    
    
    
    
    
    (1,558
    )
    
    $
    10.14Options expired/forfeited
    
    
    142,835
    
    
    
    (149,455
    )
    
    $
    30.80Balance, December 31, 2004
    
    
    577,395
    
    
    
    1,812,909
    
    
    $
    17.04
 The following table summarizes information regarding outstanding and exercisable options as of
December 31, 2004: Options outstanding
    
    
    Options exercisableWeighted averageremainingRange of exercise
    
    Number
    
    
    contractual
    
    
    Weighted average
    
    
    Number
    
    
    Weighted averageprices
    
    outstanding
    
    
    life (years)
    
    
    exercise price
    
    
    exercisable
    
    
    exercise price$7.10 - $15.00
    
    
    422,810
    
    
    
    8.5
    
    
    $
    9.87
    
    
    
    143,504
    
    
    $
    11.68$15.01 - $18.00
    
    
    777,908
    
    
    
    8.5
    
    
    $
    16.65
    
    
    
    264,144
    
    
    $
    16.43$18.01 - $23.00
    
    
    607,191
    
    
    
    6.2
    
    
    $
    21.55
    
    
    
    584,025
    
    
    $
    21.63$23.01 - $198.75
    
    
    5,000
    
    
    
    2.6
    
    
    $
    136.65
    
    
    
    5,000
    
    
    $
    136.651,812,909
    
    
    
    
    
    
    
    
    
    
    
    996,673
 F-37




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued The following table summarizes information regarding options exercisable as of December 31: 2004
    
    
    2003
    
    
    2002Number exercisable
    
    
    996,673
    
    
    
    825,448
    
    
    
    624,075Weighted average exercise price
    
    $
    19.40
    
    
    $
    22.73
    
    
    $
    26.64
 The
weighted average grant date fair value of options granted ($10.51 in 2004, $10.63 in 2003,
and $13.37 in 2002) was estimated using the Black-Scholes option pricing model with the following
weighted average assumptions: 2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    4.18
    %
    
    
    4.08
    %
    
    
    4.46
    %Expected life
    
    6.0 years
    
    10.0 years
    
    9.9 yearsExpected volatility
    
    
    76.2
    %
    
    
    80.8
    %
    
    
    81.0
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 In January 2002, 40,000 vested stock options for three resigning directors were amended to
allow for an extension of the exercise period through December 31, 2003. These options were never
exercised and expired as of December 31, 2003. Additionally, in January 2002, the Companys Board of Directors agreed to cancel up to 37,767
stock options with exercise prices ranging from $57.45 to $202.50 issued to current officers and
employees of the Company with the intent of reissuing the same number of options in the future at
the then current market price. In September 2002, the Company issued 36,867 stock options,
including 25,366 to the Companys then chief financial officer and three senior executives, at an
exercise price of $15.55 per share pursuant to this reissuance program. At the Companys Annual Meeting of Shareholders held on May 22, 2002, the shareholders
approved a new 2002 Stock Option Plan pursuant to which options to purchase 600,000 shares of
common stock may be issued to employees, officers and directors. Subsequent to December 31, 2003,
the Companys shareholders agreed to amend the 2002 Stock Option Plan to allow for the issuance of
up to 1,350,000 shares of common stock (see Note 2(a)). Additionally, in May 2002, the Companys non-employee directors were granted a total of 55,000
options at an exercise price of $20.20 to compensate the directors upon initial appointment to the
board, re-election to the board, and participation in sub-committees. Option grants for initial
appointment and subsequent re-election to the board vest equally over a three-year period. Options
for participation in sub-committees vest in full after three years but may be accelerated to vest
after each sub-committee meeting attended. In October 2002, 15,000 and 1,875 options with an
exercise price of $12.54 were granted to a newly appointed non-employee director for initial
appointment and sub-committee membership, respectively. Of the total sub-committee grants, 8,125
options were accelerated to vest on December 31, 2002, 2,500 options were forfeited by a resigning
director, and the remaining 6,250 sub-committee grants vested in 2003. F-38




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued In June 2002, the Companys Board of Directors authorized the issuance of stock options to
employees and officers of the Company as part of a structured retention and reward plan. Initially
in June 2002, 47,267 options were granted at an exercise price of $17.36 per share. Included in
these grants were a total of 25,000 options granted to the Companys chairman/chief executive
officer and president/chief operating officer. In September 2002, an additional 38,050 options
were granted to other employees and officers at an exercise price of $15.55 per share, including
14,100 stock options to the Companys former chief financial officer and one other senior
executive. These options are for a ten-year term and vest equally over a three-year period. Also in June 2002, the Companys Board of Directors authorized the issuance of stock options
to ProxyMeds executive and senior management as part of their compensation plan for the 2002 year.
As a result, 56,440 options were granted to the Companys chairman/chief executive officer and
president/chief operating officer at an exercise price of $17.36. In September 2002, 63,106
options were granted to the remaining executive and senior management at an exercise price of
$15.55 per share. All of these options are for a ten-year term, vest in full after five years and
contain a clause that enables the accelerated vesting of a portion or all of the options if
specific, pre-determined individual and company goals are met during the 2002 year. Of the 119,546
total options granted under the 2002 compensation plan discussed above, 80,194 options were
accelerated to vest on December 31, 2002 and the remaining 39,352 options will vest in 2007. In March 2003, the Company granted 36,000 stock options at exercise prices of $7.60 to $9.24
per share to certain employees of MedUnite and 10,000 stock options at an exercise price of $7.60
to an executive officer of ProxyMed. In April 2003, the six non-employee directors of ProxyMed were each granted 10,000 stock
options at an exercise price of $7.28 per share. Such options were granted pursuant to the
Companys approved stock option plans and are for a ten-year term and vest equally over three years
from the date of grant. Additionally, in May 2003, the Companys non-employee directors were
granted a total of 30,000 and 15,000 options at an exercise price of $10.63 to compensate the
directors upon re-election to the board and participation in sub-committees, respectively, pursuant
to guidelines adopted by the Companys Board of Directors in May 2002. The option grants for the
re-election to the board are for a ten-year term and vest equally over a three-year period.
Options for participation in sub-committees are for a ten year term and vest in full after five
years but a portion may be accelerated to vest after each sub-committee meeting attended. Of the
total sub-committee grants, 11,250 options were accelerated to vest on December 31, 2004 and the
remaining 3,750 sub-committee grants vested in 2004. In October 2003, the Compensation Committee approved grants of 125,000 and 50,000 stock
options at an exercise price of $15.90 per share to the Companys then current chairman/chief
executive officer and president/chief operating officer, respectively. Such options are for a
ten-year term and vest equally over three years from the date of grant. In connection with the commencement of employment of the Companys new chief financial officer
in December 2003, the Company granted this executive a total of 100,000 stock options at an
exercise price of $16.01 per share. Such options are for a ten-year term and vest equally over
three years from the date of grant. F-39




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued During the year ended December 31, 2004, the Company granted 360,373 stock options to officers
and employees at exercise prices between $7.18 and $20.05 per share. Such options are for a
ten-year term and generally vest equally over the three or four years following the date of the
grant. However, of these options, 173,120 options granted to employees of PlanVista upon its
acquisition by ProxyMed will vest two-thirds on the first anniversary date of the grant and
one-third on the third anniversary date of the grant. As described in Note 2(b), since these
options were granted at an exercise price of $17.74, which was below the $19.00 market price at the
time of issuance, the Company records periodic non-cash compensation charges over the vesting
period of the options based on the intrinsic value method. For the year ended December 31, 2004,
the Company recorded charges of $0.1 million for these options. In March 2004, 26,880 options at an exercise price of $17.74 per share were granted to
PlanVistas former chief financial officer in connection with a consulting arrangement with him.
Fifty percent of these options vested immediately upon the change of control and 25% will vest on
each of the three month and six month anniversaries of the change in control. The Company recorded
$0.1 million in compensation expense associated with this grant in the three months ended March 31,
2004 based on the Black-Scholes model using the following assumptions: risk-free interest rate of
1.2%, expected life of 9 months, expected volatility of 42% and no dividend yield. Additionally, in March 2004, 15,000 stock options at an exercise price of $17.50 per share
were granted to a new director upon appointment to the Companys board of directors as result of
the acquisition of PlanVista. Such options are for a ten-year term and vest equally over the three
years following the date of the grant. In June 2004, the Companys outside directors were granted a total of 35,000 and 15,000
options at an exercise price of $20.00 to compensate the directors upon re-election to the board
and for participation on a committee, respectively, pursuant to guidelines adopted by the Companys
Board of Directors in May 2002. Option grants for the re-election to the board are for a ten-year
term and vest immediately. Options for participation in committees are for a ten-year term and
vest in full after three years but a portion may be accelerated to vest after each committee
meeting attended. As of December 31, 2004, the 15,000 committee options granted for the 2004-2005
term were vested. As noted in Note 3, stock options to purchase 10,000 shares of the Companys common stock at
an exercise price of $16.00 were granted to a former executive of the Company who purchased the
Companys contract manufacturing assets on June 30, 2004. Such options were valued at $68,000 and
included in the loss on disposal of assets for the year ended December 31, 2004. These options are
for a three-year term and 5,000 options vest the end of each of next two years. F-40




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued As a result of PlanVistas former chief executive officers change in status and modification
to the original stock option award as described in Note 2(a), the Company is amortizing the $0.1
million value of these options as a non-cash compensation charge in its consolidated statement of
operations over the 30-month period of the agreement in proportion to the vesting schedule of the
stock options. The value of these options was computed utilizing a Black-Scholes model using the
following assumptions: risk-free interest rate of 2.8%, expected life of 2.5 years, expected
volatility of 65% and no dividend yield. Additionally, each reporting period the Company must
measure the value of these options and record any increase in value as a period charge. As of
December 31, 2004, the value of these options had decreased below their original value and no
charge is required to be recorded for the year ended December 31, 2004. In December 2004, the Companys new chairman and interim chief executive officer was granted
stock options to purchase 75,000 shares of the Companys common stock at an exercise price of $7.10
per share in connection with his consulting agreement with the Company. Such options
are for ten years and vest equally over the next 12 months at the rate of 6,250 per month. The
options will cease to vest if the consulting agreement is terminated. A compensation charge of
$14,400 for these stock options will be recorded after each monthly vesting amount based on a
Black-Scholes model using the following assumptions: risk-free interest rate of 2.9%, expected life
of 2 years, expected volatility of 55% and no dividend yield. Subsequently in January 2005, he was
granted stock options to purchase another 25,000 shares of the Companys common stock at $9.87 per
share in his capacity as chairman of the board. Such options are for ten years and vest equally
over the next twelve months at the rate of 2,083 per month. There is no compensation charge
associated with these options. F-41




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (15)
    Supplemental Disclosure of Cash Flow Information Year Ending December 31,In thousands
    
    2004
    
    
    2003
    
    
    2002Cash paid for interest
    
    $
    20
    
    
    $
    932
    
    
    $
    63Acquisition of businesses:Common stock issued for businesses acquired
    
    $
    59,760
    
    
    $
    
    
    
    $
    600Debt issued for businesses acquired
    
    
    
    
    
    
    
    
    
    
    13,400Other acquisition costs accrued
    
    
    1,328
    
    
    
    
    
    
    
    8,382Other non-cash adjustments
    
    
    (642
    )
    
    
    
    
    
    
    Details of acquisitions:Working capital components, including cash acquired
    
    
    (388
    )
    
    
    
    
    
    
    4,609Property and equipment
    
    
    (658
    )
    
    
    
    
    
    
    (2,165
    )Goodwill
    
    
    (62,829
    )
    
    
    
    
    
    
    (24,837
    )Intangible assets acquired:Customer Relationships
    
    
    (24,600
    )
    
    
    
    
    
    
    (9,440
    )Purchased Technology
    
    
    (1,180
    )
    
    
    
    
    
    
    (6,395
    )Provider Network
    
    
    (16,200
    )
    
    
    
    
    
    
    Long-term debt
    
    
    44,889
    
    
    
    
    
    
    
    Other long-term liabilities, net
    
    
    520
    
    
    
    
    
    
    
    209
    
    
    
    
    
    
    
    (15,637
    )Cash acquired in acquisitions
    
    
    782
    
    
    
    
    
    
    
    1,184Net cash acquired from (used in) acquisitions
    
    $
    782
    
    
    $
    
    
    
    $
    (14,453
    )Disposition of assets:Detail of disposition:Working capital components, other than cash
    
    $
    3,742
    
    
    $
    
    
    
    $
    Property and equipment, net
    
    
    757
    
    
    
    
    
    
    
    Net cash provided from disposition
    
    $
    4,499
    
    
    $
    
    
    
    $
    
 F-42




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (16) Concentration of Credit Risk Substantially all of ProxyMeds accounts receivable are due from healthcare providers, such as
physicians and various healthcare institutional suppliers (payers, laboratories and pharmacies).
Collateral is not required. For
the years ended December 31, 2004 and 2003, approximately 8% and
15% of consolidated revenues,
respectively and for both periods 10% of revenues in the Transaction Services segment, were from NDCHealth, a
former shareholder of MedUnite. Additionally,
for the years ended December 31, 2004 and 2003 and 2002, approximately 9%, 12%
and 10% of consolidated revenues, and 45%, 34% and 18% of Laboratory Communication
segment revenues, respectively was from a single customer for the sale, lease and service of
communication devices. The potential loss of this customer would materially affect the Companys Laboratory
Communication Solutions segment operating results. (17) Employee Benefit Plans  (a)
    401(k) Savings Plan  ProxyMed has a 401(k) retirement plan for substantially
all employees who meet certain minimum lengths of employment and minimum age requirements.
Contributions may be made by employees up to the lessor of 60% of
their annual compensation, or the maximum IRS limit. Discretionary
matching contributions are approved or declined by the Companys board of directors each
year. There were no matching contributions during 2004, 2003 or 2002. Funding of
matching contributions each year may be offset by forfeitures from terminated employees.
As of December 31, 2004, there was approximately $0.3 million in available forfeitures that
the Company intends to use to offset future matching contributions. F-43




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  At the
time the Company acquired PlanVista in March 2004 (see Note 2(a)), eligible PlanVista
employees were immediately able to participate in the ProxyMed 401(k) Plan. The Company has
filed a plan of termination for the PlanVista 401(k) Plan with the Internal Revenue Service.
As of the filing of this report, that termination request is still pending approval.(b)
    Self-Insurance  In July 2004, the Company commenced a program of
self-insuring its medical and dental insurance plans. Prior to this time, the Company
participated in several premium only plans with various insurance carriers. Under this
self-insurance arrangement, the Company pays a third-party administrator to handle claims
processing and other administrative functions. For medical and dental insurance claims,
the Company has purchased stop-gap coverage which limits its claims exposure on a per
employee basis. For disability insurance, there is no such limitation. For the year ended
December 31, 2004, the Company has accrued $1.3 million
towards its self-insurance exposure.
Through December 31, 2004, $0.9 million in claims have been paid, representing
approximately 69% of the amounts set aside for claims.(c)
    Deferred Compensation Plan  As part of our acquisition of PlanVista, the
Company has a deferred compensation plan with two former officers of PlanVista and its
predecessor companies. The deferred compensation, which together with accumulated interest
is accrued but unfunded, is distributable in cash after retirement or termination of
employment, and amounted to approximately $0.8 million at December 31, 2004. Both
participants began receiving such deferred amounts, together with interest at 12% annually,
at age 65. F-44




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (18) Contingencies  (a)
    Litigation  In December of 2001, Insurdata Marketing Services, Inc.
(IMS) filed a lawsuit against HealthPlan Services, Inc. (HPS), a former subsidiary of
the Companys PlanVista subsidiary, for unspecified damages in excess of $75,000. The
complaint alleges that HPS failed to pay commissions to IMS pursuant to an arbitration
award rendered in 1996. On January 10, 2005, the court denied the Companys opposing
motion. The Company has filed an appeal on the issue of liability, and continues to
contest vigorously the amount of damages claimed by IMS. The Company
has determined exposure to be in the range of $0.6 million to
$1.6 million and has accrued $0.6 million at
December 31, 2004.In early 2000, four named plaintiffs filed a class action against Fidelity Group, Inc.
(Fidelity), HPS a former subsidiary of the Companys
PlanVista subsidiary, for unspecified damages. The complaint stems from the failure of a
Fidelity insurance plan, and alleges unfair and deceptive trade practices; negligent
undertaking; fraud; negligent misrepresentation; breach of contract; civil conspiracy; and
RICO violations against Fidelity, and its contracted administrator, HPS. Two principals of
the Fidelity plan have been convicted of insurance fraud and sentenced to prison in a
separate proceeding. The class has been certified and the case is proceeding in discovery.
The Company is contesting the plaintiffs claims vigorously, but is unable to predict the
outcome of the case or any potential liability.In 2004, the Company filed a tax appeal in the State of New York contesting a Notice of
Deficiency sent by the State of New York to PlanVista. The notice involved
taxes claimed to be due on a deconsolidated basis for the tax years ending December 31, 1999
through December 31, 2001 in an amount of $2.8 million. The Companys contends that
taxation on a consolidated basis is appropriate, and is vigorously pursuing its appeal.
However, the Company is unable to determine whether it will be successful or whether it will
be obligated to pay some or all of the alleged deficiencies.From time to time, the Company is a party to other legal proceedings in the course of its
business. The Company, however, does not expect such other legal proceedings to have a
material adverse effect on its business or financial condition.(b)
    Disputes  The Company accrued $0.4 million as a settlement of disputed
enrollment fees and rebate amounts to NDCHealth relating to periods before December 31,
2004. The Company has accrued this amount as an increase of cost of services in the
Transactions Services Segment for the year ended December 31, 2004(c)
    Other  In connection with the Companys June 1997 acquisition of its PreScribe
technology used in its Prescription Services business, the Company would be obligated to
pay up to $10 million to the former owner of PreScribe in the event of a divestiture of a
majority interest in ProxyMed, or all or part of the PreScribe technology. F-45




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (19) Commitments and Other  (a)
    Leases  ProxyMed leases certain computer and office equipment used in its
transaction services business that have been classified as capital leases. The Company
also leases premises and office equipment under operating leases which expire on various
dates through 2010. The leases for the premises contain renewal options, and require
ProxyMed to pay such costs as property taxes, maintenance and insurance. At December 31,
2004, the present value of the capital leases and the future minimum lease payments under
non-cancelable operating leases with initial or remaining lease terms in excess of one year
(net of payments to be received under subleases) are as follows: Capital
    
    
    OperatingIn Thousands
    
    Leases
    
    
    Leases2005
    
    $
    5
    
    
    $
    1,6242006
    
    
    6
    
    
    
    1,4152007
    
    
    1
    
    
    
    1,4192008
    
    
    
    
    
    
    1,0142009
    
    
    
    
    
    
    781Total minimum lease payments
    
    
    12
    
    
    $
    6,253Less amount representing interest
    
    
    (1
    )Present value of
minimum lease payments
    
    $
    11
  The Company recognizes rent expense on a straight-line basis over the related lease term.
Total rent expense for all operating leases amounted to $2.5 million in 2004, $2.1 million
in 2003, and $1.5 million in 2002. The current portion of capital leases is included in
accounts payable and other accrued expenses and the long-term portion of capital leases is
included in other long-term liabilities in the balance sheet at December 31, 2004 and 2003.(b)
    Settlement of Contract Dispute  In September 2002, the Company favorably
settled a contract dispute in the amount of $0.3 million. The settlement resulted in the
issuance of a promissory note receivable to the Company, which was recorded at its present
value of $0.3 million. The present value of the promissory note, less legal expenses of
$34,000, was reported as other income in the year ended December 31, 2002. Under the terms
of the promissory note, payments of $25,000 were to be made each quarter over the next
three years starting October 2002. As of December 31, 2004, the note has been paid in
full.(c)
    Employment Agreements  The Company entered into employment agreements with
certain executives and other members of management that provide for cash severance payments
if these employees are terminated without cause. The Companys aggregate commitment under
these agreements is $1.4 million at December 31, 2004. F-46




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (20) Related Party Transactions In April 1997, the Company made loans totaling $0.4 million to Mr. Blue, its former chairman
of the board and chief executive officer. The funds were advanced pursuant to two demand
promissory notes in the principal amounts of $0.3 million and $60,000, respectively, each bearing
interest at a rate of 73/4% per annum. On June 30, 2000, the Company amended the terms of these
notes whereby interest on the notes ceased to accrue subsequent to July 1, 2000 and the loan plus
accrued interest, totaling $0.4 million at June 30, 2000, would be payable in a balloon payment in
December 2001. At that time, the loans were collateralized with options to purchase 36,667 shares
of common stock granted to Mr. Blue under the Companys stock option plans. Prior to 2000, these
loans were included in other assets; as of December 31, 2001, all amounts owed under these loans
have been reclassified to stockholders equity. In December 2001, a payment of $0.3 million was received from Mr. Blue and applied against the
outstanding balance of the loans. The Company agreed to refinance the remaining $0.2 million
balance and a new promissory note was executed by Mr. Blue. This new note requires monthly
interest payments at prime rate plus 1%, established at the beginning of each calendar quarter, and
was payable in a balloon payment on or before December 31, 2003. The note was collateralized with
options to purchase 36,667 shares of common stock granted to Mr. Blue under the Companys stock
option plans (of which all but 10,000 expired on December 31, 2003 and the remaining options expire
in March 2004) along with additional warrants granted to Mr. Blue from various other public
companies. In January 2002, Mr. Blue resigned from the Companys Board of Directors and the
remaining Board members agreed to extend the exercise period of certain of the stock options of the
Company held as collateral for the note in an effort to maximize the potential for repayment. In June 2003, the Company again amended the promissory note executed in December 2001 by Mr.
Blue. The amendment extended the maturity date of the promissory for an additional twelve months
to December 31, 2004 and also allowed Mr. Blue to offset any principal owed with certain amounts
payable to Mr. Blue by the Company as a result of a finders fee arrangement with the Company.
Also at that time, Mr. Blue all interest was prepaid through the maturity date. In March 2004, the Company agreed to accept as collateral for this loan 9,250 shares of its
common stock that are being issued to Commonwealth Associates (Mr. Blues former employer) in
conjunction with the Companys acquisition of PlanVista. As a result, Mr. Blue and
the Company amended a previously existing stock pledge agreement to include these shares as
additional collateral. In case of default of payment by Mr. Blue, such shares will be liquidated
or returned to the Company for liquidation and the cash proceeds will be utilized to partially or
fully satisfy the loan depending upon the value of such stock at that time. The Company received
cash payments from Mr. Blue in July and December 2004 to pay all amounts due under this loan. As
of December 31, 2004, the notes have been collected in full. F-47




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued In March 2001, a senior executive of the Company entered into an uncollateralized promissory
note for $45,400 for amounts previously borrowed from the Company. The promissory note calls for
minimum bi-weekly payments of $350 deducted directly from the executives payroll until the note is
paid in full on or before February 2006. The note is non-interest bearing but interest is imputed
annually based on the Internal Revenue Service Applicable Federal Rate at the time the note was
originated (4.98%). Under terms of the promissory note, if the executive is terminated without
cause, the note is due in full after nine months from the date of termination as long as the
scheduled bi-weekly payments continue to be made. As of December 31, 2004, the unpaid principal
balance of the note is approximately $6,000 and is included in other receivables. In June 2003, prior to its acquisition of PlanVista (see Notes 2(a) and 6), ProxyMed entered
into a joint distribution and marketing agreement with PlanVista. PlanVista was controlled by an
affiliate of Commonwealth Associates Group Holdings, LLC, whose principal, Michael Falk, is a
director of both ProxyMed and PlanVista. Additionally, one former senior executive of ProxyMed had
an immaterial ownership interest in PlanVista. As
described in Note 12 (a), the Company assumed and guaranteed a
$20.4 million secured obligation to PVC Funding Partners, LLC,
owner of approximately 20% of the outstanding common stock of
the Company. This obligation has a balance of approximately
$18.4 million at December 31, 2004. (21) Going Concern As
discussed in Note 12(a), the Company is currently negotiating
financing with Wachovia Bank, N.A. to provide funds to be used, with
existing cash balances, to make the May 31, 2005,
$17.8 million balloon payment to PVC Funding Partners, LLC, a
related party. If the Company is unsuccessful in arranging this
financing and is unable to make this balloon payment, the Company may
be unable to continue as a going concern. These consolidated
statements do no include any adjustments that might result from the
outcome of this uncertainty. (22) Quarterly Financial Data (unaudited) The following table summarizes the quarterly
consolidated statement of operations data for each of the eight
quarters in the years ended December 31, 2004 and 2003. The data
is derived from and is qualified by reference to ProxyMeds
audited financial statements, which appear elsewhere in this document. 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. 2004
Quarter Ended(1)in thousands except for share
and per share data:
    
    March 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Net Revenues
    
    $
    20,504
    
    
    $
    24,649
    
    
    $
    22,511
    
    
    $
    22,582Operating loss
    
    $
    (43
    )
    
    $
    (264
    )
    
    $
    (450
    )
    
    $
    (1,217
    )Loss from continuing operations
    
    $
    (427
    )
    
    $
    (772
    )
    
    $
    (1,028
    )
    
    $
    (1,573
    )Net loss applicable to common shareholders
    
    $
    (427
    )
    
    $
    (772
    )
    
    $
    (1,028
    )
    
    $
    (1,573
    )Net loss per share (basic and diluted)
    
    $
    (0.05
    )
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.12
    )Basic and diluted weighted average common shares outstanding
    
    
    8,570,731
    
    
    
    12,625,260
    
    
    
    12,626,066
    
    
    
    12,626,182
 2003
Quarter Ended(2)March 31
    
    
    June 30
    
    
    September 30
    
    
    December 31(as restated)
    
    
    (as restated)
    
    
    (as restated)Net revenues
    
    $
    17,430
    
    
    $
    17,701
    
    
    $
    18,062
    
    
    $
    18,363Operating income (loss)
    
    $
    (2,278
    )
    
    $
    (913
    )
    
    $
    170
    
    
    $
    (621
    )Loss from continuing operations
    
    $
    (2,452
    )
    
    $
    (1,108
    )
    
    $
    (33
    )
    
    $
    (1,407
    )Net loss applicable to common shareholders
    
    $
    (2,452
    )
    
    $
    (1,108
    )
    
    $
    (33
    )
    
    $
    (1,407
    )Net loss per share (basic and diluted)
    
    $
    (0.36
    )
    
    $
    (0.16
    )
    
    $
    
    
    
    $
    (0.21
    )Basic and diluted weighted average common shares outstanding
    
    
    6,782,938
    
    
    
    6,782,938
    
    
    
    6,783,095
    
    
    
    6,784,118
 (1) Includes operations
of PlanVista from March 2, 2004.  F-48




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##### 



PROXYMED, INC. AND SUBSIDIARIES SCHEDULE II  Valuation and Qualifying Accounts In thousands
    
    Allowance for Doubtful AccountsAdditionsYear ended
    
    Balance at
    
    
    Charged to
    
    
    Charged to
    
    
    
    
    
    
    Balance atDecember 31,
    
    beginning of year
    
    
    costs and expenses
    
    
    other accounts (1)(2)
    
    
    Deductions (3)
    
    
    end of year2004
    
    $
    882
    
    
    
    858
    
    
    
    7,138
    
    
    
    5,710
    
    
    $
    3,1682003
    
    $
    1,096
    
    
    
    152
    
    
    
    803
    
    
    
    1,169
    
    
    $
    8822002
    
    $
    228
    
    
    
    38
    
    
    
    1,008
    
    
    
    178
    
    
    $
    1,096
 (1) Includes amounts charged against revenue in 2002 ($346), 2003 ($803), and 2004 ($1,997)
(2) Includes amounts acquired through acquisitions in 2002 ($662), 2003 ($-0-), and 2004 ($5,141)
(3) Primarily write-off of bad debts and amounts charged against revenues, net of recoveries F-49