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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)

x     
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year
ended December 31, 2003
or

o     
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 000-22052

PROXYMED, INC.

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(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
    
    30093(Address of principal executive offices)
    
    (Zip Code)


Registrants telephone number, including area code: (770)-806-9918

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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

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(Title
of class)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x  Yes
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). [X] Yes [ ] No

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant computed using $12.91 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 $54,511,031.

As of March 26, 2004, 12,624,626 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 2, 2004, are incorporated by reference into Part III of this
Annual Report on Form 10-K.



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TABLE OF CONTENTS  PART IITEM 1. OUR BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCK MATTERSITEM 6. SELECTED FINANCIAL DATAFACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESSITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXIndex to Consolidated Financial Statements and ScheduleREPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTSConsolidated Balance SheetsConsolidated Statements of OperationsConsolidated Statements of Stockholders EquityConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsAmendment to Articles of IncorporationAmendment to Articles of IncorporationEmployment Letter-J. MarkleEmployment Agreement - G. EisenhauerEmployment Agreement - T. WohlfordAmendment to Employment Agreement - T. TolanAmendment to Employment Agreement - M. HooverAmendment to Employment Agreement - N. Ham2002 Stock Option Plan, as amendedLoan and Security AgreementRevolver NotePatent and Trademark Security AgreementSubsidiaries of the RegistrantConsent of PriceWaterhouseCoopers LLPSection 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO 
 PART I 
 ITEM 1. OUR BUSINESS ProxyMed, Inc., incorporated in Florida in 1989, is an electronic
healthcare transaction processing services company providing connectivity
services and related value-added products to physician offices, payers, medical
laboratories, pharmacies and other healthcare institutions. We maintain an
open electronic network for electronic transactions with no equity ownership in
businesses engaged in the front-end (i.e., physician practice management
software system vendors and other physician desk top vendors) or in the
back-end (i.e., payers, laboratories and pharmacies). Our business strategy is
to leverage our leadership position in connectivity services in order to
establish ProxyMed as the premier provider of automated financial, clinical and
administrative transaction services primarily between small physician offices
(offices with one to nine physicians) and payers, clinical laboratories and
pharmacies. With our neutral position, we believe that we can better attract
both front-end and back-end partners who may be more comfortable doing business
with a non-competitive partner. Our electronic transaction processing services support a broad range of
financial, clinical, and administrative transactions. To facilitate these
services, we operate 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, the
industrys largest list of chain and independent pharmacies and the largest
list of clinical laboratories. 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. All of our revenues are generated domestically. According to the Centers for Medicare and Medicaid Services, the
healthcare industry has grown from $1.4 trillion in 2001 to $1.6 trillion in
2002, with physician services comprising 21% of this amount. Healthcare
accounts for 14.9% of the U.S. Gross National Product. 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 participants in the healthcare system will need to
process many of these types of transactions electronically. In fact, under
legislation named the Health Insurance Portability and Accountability Act of
1996 (HIPAA) (see Healthcare and Privacy Related Legislation below), eight
major transaction types, including claims, eligibility inquiries and claims
status inquiries are generally required to be conducted electronically.
Because of the number of participants, the challenges of meeting HIPAA
requirements and the complexity of establishing reliable and secure
communication networks, the healthcare industry needs companies such as
ProxyMed with its secure, proprietary systems to facilitate the processing of
these transactions, its extensive connectivity to back-end healthcare
institutions, and its ability to market to the underserved niche of small
physician office practices. 2




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Acquisition of PlanVista On December 5, 2003, we entered into a definitive agreement to acquire all
of the outstanding capital stock of PlanVista Corporation (PlanVista), a
publicly-held company with locations in Tampa, Florida and Middletown, New York
for 3,600,000 shares of our common stock. PlanVista 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. We raised $24.1 million by selling 1,691,229 shares of our common stock at
$14.25 per share in a private equity transaction with various entities
affiliated with General Atlantic Partners and Commonwealth Associates to pay
off certain debts of PlanVista and other obligations as a result of the
acquisition. The acquisition enables us to enter into a new line of business,
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. During
the second quarter of 2003, we entered into a joint marketing and distribution
agreement with PlanVista, pursuant to which PlanVista had access to our
significant payer customers for purposes of marketing PlanVistas services. On March 1, 2004, shareholders of both companies approved the merger, and
on March 2, 2004, we acquired all of the outstanding stock of PlanVista. As a
result, each outstanding share of PlanVista common stock, par value $.01 per
share, was converted into the right to receive 0.08271 shares of our common
stock. Additionally, each outstanding share of PlanVista series C preferred
stock, par value $.01 per share, was converted into the right to receive
51.5292 shares of our common stock. Following consummation of the transaction,
PlanVistas common stock was delisted from the Over the Counter Bulletin Board.
We also provided the funds necessary to satisfy $27.4 million of PlanVistas
debt and other obligations outstanding as of the effective time of the merger
through the use of available cash, a draw on our line of credit and cash raised
through the private placement. In connection with the merger, our shareholders approved (1)
an amendment to our articles of incorporation to increase the total number of
authorized shares of our common stock from 13,333,333 1/3 shares to 30,000,000
shares; (2) the issuance of 1,691,229 shares of our common stock at $14.25 per
share in a private equity offering valued at $24.1 million; (3) the issuance of
3,600,000 shares of our common stock to PlanVista stockholders in connection
with the merger; and (4) an amendment to our 2002 Stock Option Plan to increase
the total number of shares available for issuance under such plan from 600,000
to 1,350,000. Additionally, one director of PlanVista was appointed to our
board of directors. As noted above, upon completion of the merger, each share of PlanVistas
outstanding common stock was cancelled and converted into the right to receive
0.08271 of a share 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, collectively 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 the Company. PlanVista will be operated as our wholly-owned subsidiary and its
operations will be included in our Transaction Services segment. All officers
and employees of PlanVista, with the exception of the PlanVistas Chief
Financial Officer, were offered continued employment with us. Additionally, certain officers, directors and employees of PlanVista were
granted options to purchase an aggregate of 200,000 shares of our common stock
at $17.74 per share. Of these options, 173,120 will vest two-thirds on the
first anniversary date of the grant and one-third on the third anniversary date
of the grant. The balance of 26,880 options 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 each vest after three and six months. 3




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Acquisition of MedUnite On December 31, 2002, we acquired all of the outstanding stock of
MedUnite, Inc. (MedUnite) for $10.0 million in cash, $13.4 million in 4%
convertible promissory notes, and $6.7 million in transaction and exit related
costs (originally estimated at $8.3 million). Interest on the convertible
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 the founders of
MedUnite achieve certain revenue-based triggers over the next three and
one-half year period. The shares of our common stock issuable upon conversion
of the convertible notes will be registered by us promptly after a conversion
trigger event. The first conversion trigger event was met during the fourth quarter of 2003. MedUnite was founded in June 2000 by seven of the nations leading health
insurers Aetna, Anthem, CIGNA, Health Net, Inc., Oxford Health Plans,
PacifiCare Health Systems, and Wellpoint Health Network  and its technology
includes one of the industrys largest Internet-based real time transaction
networks, in addition to electronic data interchange (EDI) based processes.
At the time of our acquisition exiting 2002, MedUnites legacy claims platform,
which was acquired from NDCHealth Corporation (NDCHealth) in 2001, was
annually processing over 85 million transactions with approximately 4.7 million
real-time transactions processed by MedUnites new state-of-the-art platform.
The acquisition of MedUnite added an additional 30,000 physicians to our
network and provided unique opportunities for cross-selling products and
services to our existing and new customer base. During 2003, we began the
integration of MedUnites operations into ours and, by the end of the 2003
year, were successful in creating one Transaction Services business. Our acquisition of MedUnite resulted in an organization serving 140,000
physicians and other healthcare providers and processing over 200 million
healthcare transactions processed annually, making us the nations second
largest physician-based transaction processing company, second only to WebMD
Corporation. In addition, in conjunction with the acquisition of MedUnite, we
formed a strategic relationship with NDCHealth, MedUnites 8th shareholder, for
processing claims and real-time transactions and now as a result we have
potential access to over 100,000 physicians that utilize NDCHealths various
practice management systems. * * * Our corporate offices are now located at 1854 Shackleford Court, Suite
200, Atlanta, Georgia, and our telephone number is 770-806-9918. As used in this report, unless the context requires otherwise, we, us,
our, ProxyMed or the Company, means ProxyMed, Inc. and its consolidated
subsidiaries. Italicized terms in this document indicate trademarks or other
protected intellectual property that we own or license. 4




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Overview of ProxyMed. Where Healthcare Connects Our mission statement is as follows: ProxyMed solves the business
problems of healthcare providers every day by automating their
financial, administrative and clinical transactions with their healthcare
institution partners. We exceed customer expectations through our expertise,
proven methodologies and dedication to service excellence. Our focus is connecting small physician offices with their contracted
financial and clinical partners so that they can conduct transactions
electronically. We are organized into two business segments: Transaction
Services (formerly known as Electronic Healthcare Transaction Processing) and
Laboratory Communication Solutions. Transaction Services includes transaction
and value-added services principally between physician offices and insurance
companies (Payer Services), physician offices and pharmacies/pharmacy benefit
managers (Prescription Services), and cost containment and business process
outsourcing solutions for insurance companies offered through our recently
completed acquisition of PlanVista on March 2, 2004 (Medical Cost Containment
Services); and Laboratory Communication Solutions includes the sale, lease and
service of communication devices principally to laboratories and the contract
manufacturing of printed circuit boards and other value-added services
(Laboratory Services). Since the beginning of 2001, our focus has been to double the number of
physicians and other healthcare providers we serve as well as to increase the
utilization of our transaction-based services among them over the following
five years. Our success is largely dependent upon our ability to cross-sell
our services across our provider base; to offer new transactions and services
as they become available; and to achieve economies of scale in our operations
resulting from the consolidation of our operation centers, including production
and financial systems, from our various acquisitions. We believe that we are well positioned today in each of our business
units. With our completed acquisition of MedUnite on December 31, 2002, we
believe that we are the second largest medical claims clearinghouse for
physician offices, the largest provider of intelligent laboratory results
reporting devices, and the largest provider of retail pharmacy-to-physician
connectivity. In 2003, we processed approximately 226.6 million electronic
transactions among physician offices, payers, laboratories and pharmacies
compared to 114.2 million electronic transactions in 2002. We leverage the
connectivity of our back-end transaction network, Phoenix, and continue to add
partners by developing new value-added products and services, by adding
additional payer transaction types such as improved eligibility and claim
status reports, and by expanding our Internet-based transaction offerings such
as claims, lab results reporting and prescription refills through our Internet
portal, ProxyMed.net. We are an attractive, neutral partner to front-end
electronic healthcare companies who are focused on physician office services,
as we remain the only national and independent transaction center that does not
compete with them for the physicians desktop and that can connect their
physician offices on the back-end to carry on electronic transactions between
them and their payers, laboratories and pharmacies. Financial information
relating to the Companys segments, including revenue, segment operating margin
and assets attributable to each segment for each of the fiscal years ending
2001, 2002 and 2003 is presented in Note 4 of the Notes to Consolidated
Financial Statements in Item 8  Financial Statements and Supplementary Data. Our business is driven by the healthcare communitys need to process information more efficiently With more than 35 billion financial and clinical transactions being
generated each year, the major driver of our business is the increasing number
of physicians who wish to adopt secure electronic solutions that improve the
quality of their patient care while reducing costs and administration time. We
believe that it is just a matter of time before the majority of physicians,
payers, laboratories and pharmacies embrace the electronic transmission and
processing of virtually all of a patients clinical and financial transactions.
Our efforts concentrate on the innovative design of our products and services
that make these electronic transactions easy to use, fast, reliable and secure.
Phoenix, our secure, proprietary national healthcare information network, is
the key enabler that makes this possible. We are a leader in providing these
back-end connections and offer a host of transaction 5




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services to smaller physician offices which we believe reduce costs by
increasing efficiency, reducing payment cycle time, and enabling physicians to
make more informed decisions at the point of care. Connectivity and physician relationships are key strengths Our advantage lies in two critical areas. First, we offer the industrys
broadest range of financial, clinical and administrative connectivity available
from a single company. Our existing connectivity to payers positions us as the
second largest medical claims clearinghouse in the industry with 94% of our
annual transaction volume sent directly to the designated payer rather than
being routed through other transaction centers. In addition, we are the
largest provider of intelligent laboratory results reporting devices and the
largest provider of retail pharmacy connectivity. Our electronic transaction
processing services support a broad range of financial transactions (such as
claims, patient statements, claims status reports, eligibility verification,
explanations of benefits (EOB) and electronic remittance advices); 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 physicians office to the appropriate healthcare institution
(payer, laboratory and pharmacy) facilitating diagnosis, treatment and payment. Our second advantage is our extensive physician relationships. Following
our acquisition of MedUnite, we have almost 140,000 physicians directly or
indirectly using at least one of our existing solutions. To reach these direct
and partnered physicians, we have licensing and connectivity agreements with
many national and regional companies, such as practice management system
vendors, billing services, and electronic healthcare companies, and with
physician offices directly. These relationships offer us an opportunity to
cross-sell our products and services to our existing physician office customer
base. We have built a comprehensive back-end model which would be difficult and time-consuming to replicate We were an early entrant into the healthcare electronic transaction
industry, having developed, as a result of our own efforts and through
acquisitions, our back-end connectivity for both financial and clinical
transactions. We believe that the development and maintenance of our
connections from both a technical and relationship perspective were costly,
complex and time-consuming, and represent a barrier to entry for would-be
competitors. Having accomplished much of this task, there is an opportunity
for us to leverage our existing connectivity and existing relationships,
especially since we believe we are the only connectivity company that is, in
fact, processing new prescriptions, refill prescriptions, laboratory test
results reports and financial transactions over a single network. Current Products and Services We offer a variety of financial and clinical electronic processing
services through our suite of Windows®-based1 products, through our Internet
portal, ProxyMed.netand through various direct network connection programs.
Each of these entry points connects physician offices to our network and then
routes transactions to their contracted payer, laboratory and pharmacy
partners. Claims submission and reporting, insurance eligibility verification,
claims status inquiries, referral management, laboratory test results reporting
and prescription refills are all available today through ProxyMed.net. We
continue to expand our offerings through ProxyMed.netto 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. Our recently
completed acquisition of PlanVista also adds a suite of cost containment and
business process outsourcing solutions to our payer customers.   1
    
    Windows is a registered trademark of Microsoft Corporation. 6




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Payer Services Over the course of 2003 ProxyMed completed the integration of MedUnites
products and services into ProxyMeds existing suite of products. This
combination has resulted in a broad suite of products that fit the transaction
processing and connectivity needs of all physician offices, regardless of the
technology that they use. This suite of products covers platforms as old as
DOS but also includes solutions for those that have the latest in Internet
platforms. We offer several Windows and Unix based desktop products, including claims
submission through ProxyClaimand claims tracking through our ProxyTracker
product. We also offer Statlink, that can be used to submit claims,
eligibility and claims status. We also offer a non-computer based solution in
our point-of-service terminal that allows for a low cost, stand-alone solution
for electronic eligibility verification, patient statement processing, paper
claims printing and Explanation of Benefits (EOB) scanning. For physicians who prefer to use Internet based services ProxyMed had
developed and had been operating our provider transaction services web portal,
ProxyMed.com,for over three years. With our acquisition of MedUnite and its
MedUnite.netweb portal, we started the 2003 year operating two provider web
portals. However, in July 2003, we launched a consolidated new portal,
ProxyMed.net, that integrated the MedUnite.netindividual application services
with the ProxyMed.commenu system, user access management, enrollment and other
infrastructure components. By the end of 2003, the majority of transactions
and customers had been migrated from ProxyMed.comand MedUnite.netto the new
portal. ProxyMed.netsavailable web-based financial and administrative
transactions now include claims submission and reporting, eligibility
verification, claims status inquiries, referral management and
pre-certifications. In addition to working directly with physician offices, 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 MedUnites proprietary XML transaction format.
The platform and the API as implemented were not HIPAA-compliant and MedUnite
had an ongoing project to bring the platform and API to HIPAA-compliance. We
completed this project in mid 2003 and all transaction types are HIPAA
compliant. In addition to remediating the physician side of our connectivity services
to be HIPAA compliant. ProxyMed also updated all payer side connectivity
platforms to be HIPAA compliant. This project was completed in 2003. The
parallel effort to work with each connected payer to remediate its connection
for HIPAA-compliance is continuing in 2004. We anticipate completion of this
project by mid-year. Prescription Services In our Prescription Services business unit, we offer both new prescription
ordering and refill management through our PreScribe®family of products.
There are currently over 1,200 physician clients using PreScribe®. PreScribe®
and Phoenix support the largest and oldest electronic and fax gateway
infrastructure with connectivity to over 30,000 pharmacies nationwide. We also
offer a private-label version of our web-based refill prescription application. Laboratory Services Our Laboratory Services business unit offers lab order entry and results
reporting through our recently announced QuickReqproduct. We believe the
QuickReqadvantage is its enterprise scope with a modular approach, giving even
the smallest labs the ability to deploy an order entry and results reporting
solution. In addition to QuickReq, we offer a family of intelligent remote
reporting devices for communicating lab results to 7




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physician clients. Our devices are installed in more than 100,000
physician offices throughout the United States. Our FleetWatchSM monitors and
reports the status of individual remote reporting devices within a fleet. This
service is valuable to laboratories in its ability to detect and proactively
resolve problems, many times before clients ever notice a disruption in
service. Medical Cost Containment Services Through our recently completed 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 through our
operating subsidiary, PlanVista. PlanVistas customers include healthcare
payers such as self-insured employers, medical insurance carriers, third party
administrators, health maintenance organizations, sometimes referred to as
HMOs, and other entities that pay claims on behalf of health plans. PlanVista
also provides network and data management business process outsourcing services
for health care providers, including individual providers, preferred provider
organizations, sometimes referred to as PPOs, and other provider groups. PlanVista provides healthcare payers with access to its preferred provider
network, known as the National Preferred Provider Network, which offers payers
discounts on participating provider medical services. The National Preferred
Provider Network is a network of networks, comprised of more than 30 local
PPO networks and independent physician associations with which PlanVista
contracts, as well as directly contracted independent physicians in some cases.
PlanVistas National Preferred Provider Network includes approximately 400,000
physicians, 4,000 acute care hospitals, and 55,000 ancillary care providers.
In addition to offering payers in-network discounts, PlanVista has added
medical bill review and negotiation through key strategic alliances.
PlanVistas cost containment customers also benefit from its advanced claims
repricing and network and data management services. PlanVista has leveraged its leading edge technology and management
expertise to offer its clients network and data management outsourcing services
that are independent of the National Preferred Provider Network access
business. In late 2001, PlanVista launched its PayerServ business, which helps
payers manage all of their network relationships, whether or not the payers
also access the National Preferred Provider Network. PlanServ, the other
business initiative PlanVista implemented in late 2001, provides claims
repricing and network and data management services that help PPOs support all
of their payer relationships, not simply payer relationships that they maintain
through the National Preferred Provider Network. Business Strategy- We plan to grow operating revenue and profits by
increasing the market share of PlanVistas medical cost containment business,
building its existing network and data management business process outsourcing
businesses, introducing new medical cost management solutions for its customers
and accessing our significant payer customers. PlanVistas strategy to date
has been to market its established National Preferred Provider Network brand as
a leading national preferred provider network and to provide a broad array of
technology-based business process outsourcing services to existing and new
customers. This strategy is designed to help customers maximize their total
savings on medical claims and administration through PlanVistas advanced
network and administrative capabilities. Focused Penetration of Payer Market We believe that we can increase
PlanVistas market share by marketing its claims repricing technology, its
ability to capture discounts on a large percentage of claims due to the size of
its National Preferred Provider Network, and the attractiveness to payer
customers of its percentage of savings revenue model. PlanVista also
cross-sells its PayerServ products to its existing National Preferred Provider
Network access customers. Additionally, because PlanVistas National Preferred
Provider Network is a network comprised in part of a number of regional PPOs,
we believe that PlanVistas ability to market its products to PPOs is enhanced
because, in operating the National Preferred Provider Network, PlanVista has
gained experience in managing the back office, automation, and technology
challenges that most PPOs face. Emphasis on Superior Technology- We intend to continue differentiating
PlanVista as a technology leader by using its electronic claims repricing
technology to increase its customer base. In June 2003, PlanVista completed
the migration of all its clients to its MedEngine repricing system on the
Oracle Database, thereby 8




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updating its technology-enabled services to further improve speed and
accuracy and achieve greater operational efficiencies and enhanced claim data
integrity. This technology update took place over the course of two years and
represented a significant achievement for PlanVista, allowing it to handle the
most demanding claim repricing tasks. The latest version of PlanVistas Internet claims repricing system,
ClaimPassXL® v3.5, allows PlanVista to shift claims repricing submissions
from paper or fax to the Internet, which reduces its claims processing costs
from between $0.75 and $0.80 per claim to $0.15 per claim, and reduces
turnaround times from three business days to real-time for most claims. We
believe that faster turnaround of claims repricing will become more important
to payers as state insurance regulators increase their scrutiny of claims
payment turnaround times. Since the March 2001 release of
ClaimPassXL® v3.0,
the predecessor to ClaimPassXL® v3.5, PlanVistas volume of Internet repriced
claims has increased steadily. National Preferred Provider Network-The National Preferred Provider
Network is comprised of PPOs, independent physician associations, and
individually contracted providers that offer discounts on medical services.
These providers and provider groups participate in the National Preferred
Provider Network to increase patient flow and benefit from the National
Preferred Provider Networks prompt, efficient claims repricing services.
Healthcare payers access the National Preferred Provider Network to benefit
from the discounts offered by participating providers. The size of the
National Preferred Provider Network and the level of National Preferred
Provider Network discounts provide PlanVistas payer customers with significant
reductions in medical claims costs. The National Preferred Provider Network access agreements generally
require PlanVistas customers to pay PlanVista a percentage of the cost savings
generated by the National Preferred Provider Network 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 the National Preferred Provider Network 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 PlanVista receives a provider
bill for medical services that are covered by the National Preferred Provider
Network discount arrangements, PlanVista electronically reviews the bill and
reprices it to conform to the negotiated discounted rate, which is typically
lower than the invoiced amount. PlanVista charges payers an average of 18.0%
of the savings that the payer realizes from the discount. PlanVista derives
the balance of its National Preferred Provider Network operating revenue from
payer customers that pay a flat fee per month based on the number of enrolled
members. These customers generally access the National Preferred Provider
Network as their primary PPO network. PlanVistas contracts with PPO participants and other participating
providers generally have renewable terms ranging from one to two years, but in
most cases are terminable by either party without cause on 90 days notice. The
termination of any PPO contracts would render PlanVista unable to provide
customers with access to the PPOs provider discounts, and therefore would
eliminate PlanVistas ability to reprice claims and derive operating revenue
accordingly. More than 80.0% of PlanVistas participating providers have been
part of the National Preferred Provider Network for more than three years, with
some relationships spanning more than nine years since the beginning of the
National Preferred Provider Networks inception in 1994. Since the majority of
the provider arrangements are through other networks, PlanVista depends on its
contracted networks to maintain provider relationships and ensure provider
compliance with the terms of the network arrangements. Electronic Claims Repricing- In connection with its National Preferred
Provider Network access business, PlanVista provides electronic claims
repricing services that benefit both its payer clients and its participating
providers. A participating provider submits a claim at the full, undiscounted
provider rate. The provider sends the claim directly to PlanVista or to the
payer, which then forwards the bill to PlanVista. Because there are a wide
variety of provider systems for submitting claims, PlanVista accepts claims by
traditional methods such as mail and fax, as well as through the Internet and
by electronic data interchange. PlanVista converts paper and faxed claims to
an electronic format, and then electronically reprices the claims by
calculating 9




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the reduced price based on its National Preferred Provider Networks
negotiated discount. PlanVista returns the repriced claims file to the payer
electronically, in most cases within three business days. PlanVistas ClaimPassXL® Internet and electronic data interchange services
speed the claims repricing process for its customers. By logging onto
PlanVistas ClaimPassXL® Internet site, a payer can input claims information
directly into PlanVistas claims system. PlanVista electronically reprices the
claim and delivers the repriced claim information to the payer customer through
the Internet. PlanVistas electronic data interchange (sometimes referred to
as EDI), system provides an alternative way for customers to simplify the
claims repricing process. EDI customers do not have to key claims information
into PlanVistas Internet site. Instead, PlanVistas EDI system interfaces
directly with the payers claims file configuration, which allows the payer to
send PlanVista its claims file in its existing electronic format. After
PlanVista electronically reprices the claims, PlanVista sends the customer an
electronic file of claims information that the payer can incorporate into its
claims database automatically. Although PlanVista does not charge its network access customers a separate
fee for claims repricing, PlanVista believes that its advanced repricing system
provides significant benefits that make PlanVistas network access services
more attractive to payers. It is time consuming and expensive for a payer to
load PPO rates and demographic information into its claims system and to create
a system that accepts the various forms in which claims information is
submitted. PlanVista offers a turnkey solution that requires only a limited
number of payer personnel. PlanVista can reduce claims turnaround times and
provide efficient claims transmission options. PlanVistas system also can
reduce lost claims, reduce the number of undiscounted claims, support high
claim volume customers, and improve accuracy over manually processed claims.
PlanVistas customers are also relieved of some of the burden of complying with
the Health Insurance Portability and Accountability Act, sometimes referred to
as HIPAA, which imposes privacy and data configuration requirements that apply
to claims repricing. PlanVista believes that its claims processing procedures
are in material compliance with current HIPAA requirements and will be
compliant with future requirements. Providers also benefit from PlanVistas
streamlined claims system, which helps increase the speed with which they get
paid and the accuracy of the claims payments. Network and Data Management PlanVista uses its information system
capabilities to provide network and data management services for the payers
that access the National Preferred Provider Network. For some network access
payers, PlanVista acts as the payers mailroom for receipt of all provider
claims, converting payer and fax claims to an electronic format, identifying
the correct network fee schedule applicable to each claim, and electronically
repricing the claim accordingly. PlanVista prepares detailed reports regarding
repricing turnaround times and the savings that each payer realizes, itemized
by the total number of claims incurred, the 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, which is the ratio of paid medical claims compared to
collected premiums. As a provider of data management services, PlanVista
maintains provider demographics and fee schedules and updates provider
directories. PlanVista integrates 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. PlanVista generally does not charge its National Preferred Provider
Network access customers any additional fee for its standard network and data
management services. Bill Review and Negotiation- In April 2002, PlanVista began offering
optional medical bill review and negotiation services to its payer clients.
Many of PlanVistas percentage of savings clients send PlanVista all claims
that fall outside their primary PPO network arrangements. Traditionally,
PlanVista identified and repriced the claims that were subject to the National
Preferred Provider Network discount arrangements and returned the non-National
Preferred Provider Network claims to the payer without applying any discount.
PlanVista now offers payer customers the opportunity to realize cost savings on
these out-of-network claims through PlanVistas affiliations with bill review
and negotiation companies. PlanVista can electronically transmit non-National
Preferred Provider Network 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 10




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bill negotiator then contacts the provider to discuss PlanVistas
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 PlanVista,
and PlanVista forwards it to the payer along with the payers other repriced
claims. Payers pay PlanVista a percentage of the savings that are generated by
the bill review and negotiation service. Advance Funding- In 2002, PlanVista launched a program to provide advance
funding services for payers and providers. Through an arrangement with
established advance funding companies, PlanVista offers participating providers
the opportunity to receive claim payments in advance of the due date. In
exchange, the providers agree to accept a discount of the original billed
amount. This service provides both a reduction in claim costs for payers and
rapid payment for providers. Business Process Outsourcing- PlanVista traditionally provided claims
repricing and network management services only with respect to claims that its
National Preferred Provider Network participating providers submitted to one of
PlanVistas network access payer customers. Through its network and data
management business process outsourcing business, PlanVista has expanded its
scope to offer payers and providers services that are independent of
PlanVistas 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,
PlanVista believes 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 claims. Through PayerServ, PlanVista uses its existing technology and management
expertise to help payers manage all of their network relationships, whether or
not they also access the National Preferred Provider Network. A payer can
outsource its network and data management obligations to PlanVista, and
PlanVista will assume the responsibility for moving, tracking, and repricing
healthcare claims among all of the PPO networks with which it has contracts.
By maintaining provider fee schedule and demographic information for all of the
providers in a payers provider configuration, PlanVista eliminates bottlenecks
in the payers claim work flow, expedites claims repricing, and improves
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. PlanVista also
can provide reporting and other network management services with respect to all
of the payers networks. PlanVista can prepare customized reports for payers
that capture information regarding repricing turnaround time, cost management,
demographics, case management, provider services, diagnoses and procedures.
PlanVista believes that its PayerServ customers benefit from reduced operating
expenses, streamlined network management, HIPAA-compliant procedures, and
electronic repricing with rapid turnaround times. PlanVista does not require
customers to pay upfront network loading fees and monthly maintenance fees,
which are features of many of its competitors systems. PayerServ customers typically pay PlanVista for claims repricing and
claims and network and data management services on a per-claim basis. For each
PayerServ customer, PlanVista analyzes the customers service requirements,
including claims work flow, claims volume and types, and PPO network
configurations. Then, based on its proprietary pricing model, PlanVista
determines the pricing for each claim transaction. PlanServ- PlanServ uses the same technology and management expertise that
supports PlanVistas PayerServ business to offer claims repricing and network
data management services to PPOs. PlanVistas PPO participants generally
maintain relationships with payers that are independent from the PPOs
affiliation with PlanVistas National Preferred Provider Network. Many of
these PPOs are seeking cost-efficient ways to develop their own automated
claims handling and repricing systems and to manage the provider data necessary
to update 11




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their provider directories efficiently and otherwise support network
access. By outsourcing repricing functions to PlanServ, a PPO can achieve
advanced electronic capabilities for its payer clients without incurring the
high cost of systems development. PlanVista can serve as a mailroom for
PlanServ clients, receiving paper and fax claims and converting them to an
electronic form for repricing, so that the PPO never touches the claims. 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. Each
PPOs website includes the PPOs logo and other material chosen by the PPO. PlanServ also offers PlanVistas 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. PlanVista
believes that obtaining and analyzing information is increasingly important to
PPOs because this information is necessary for them to properly establish their
discount levels. PlanVista also provides PlanServ customers with database
administration, including provider directory updates and maintenance of
provider demographics and fee schedules. 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. Product and Services Development In Payer Services, several initiatives are underway to convert all current
transactions to their respective HIPAA-compliant formats (see Healthcare and
Privacy Related Legislation below). To date, our institutional, professional
and dental claims (837); electronic remittance advice (835); eligibility
(270/271); claims status (276/277) and referral (278) transactions have been
certified as HIPAA-compliant by Claredi, one of the nations leading commercial
providers of HIPAA EDI compliance testing and certification services. We are
actively engaged in migrating all of our existing payer and provider
connections to a HIPAA-compliant format, in conjunction with our contingency
plan for HIPAA compliance. HIPAA also affords us many opportunities to
increase both the number and type of transactions we offer to both physicians
and payers. In addition to processing the basic HIPAA-defined transactions, we seek to
expand our product and service offerings to include other value-added services
for its providers and payers. In furtherance of this strategy, we formed a
strategic relationship in July 2003 with First Data Corporation (First Data).
By leveraging our deep payer and provider connectivity with First Datas
financial transaction expertise, the two companies are jointly marketing
FirstProxy, a new suite of innovative solutions that streamline and expedite
healthcare claim, payment and settlement processes. The first offering,
FirstProxy ERA/ EFT, will transform the remittance advice and payment process
from paper-based to electronic. Together, ProxyMed and First Data will allow healthcare providers and
insurance companies to rapidly convert existing paper-based checks and
explanation of benefits into secure, HIPAA-compliant electronic ERAs with
electronic funds transfer. The processing and settlement of the financial
transactions and payments will start and end within the First Data processing
system. FirstProxy ERA/ EFT will also ensure that insurers and providers are
compliant with upcoming HIPAA regulation deadlines that require standards for
health information security and privacy as well as the implementation of
electronic data interchange for ERAs. In addition, we announced in June 2003
that we entered into a joint marketing program to offer our electronic
healthcare transaction processing services and PlanVistas network access
product as an integrated package to existing and prospective payer customers.
We will integrate PlanVistas network, repricing services and network
management services with our physician and hospital claims processing services.
The resulting leading-edge medical cost management solutions will include
medical claim repricing, flexible EDI connectivity and national PPO access
through PlanVistas preferred provider network, NPPN. Combining these
solutions will allow us to offer a one- 12




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stop shop for all our customers claims needs, which will include a
guaranteed 24-hour turn-around time and bill negotiation. These services are
available immediately for our payer customers In Laboratory Services, we were pursuing opportunities to convert our
business from the traditional sale, lease and service of intelligent laboratory
reporting devices to recurring transaction-based revenue streams. Although
this is a factor in our long-term growth strategy, to date, the marketplace has
been slow to adopt this economic model and we have had limited success with
this service. As a result, we have postponed any significant further
development or deployment at this time. The total amount capitalized for purchased technology, capitalized
software and other intangible assets as of December 31, 2003, was approximately
$15.9 million, net of amortization. Our research and development expense was approximately $4.4 million in
2003, $3.2 million in 2002 and $2.0 million in 2001. Marketing We have a direct sales force and customer support staff that serves
physician offices, payers, laboratories and pharmacies. In addition, since we
do not compete for the physician desktop and allow for private branding of our
value-added products and services, we are able to leverage the marketing and
sales efforts of our partners by giving them even greater added value to drive
our revenues and transactions. Our marketing efforts are focused on providing connectivity solutions for
the 326,000 small physician offices (one-to-nine physicians) in the United
States, a niche that is underserved by our competitors. We utilize a unique sales and marketing methodology called FOCUS (an
acronym for Find, Obtain, Capture, Utilize and Service) for targeting,
acquiring, retaining and maximizing the utilization of our services at the
small physician office. Working with our payer and pharmacy partners to
identify high volume paper claim submitters and prescription writing physicians
as qualified sales leads, the results of our FOCUS program indicate quick
contract-to-implementation time frames, low attrition rates and high
post-implementation satisfaction levels. 13




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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 physician offices, payers, laboratories and
pharmacies. We license access to our proprietary network,
Phoenix, and provide intelligent laboratory results reporting
devices for communications between physicians and laboratories.Partners
    
    We work with the vendors of physician and pharmacy office
management systems so that they may enable their existing
applications to process transactions through Phoenixbetween
physicians and payers, laboratories and pharmacies. We also
license these customers to offer our products and services under
their own private label. We also connect other electronic
transaction processing networks to Phoenixso that the
participants on both networks can communicate with each other in
National Council of Pharmacy Drug Program (NCPDP) standard, HIPAA
approved formats, and the HL-7 standard format for laboratories.Internet
    
    We are a provider of financial, clinical and administrative
electronic transaction processing services through our portal,
ProxyMed.net, which may be easily accessed by any physician
office with an Internet connection.
 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 such as RxHub LLC, 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 MedUnite
and its Internet-based platform for real-time transactions, 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 Access- 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, BCE Emergis/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 Blue
Shield, Aetna, WellPoint Health Networks, Inc., UnitedHealth Group, Humana
Health Care Plans, Private Healthcare Systems, and CIGNA 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. 14




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Electronic Claims Repricing- The claims repricing service market is also
fragmented. PlanVistas repricing competitors provide some or all of the
services PlanVista currently provides. PlanVistas 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, UnitedHealth
Group, and Wellpoint Health Networks;  
    
    Healthcare information technology companies providing
enterprise-wide systems to the payer market, such as
McKesson HBOC, Eclipsys Corporation, and Perot Systems
Corporation; and  
    
    Healthcare information software vendors selling claim
processing products to the provider market, such as The
TriZetto Group, Healthaxis, AVIDYN/ppoONE, and several
private companies. 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. PlanVista competes on the basis of the strength of its electronic claims
repricing technology, the size of its network and the level of its network
discounts, its percentage of savings pricing model, and the diversity of
services PlanVista offers through its 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 ProxyMed 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;  
    
    FTC enforcement actions of existing privacy laws relating to the Internet;  
    
    Medicare or Medicaid prescription benefit plans;  
    
    State licensing requirements; or  
    
    Patient protection initiatives. 15




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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 (HIPAA) 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,
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. The deadline for compliance with the privacy aspects of
HIPAA was April 14, 2003. Although we have undertaken several measures to
ensure compliance with the privacy regulation by the deadline and believe that
we are in compliance, the privacy regulations are less definitive than other
HIPAA 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. HIPAA specifically designates
clearinghouses (including the Company and other financial network operators) as
the compliance facilitators for healthcare providers and payers. On August 17,
2000, the U.S. Department of Health and Human Services published final
regulations to govern eight of the most common electronic transactions
involving health information. Under a revised bill passed by the U.S.
Congress, the deadline for the transaction and code sets aspects of HIPAA was
extended to October 16, 2003, provided that a formal request for extension and
plan for compliance was submitted by October 16, 2002. 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.
A substantial number of our transactions, including those related to its
acquisition of MedUnite, on behalf of our physician and payer customers are
currently being processed in a non-HIPAA compliant manner in accordance with
our contingency plan. Security Compliance HIPAAs Security Rule imposes standards for the security of electronic
protected health information and was finalized on February 20, 2003. 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. 16




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Identifiers and Future HIPAA Regulations Because some HIPAA regulations, including some various national
identifiers, have yet to be issued or implemented, and because even final HIPAA
regulations may be subject to additional modification or amendment, the
Companys products may require modification in the future. If we fail to offer
solutions that permit compliance with applicable laws and regulations, our
business could suffer. 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. Regulations Specific to PlanVista Regulation in the healthcare industry is constantly evolving. Federal,
state and local governments continue their efforts to reduce the rate of
increases in healthcare expenditures and to regulate the adjudication of
healthcare claims for the protection of patients as well as providers. Many of
these policy initiatives have contributed to the complex and time-consuming
nature of obtaining healthcare reimbursement for medical services. The impact
of regulatory developments in the healthcare industry is complex and difficult
to predict, and PlanVistas business could be adversely affected by new
healthcare regulatory requirements or new interpretations of existing
requirements. PlanVista believes, however, that the increasing complexity of
healthcare transactions and the resulting additional information management
requirements placed on providers and payers should increase the demand for its
services. At the same time, these requirements may dramatically increase the
cost of providing services. Gramm-Leach-Bliley Many of PlanVistas customers may also be subject to state laws
implementing 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. PlanVista also may be
subject to state privacy laws, which may be more stringent in some cases. 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. 17




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PlanVistas 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 PlanVistas customers
reliance on any of the services PlanVista provides contribute to any alleged
violation of these laws or regulations, then PlanVista 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 PlanVista when it provides claims services and a
violation of any of these laws could subject PlanVista to fines or penalties. Licensing Regulation PlanVista is subject to, and in compliance with, the licensing
requirements of the State of Illinois for the services we provide. While
PlanVista is currently not subject to any other licensing requirements for the
services it provides, some states require PlanVista, as a non-risk-bearing PPO,
to formally register and file an annual or one-time accounting of networks and
providers with which PlanVista contracts. Given the rapid evolution of
healthcare regulation, it is possible that PlanVistas business will be subject to future
licensing requirements in any of the states where PlanVista currently performs
services, or that one or more states may deem PlanVistas 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 PlanVistas 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. Although we do not currently hold any patents, as a result of the
MedUnite acquisition, we acquired rights under four patent applications filed
by MedUnite for its healthcare transaction processing platform and method for
facilitating the exchange of healthcare transactional information, in addition
to rights under various trademarks and trademark applications. We have twelve
(12) copyright registrations covering our various software and proprietary
products. As part of our confidentiality procedures, we generally enter into
nondisclosure agreements with our employees, distributors and customers, and
limit access to and distribution of our software, databases, documentation and
other proprietary information. We cannot assure that the steps taken by us
will be adequate to deter misappropriation of our proprietary rights or that
third parties will not independently develop substantially similar products,
services and technology. Although we believe our 18




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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. PlanVista PlanVistas proprietary technology offers customers the
benefits of an open architecture, which means that it is compatible with other
operating systems and applications. Using a combination of electronic data
interchange and Internet systems, customers can interface with our claims
repricing system without incurring significant incremental capital expenditures
for hardware or software or having to adopt a specific claims format. The open
architecture of PlanVistas system also improves reliability and facilitates
the cross-selling of other technology-based services to PlanVistas customers. Employees As of March 8, 2004, we employed 541 full-time employees, and 18 part-time
employees. We are not and never have been a party to a collective bargaining
agreement. We consider our relationship with our employees to be good. Available Information The
Companys Internet address is www.proxymed.com. The Company makes
available free of charge on or through its Internet website its 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. 19




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ITEM 2. PROPERTIES Our significant offices are located as followed: Business
    
    
    
    
    
    ApproximateSegment
    
    Location
    
    Description
    
    Square FootagePrescription Services
    
    Fort Lauderdale, Florida
    
    Operations office
    
    
    20,500Payer Services
    
    Santa Ana, California
    
    Operations office/data center
    
    
    19,600San Diego, California
    
    Development office
    
    
    4,700Atlanta, Georgia
    
    Corporate headquarters/operations
office/data center
    
    
    31,200Sioux Falls, South Dakota
    
    Operations office
    
    
    3,700Richmond, Virginia
    
    Operations office/data center
    
    
    3,000Medical
Cost Containment Services
    
    Tampa, Florida
    
    PlanVista headquarters
    
    
    8,200Middletown, New York
    
    PlanVista operations center
    
    
    26,900Laboratory Services
    
    New Albany, Indiana
    
    Operations office/manufacturing facility
    
    
    42,000Moorestown, New Jersey
    
    Operations office/depot service facility
    
    
    4,000
 We also maintain portions of our Phoenixnetwork at a secure, third-party
co-location center in Atlanta, Georgia. In addition, we also lease several
remote sales offices and 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. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is a party to 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. 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, 2003. 20




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PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY
AND RELATED STOCK MATTERS Our common stock trades on the National Market tier of The Nasdaq Stock
Market under the symbol PILL. The following table sets forth the high and
low sale prices of the common stock for the periods indicated. High
    
    Low2004:First Quarter
(through March 26, 2004)
    
    $
    19.80
    
    
    $
    16.652003:First Quarter
    
    $
    11.45
    
    
    $
    7.25Second Quarter
    
    
    13.21
    
    
    
    7.08Third Quarter
    
    
    16.40
    
    
    
    12.01Fourth Quarter
    
    
    17.64
    
    
    
    14.552002:First Quarter
    
    $
    22.35
    
    
    $
    15.00Second Quarter
    
    
    21.99
    
    
    
    17.21Third Quarter
    
    
    20.44
    
    
    
    10.50Fourth Quarter
    
    
    15.95
    
    
    
    9.48
 On March 26, 2004, the last reported sale price of the common stock was
$16.70 per share. As of March 26, 2004, we estimate that
there were approximately 684 registered holders of record of the common stock. We believe that many of
ProxyMeds holders of record are in street name and that the number of
individual shareholders is greater than 684. 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 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. 21




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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, 2003, and has been derived from our audited consolidated
financial statements. Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999STATEMENT OF OPERATIONS DATA:Revenues
    
    $
    76,142
    
    
    $
    50,182
    
    
    $
    43,230
    
    
    $
    33,441
    
    
    $
    29,023Operating income (loss)
    
    $
    (3,642
    )
    
    $
    1,340
    
    
    $
    (6,712
    )
    
    $
    (23,460
    )
    
    $
    (20,019
    )Income (loss) from continuing operations
    
    $
    (5,000
    )
    
    $
    1,950
    
    
    $
    (6,798
    )
    
    $
    (26,927
    )
    
    $
    (20,120
    )Income (loss) from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    241
    
    
    $
    (1,714
    )Net income (loss) applicable to common shareholders
    
    $
    (5,000
    )
    
    $
    1,338
    
    
    $
    (19,060
    )
    
    $
    (48,052
    )
    
    $
    (21,856
    )PER SHARE DATA:Basic and diluted net loss per share of common stock:Income (loss) from continuing operations
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    )
    
    $
    (37.03
    )
    
    $
    (16.75
    )Income (loss) from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.19
    
    
    $
    (1.43
    )Net income (loss)
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    )
    
    $
    (36.84
    )
    
    $
    (18.18
    )Diluted weighted average common shares outstanding
    
    
    6,783,742
    
    
    
    6,396,893
    
    
    
    2,162,352
    
    
    
    1,304,342
    
    
    
    1,202,136DIVIDEND DATA:Dividends on common stock
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Dividends on cumulative preferred stock
    
    $
    
    
    
    $
    
    
    
    $
    1,665
    
    
    $
    1,275
    
    
    $
    22 December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999BALANCE SHEET DATA:Working capital
    
    $
    10,512
    
    
    $
    8,749
    
    
    $
    9,393
    
    
    $
    12,156
    
    
    $
    12,580Convertible notes
    
    $
    13,137
    
    
    $
    13,400
    
    
    $
    
    
    
    $
    
    
    
    $
    Other long-term obligations
    
    $
    3,518
    
    
    $
    2,581
    
    
    $
    442
    
    
    $
    729
    
    
    $
    583Total assets
    
    $
    73,130
    
    
    $
    88,704
    
    
    $
    35,882
    
    
    $
    27,666
    
    
    $
    44,773Net assets of discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    3,022Stockholders equity
    
    $
    45,778
    
    
    $
    50,735
    
    
    $
    22,873
    
    
    $
    22,377
    
    
    $
    37,756 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. 22




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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 its 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 the
Company 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
business 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 PlanVista. There is no guarantee that we will be
able to successfully integrate PlanVista, 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 matter 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 PlanVista, MedUnite and other 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, operational and administrative 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. 23




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Businesses we acquire may have undisclosed liabilities that 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. If we acquire a company having undisclosed
liabilities, as a successor owner we may be responsible for such undisclosed
liabilities. 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, 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
will not be indemnifying us in connection with the merger that occurred on
March 2, 2004. 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 such as
MedUnite 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, including the merger with PlanVista, 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, 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 health care information. Final HIPAA rules on
standards governing privacy of patient health care information were published
in 2000. The implementation deadline for HIPAAs privacy related regulations
was April 14, 2003. Although we have undertaken several measures, including
the adoption of policies and procedures for the handling of patient healthcare
information, to ensure compliance with the privacy measures by the deadline and
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, our business partners or customers are or will be in
compliance in the future. HIPAA also mandates the use of standard transactions, standard
identifiers, security and other provisions for electronic claims transactions.
The deadline for compliance with the transaction code set aspects of HIPAA was
October 16, 2003. However, covered entities, including ProxyMed and its
physician and payer customers, may 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. A substantial number of our transactions, including
those related to its acquisition of MedUnite, on behalf of its physician and
payer customers are currently being processed in a non-HIPAA compliant manner
in accordance with our contingency plan. 24




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We expect, but cannot guarantee, that we will be able to complete the
migration of these transactions into a HIPAA-compliant format on our
PhoenixTM
platform in an accurate and timely manner, and in close coordination with its
physician and payer customers. We may be subject to complaints by its
customers with regard to the accuracy and timeliness of this migration, which
complaints may lead to demands for credits from, or termination of contracts
with, us. Our contracts with our customers, strategic partners, providers, payers
and other healthcare entities mandate or will mandate that the 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 Center
for Medicare and Medicaid Services 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. If electronic transaction processing penetrates the healthcare industry more
extensively, we may face pressure to reduce our prices which potentially may
cause us to no longer be competitive. If electronic transaction processing extensively penetrates the healthcare
market or becomes highly standardized, it is possible that competition among
electronic transaction processors will focus increasingly on pricing. This
competition may put intense pressure on us to reduce our pricing in order to
retain market share. If we are unable to reduce our costs sufficiently to
offset declines in our prices, or if we are unable to introduce new, innovative
service offerings with higher prices, we may not be competitive. 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 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 its prices, our margins will decrease, unless we
are able to achieve corresponding reductions in expenses. 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 is one of the most significant factors influencing
our growth. There is no 25




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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 participants. Our business is enhanced by the substantial number of payers, such as
insurance companies, Medicare and Medicaid agencies, to which we have
electronic connections. These connections may either be made directly or
through a clearinghouse. We have attempted to enter into suitable contractual
relationships to ensure long-term payer connectivity; however, we cannot assure
that we will be able to maintain our links with all these payers. In addition,
we cannot assure that we will be able to develop new connections, either
directly or through clearinghouses, on satisfactory terms. Lastly, some
third-party payers provide systems directly to healthcare providers, bypassing
us and other third-party processors. Our failure to maintain existing
connections with payers and clearinghouses or to develop new connections as
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 others projects. 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. The acceptance of electronic processing of clinical transactions in the
healthcare industry is still in its early stages; thus, the future of our
business is uncertain. Our strategy anticipates that electronic processing of 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. Electronic transmission of
clinical healthcare transactions (and, in particular, the use of the Internet
to transmit them) is still developing, and complexities in the nature and types
of transactions which must be processed have hindered, to some degree, the
development and acceptance of electronic processing of clinical transactions in
this industry. While discussions of government legislation might be a catalyst
for the use of the electronic processing of clinical healthcare transactions,
we cannot assure that continued conversion from paper-based transaction
processing to electronic transaction processing in the healthcare industry,
using proprietary healthcare management systems or the Internet, will occur. 26




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An error by any party in the process of providing clinical connectivity, such
as prescribing drugs, filling prescriptions, and transmitting laboratory orders
and results, could result in substantial injury to a patient, 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 many of our products and services relate to the prescribing and refilling
of drugs and the transmission of medical laboratory orders and results, an
error by any party in the process could result in substantial injury to a
patient. As a result, our liability risks are significant. We cannot assure that our insurance will be sufficient to cover potential
claims arising out of our current or proposed operations, or that our present
level of coverage will be available in the future at a reasonable cost. A
partially or completely uninsured claim against us, if successful and of
sufficient magnitude, would have significant adverse financial consequences.
Our inability to obtain insurance of the type and in the amounts we require
could generally impair our ability to market our products and services. Our laboratory communication devices may be replaced with web-based technology
for lab results delivery, and we may not be successful in converting our
customers toPhoenixand to our own Internet site atProxyMed.net, which would
adversely impact our revenues. A key element of our longer-term Laboratory Services business strategy is
to market our intelligent laboratory results reporting devices and related
services, and our web-based solutions directly to independent and
hospital-based medical laboratories. As the Internet becomes a more acceptable
method of transmitting laboratory orders and reporting results because of the
efficiencies and savings believed to be available, we hope to leverage more
than 25 years of goodwill (through our Key Communications Service subsidiary)
and reputation for quality of products and superior service to migrate our
customers over to Phoenix, more specifically to our Internet site at
ProxyMed.net. We expect others to develop similar web-based solutions and
compete aggressively in an attempt to capture our large customer base. In
addition, many of our device customers may choose to offer Internet services
themselves, rather than utilizing a third party. We have no assurances that we
will be able to retain or continue to grow our customer base. Further, even as
to the continuing sales of our laboratory communication devices, we are unable
to control many of the factors that influence our customers buying decisions,
including our customers budgets and procedures for approving expenditures, and
the changing political, economic and regulatory influences which affect the
purchasing practices and operation of healthcare organizations. We may not be able to retain key personnel or replace them if they leave. Our success is largely dependent on the personal efforts of Michael K.
Hoover, our Chairman of the Board and Chief Executive Officer and Nancy J. Ham,
our President and Chief Operating Officer, and PlanVista is highly dependent on
its senior management, particularly PlanVistas President and Chief Operating
Officer Jeffrey L. Markle. Although we have entered into employment agreements
with Mr. Hoover, Ms. Ham, Mr. Markle and other senior executives, the loss of
any of their services could cause our business to suffer. Our success is also
dependent upon our ability to hire and retain qualified operations, development
and other personnel. Competition for qualified personnel in the healthcare
information services industry is intense, and we cannot assure that we will be
able to hire or retain the personnel necessary for our planned operations. 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, including WebMD Corporation, NDCHealth
Corporation, Per-Se Technologies, and other healthcare related entities such as
RxHub LLC, have targeted this industry for growth, including the development of
new technologies utilizing Internet-based systems. PlanVista faces competition
from HMOs, PPOs, third party administrators, and other managed healthcare
companies, such as Blue Cross and Blue Shield, McKesson HBOC, 27




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The TriZetto Group, Inc., HealthAxis, Avidyn/ppoOne, Inc., Concentra,
Inc., Beech Street Corporation, MultiPlan, Inc., Private Healthcare Systems
(PHCS), and Coalition America, Inc. While our ability to compete has been
enhanced by our acquisition of PlanVista and MedUnite, 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 ProxyMeds Transaction
Services business, the loss of any one provider would not be material, but if
large numbers of providers chose to terminate their contracts, our revenues and
net income could be materially adversely affected. For PlanVista, 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
PlanVistas ability to reprice claims and derive revenues. Furthermore, as a
network of networks, PlanVista relies on its participating PPOs and provider
groups to ensure participation by such providers. PlanVistas PPO contracts
generally do not provide PlanVista 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 PlanVistas National
Preferred Provider Network. 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
PlanVista customers. Some providers have historically been reluctant to participate in secondary
networks. PlanVistas percentage of savings business model sometimes allows a payer
to utilize PlanVista network discounts in circumstances where PlanVistas
National Preferred Provider Network is not the payers primary network. In
these circumstances, PlanVistas National Preferred Provider Network
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
PlanVista thinks that the steerage provided by its payers as a whole and the
speed and efficiency with which PlanVista provides claims repricing services
make National Preferred Provider Network affiliation an attractive option for
providers, there can be no assurance that PlanVistas business model will not
discourage providers from commencing or maintaining an affiliation with the
National Preferred Provider Network. PlanVistas accounts receivable are subject to adjustment. PlanVista generally records revenue for its 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. To the extent that actual claim reversals and bad debts
associated with the PlanVista business exceed the amounts reserved, such
difference could have a material adverse impact on our results of operations
and cash flows. PlanVista may not prevail in ongoing litigation and may be required to pay
substantial damages. PlanVista is party to various legal actions as either plaintiff or
defendant in the ordinary course of business. While PlanVista believes that
the final outcome of these proceedings will not have a material adverse effect
on PlanVistas financial position, cash flows or results of operations,
PlanVista cannot assure the ultimate outcome of these actions and the estimates
of the potential future impact on PlanVistas financial position, cash flows or
results of operations for these proceedings could change in the future. In
addition, we will continue to incur additional legal costs in connection with
pursuing and defending such actions. 28




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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. 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 Norcross,
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 29




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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. 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 its 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.
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. While 2002 was our first full year of positive earnings, we have incurred
substantial losses, including losses of $5.0 million in the fiscal year ended
December 31, 2003, and $19.1 million for the fiscal year ended December 31,
2001. As of December 31, 2003 and December 31, 2002, we had an accumulated
deficit of $100.3 million and $95.3 million, respectively. While we believe
that our business model supports earnings growth in the future, various factors
that may affect loss of customers and related revenues or increased and
unforeseen expenses could cause us to fall short of our financial goals. Such
shortfall could have a detrimental effect on the market price of our stock and
our liquidity and operations. 30




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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;
    
    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. 31




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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 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 two 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 of 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 are the nations second largest provider-based electronic healthcare
transaction services company. We provide connectivity services and related
value-added products to physicians, payers, pharmacies, medical laboratories,
and other healthcare providers and suppliers. Our services support a broad
range of financial, clinical and administrative transactions, and are
HIPAA-certified through Claredi, an independent certification and testing
services company specializing in HIPAA compliance. To facilitate these
services, we operate PhoenixTM, our secure national electronic information
platform, which provides physicians and other healthcare providers with direct
connectivity to one of the industrys largest list of payers, the industrys
largest list of chain and independent pharmacies and the largest list of
clinical laboratories. Our 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. All of our revenues are generated domestically. Our primary strategy is focused on leveraging our leading position as an
independent back-end connectivity provider to small physician offices. Through
strategic relationships and partnerships with front-end solution providers, our
goal is to drive more healthcare transactions through PhoenixTMwhile 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 32




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additional capabilities and value-added products and services, and to expanding
our back-end connectivity network. In conjunction with this philosophy, we have
recently introduced ProxyMed.net, our new web portal for providers, and
PhoenixTM, our new transaction processing platform which has been
HIPAA-certified through Claredi. We have also added new services offerings for
our payer customers through agreements with PlanVista Corporation (PlanVista)
for claims re-pricing services and First Data Corporation for a jointly
marketed suite of services being offered under the brand name FirstProxy. Acquisitions On December 31, 2002, we acquired all of the outstanding stock of
MedUnite, Inc. (MedUnite) for $10 million in cash and an aggregate of $13.4
million principal amount of 4% convertible promissory notes. In addition, we
paid approximately $6.7 million in transaction and exit related costs (which
were originally estimated at $8.3 million). Interest on the convertible 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 the former shareholders
of MedUnite achieve certain revenue-based triggers over the next three and
one-half year period. The shares of our common stock issuable upon conversion
of the convertible notes will be registered by us promptly after a conversion
trigger event is met. The first threshold trigger was reached during the
fourth quarter of 2003 and the convertible notes were reduced to $13.1 million
at December 31, 2003 as a result of a claim against the escrow. The operations
of MedUnite are reflected with our operations for the twelve months ended
December 31, 2003. Additionally, we spent much of the 2003 year integrating the
operations of MedUnite into our existing operations and currently the
organizations are run and managed as one operating unit. As a result,
meaningful separate results and statistics for MedUnite are no longer
available. On March 2, 2004, a merger was consummated by and among ProxyMed, Planet
Acquisition Corporation (a wholly-owned subsidiary of ProxyMed that was formed
solely to effect the merger) and 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 health care
providers, including individual providers, preferred provider organizations and
other provider groups). In connection with this merger, our shareholders
approved (1) an amendment to our articles of incorporation to increase the
total number of authorized shares of the Companys common stock from 13,333,333
1/3 shares to 30,000,000 shares, (2) the issuance of 1,691,229 shares of our
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 our common stock in
connection with the merger, and (4) an amendment to our 2002 Stock Option Plan
to increase the total number of shares available for issuance from 600,000 to
1,350,000. Upon completion of the merger, each share of PlanVistas outstanding
common stock was cancelled and converted into the right to receive 0.08271 of a
share 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. PlanVista
will be operated as a wholly-owned subsidiary of ours and its operations will
be included in our Transaction Services segment commencing March 2004. As described above, to acquire PlanVista we issued 3,600,000 shares of
our common stock to PlanVista shareholders valued at $68.4 million (based
on the closing price of our common stock on March 2, 2004), we assumed
debt and other liabilities of PlanVista, and we estimated approximately
$1.3 million in acquisition-related costs. Additionally, we raised $24.1
in a private placement sale of our common stock to partially fund
repayment of PlanVistas debts and other obligations outstanding at the
time of the acquisition.
 The merger enables
us to enter into a new line of business, 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. Operating Segments We operate in two reportable segments that are separately managed:
Transaction Services (formerly known as Electronic healthcare transaction
processing) and Laboratory Communication Solutions. Transaction 33




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Services includes transaction and value-added services principally between
physicians and insurance companies (Payer Services) and physicians and
pharmacies (Prescription Services); and Laboratory Communication Solutions
includes the sale, lease and service of communication devices principally to
laboratories and the contract manufacturing of printed circuit boards
(Laboratory Services). The results for the Transaction Services and Laboratory
Communication Solutions segments do not include an allocation of Corporate
overhead in assessing the operating performance of the respective segments.
Commencing in March 2004, the operations of PlanVista will be included in our
Transaction Services segment (Medical Cost Containment Services). Results of Operations 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 by 108% over the 2002
period. This increase was driven by strong internal growth and more
significantly by transactions generated by MedUnite. Total healthcare transactions grew from 114.2 million transactions in the
2002 period to 197.6 million transactions in 2003. Core transaction growth is
up 73% 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. While our encounter volume remained flat between the
periods, the net increases were generally the result of transactions acquired
from MedUnite and new sales, including transactions generated by new vendor
partners that resulted in greater claim and patient statement processing
transactions. A summary of the number of transactions we processed for the
periods presented is as follows: In thousands
    
    2003
    
    2002Core transactions
    
    
    201,120
    
    
    
    89,123Encounters
    
    
    25,529
    
    
    
    25,045Total transactions
    
    
    226,649
    
    
    
    114,168 Core transactions represent all transactions except for encounters.
Encounters are an administrative reporting transaction for payers but do not
generate revenue for the provider who must submit them. Accordingly, rather
than submitting on a routine basis, most providers choose to periodically
catch up on their submissions, creating monthly and quarterly swings in both
the number of encounters we process and what percentage of our transaction mix
they represent. Since encounters are at a significantly lower price point than
claims, these swings make it difficult to easily analyze our
quarter-over-quarter growth in our core business. In addition, we do not
expect our encounter volume to grow on an annual basis, as payers are not
expanding the capitated service model that is the foundation of encounters.
Therefore, we believe that breaking out encounters shows more clearly our
growth in core transactions, which are the growth engine for our Transaction
Services segment. For the 2003 period, approximately 65% of our revenues came
from our Transaction Services processing segment, compared to 45% from this
segment for 2002. 34




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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
have seen 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 segments 2003 revenues. Our future
goals for this business include creating new opportunities with existing
customers with our Report Tracker product and capitalizing on our relationships
for transaction-based solutions. 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 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
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 35




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resulting in a decrease in the amount of capitalized development related
to our real-time and PhoenixTMplatforms. 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 Communications 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 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 PhoenixTM 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.
(Gain) loss on disposal of assets classified by our reportable segments is as
follows: In thousands
    
    2003
    
    2002Transaction Services
    
    $
    107
    
    
    $
    Laboratory Communication Solutions
    
    
    (6
    )
    
    
    Corporate
    
    
    10
    
    
    
    $
    111
    
    
    $
     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: In thousands
    
    2003
    
    2002Transaction Services
    
    $
    193
    
    
    $
    38Laboratory Communication Solutions
    
    
    348
    
    
    
    $
    541
    
    
    $
    38 36




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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 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. 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. During the term the warrant was outstanding,
the value of the warrant was evaluated at the end of each calendar quarter. On
September 30, 2003, the value of the warrant increased to approximately $5.3
million primarily as a result of an increase in the market value of PlanVista common
stock and this increase was reflected as other income in the statement of
operations during the third quarter of 2003. Upon expiration of the warrant in
December 2003, we recorded an impairment loss in the amount of $5.3 million
resulting in a net impairment loss in the amount of $0.5 million (representing
the original value of the warrant) for the 2003 year. 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 loss applicable to common shareholders of
$1.3 million for 2002. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Net Revenues.Consolidated net revenues for 2002 increased by $7.0
million or 16%, to $50.2 million from consolidated net revenues of $43.2
million for 2001. Net revenues classified by our reportable segments are as
follows: In thousands
    
    2002
    
    2001Transaction Services
    
    $
    22,439
    
    
    $
    16,938Laboratory Communication Solutions
    
    
    27,743
    
    
    
    26,292$
    50,182
    
    
    $
    43,230 37




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Net revenues in our Transaction Services segment increased by 32%
primarily due to a 30% increase in the number of electronic clinical and
financial healthcare transactions processed through Phoenix(previously called
"ProxyNet). Total transactions grew from 87.9 million transactions in the
2001 period to 114.2 million transactions in 2002. Core transaction growth is
up 47% from the 2001 period. The increase in transaction volume was primarily
attributable to internal growth in both claims and statements processed.
Additionally, we continued to make progress in our cross-selling efforts to our
existing customers resulting in an increase of transaction services utilized
per directly contracted provider from a 1.3 (estimated) in 2001 to 2.5 in 2002.
A summary of the number of transactions we processed for the periods presented
is as follows: In thousands
    
    2002
    
    2001Core transactions
    
    
    89,123
    
    
    
    60,523Encounters
    
    
    25,045
    
    
    
    27,419Total transactions
    
    
    114,168
    
    
    
    87,942 Core transactions represent all transactions except for encounters.
Encounters are an administrative reporting transaction for payers but do not
generate revenue for the provider who must submit them. Accordingly, rather
than submitting on a routine basis, most providers choose to periodically
catch up on their submissions, creating monthly and quarterly swings in both
the number of encounters we process and what percentage of our transaction mix
they represent. Since encounters are at a significantly lower price point than
claims, these swings make it difficult to easily analyze our
quarter-over-quarter growth in our core business. In addition, we do not
expect our encounter volume to grow on an annual basis, as payers are not
expanding the capitated service model that is the foundation of encounters.
Therefore, we believe that breaking out encounters shows more clearly our
growth in core transactions, which are the growth engine for our Transaction
Services segment. We exited the year on an annualized run rate of over 120 million total
transactions for ProxyMed on a stand-alone basis. The acquisition of MedUnite
added another 90 million transactions; therefore, we exited 2002 with a
combined annualized run rate of almost 210 million total transactions. For 2002, approximately 45% of our revenues came from our Transaction
Services segment, compared to 39% from this segment for 2001. Laboratory Communication Solutions net revenues increased by 6% primarily
due to the acquisition of KenCom and an increase in contract manufacturing
revenues, offset by decreases in sales and leases of communication devices, and
field service revenues. Cost of Sales.Consolidated cost of sales decreased from 54% in 2001 to
52% in 2002. Cost of sales classified by our reportable segments is as
follows: In thousands
    
    2002
    
    2001Transaction Services
    
    $
    8,793
    
    
    $
    6,531Laboratory Communication Solutions
    
    
    17,223
    
    
    
    16,895$
    26,016
    
    
    $
    23,426 Cost of sales in the 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 travel expenses. Cost of sales as a percentage of revenues
remained constant at 39% for 2002 and 2001. Cost of sales in the Laboratory Communication Solutions segment includes
hardware, third-party software, consumable materials, direct manufacturing
labor and indirect manufacturing overhead (as a result of reclassifications
that were done in 2003 between SG&A and cost of sales). Cost of sales as a
percentage of 38




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##### 



revenues decreased to 62% for 2002 compared to 64% for 2001 primarily as a
result of a change in the mix of revenues from higher margin leases of
communication devices (as our lease base shrinks) to lower margin device sales
and contract manufacturing. Selling, General and Administrative Expenses.Consolidated SG&A increased
for 2002 by $1.9 million, or 10%, to $20.2 million from consolidated SG&A of
$18.2 million for 2001. Consolidated SG&A expenses as a percentage of
consolidated revenues decreased to 40% for 2002 compared to 42% in 2001. SG&A
expenses classified by our reportable segments are as follows: In thousands
    
    2002
    
    2001Transaction Services
    
    $
    11,430
    
    
    $
    9,906Laboratory Communication Solutions
    
    
    6,128
    
    
    
    5,150Corporate
    
    
    2,594
    
    
    
    3,193$
    20,152
    
    
    $
    18,249 Transaction Services SG&A expenses for 2002 increased 15% over 2001
primarily due to adding associates in our Payer Services transaction business
sales and marketing teams to drive our core revenue growth and in our technical
and development areas as it relates to our HIPAA compliance efforts, and
incremental expenses incurred at our South Dakota operations as a result of our
acquisition of MDIP. These increases were offset by the capitalization of
payroll and other costs for HIPAA and private label internal-use software
projects for 2002. Segment SG&A expenses as a percentage of segment net
revenues decreased to 51% for 2002 compared to 58% for 2001 due to the
operational leverage inherent in the business. As we increase the number of
transactions we process, we do not experience a direct correlation in our costs
due to the semi-fixed nature of operating expenses in this segment. Laboratory Communication Solutions SG&A expenses for 2002 increased by
19% primarily due to incremental expenses incurred for the May 2002 acquisition
and operations of KenCom plus increases in contract manufacturing personnel.
As a result, segment SG&A expenses as a percentage of segment net revenues
increased to 22% for 2002 compared to 20% for 2001. However, in the fourth
quarter of 2002, we enacted several cost containment programs in an effort to
curtail spending. Corporate SG&A expenses decreased 19% for 2002 compared to 2001 primarily
due to the non-cash compensatory warrants and the additional accrual recorded
for our software licensing contingency for 2001. Depreciation and Amortization.Consolidated depreciation and amortization
decreased by $5.5 million to $2.6 million for 2002 from $8.2 million for 2001.
This decrease was primarily from a reduction in amortization expense due to the
conclusion of amortization of certain intangible assets in 2001 related to
prior acquisitions in our Transaction Services segment and the adoption of SFAS
No. 142 on January 1, 2002, offset by amortization of identifiable intangible
assets (other than goodwill) related to the acquisitions of KenCom, MDIP, and
the customer relationships of Claimsnet.com in September 2002 for $0.7 million.
Amortization expense related to these acquisitions is expected to be
approximately $0.1 million per quarter through the first quarter of 2005.
Depreciation and amortization classified by our reportable segments is as
follows: In thousands
    
    2002
    
    2001Transaction Services
    
    $
    1,581
    
    
    $
    7,285Laboratory Communication Solutions
    
    
    857
    
    
    
    561Corporate
    
    
    198
    
    
    
    330$
    2,636
    
    
    $
    8,176 39




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Operating Income (Loss).As a result of the foregoing, consolidated
operating income for 2002 was $1.3 million compared to a loss of $6.7 million
for 2001. Operating income (loss) classified by our reportable segments is as
follows: In thousands
    
    2002
    
    2001Transaction Services
    
    $
    597
    
    
    $
    (6,859
    )Laboratory Communication Solutions
    
    
    3,535
    
    
    
    3,686Corporate
    
    
    (2,792
    )
    
    
    (3,539
    )$
    1,340
    
    
    $
    (6,712
    ) Write-off of Impaired and Obsolete Assets. For the 2002 period, 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 in
December 2002. As a result of our periodic review of fixed assets and
co-location of our clinical production network, in December 2001 we wrote off
$0.1 million in obsolete fixed assets, which consisted of primarily computer
hardware and software. Interest Income (Expense), net.Consolidated net interest income for 2002
was $0.3 million compared to net interest expense of $0.1 million for 2001.
This net increase is primarily due to higher cash balances as a result of our
investment from GAP in April 2002, even though effective interest rates are
lower for 2002 compared to 2001 on the cash invested. Net Income (Loss). As a result of the foregoing, consolidated net income
for 2002 was $2.0 million compared to a net loss of $6.8 million for 2001. Deemed Dividends and Other Charges.We incurred deemed dividends and
other charges of $0.6 million for 2002 as a result of non-cash accounting
charges for the conversion of 31,650 preferred shares into 242,510 shares of
common stock by our Series C preferred shareholders in 2002 pursuant to our
offer to convert their shares commencing in December 2001. For the 2001
period, we incurred total deemed dividend and other charges of $12.3 million
primarily as a result of non-cash accounting charges from the anti-dilution
reset in number and price of certain warrants issued to our Series B preferred
shareholders in February 2001, non-cash accounting charges from the exchange of
271,700 warrants into 218,828 shares of common stock by our Series B preferred
shareholders in April 2001, non-cash accounting charges from the exchange of
1,412,033 warrants into 1,050,691 shares of common stock by our Series C
preferred shareholders in August 2001, non-cash accounting charges related to
the conversion of our Series C preferred into 1,296,126 shares of common stock
pursuant to our Conversion Offer through December 31, 2001, non-cash charges
from the anti-dilution reset in number and price of certain warrants issued to
our remaining Series B preferred warrant holder in December 2001 as a result of
the reduced conversion price pursuant to our Conversion Offer to Series C
preferred stockholders and dividends paid to the holder of our Series B
Preferred stock (which was fully converted in October 2001) and dividends paid
to our Series C preferred shareholders through the issuance of shares of common
stock. Net Income (Loss) Applicable to Common Shareholders.As a result of the
foregoing, we reported net income applicable to common shareholders of $1.3
million for 2002 compared to a net loss applicable to common shareholders of
$19.1 million for 2001. 40




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Liquidity and Capital Resources In 2003, 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. In 2002, cash provided by operating activities was $2.8 million. During
this period, we paid $9.1 million ($10.0 million cash less $0.9 million cash
acquired, in addition to $13.4 million (now $13.1 million after a claim against
the portion held in escrow) in 4% convertible notes due December 2008) for our
acquisition of MedUnite; we paid $2.9 million ($3.2 million adjusted cash
purchase price less $0.3 million cash acquired, in addition to 30,034 shares of
our common stock valued at $0.6 million) for our acquisition of KenCom; we paid
$2.4 million for our acquisition of MDIP; paid $0.7 million for our acquisition
of customer relationships from Claimsnet.com; paid in full our $7.0 million
promissory note for our acquisition of MDP; 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
(resulting in net proceeds to us of $24.9 million) in April 2002, proceeds of
$0.5 million from the exercise of 34,500 Series B warrants, and available cash
resources. We had cash and cash equivalents totaling $5.3 million as of December 31,
2003 compared to $16.4 million at December 31, 2002. These available funds
will be used for operations, strategic acquisitions, the further development of
our products and services, and other general corporate purposes. We continue
to evaluate other acquisition opportunities and strategic alternatives that may
add synergies to our product offerings and business strategy. On March 2, 2004, we acquired PlanVista through the issuance of 3.6
million shares of our common stock (valued at $69.3 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. At the current time, we do not have any material commitments for capital
expenditures except for the final installment related to the licensing of
software for use in our internal systems in the amount of $0.2 million due in
the first quarter of 2004 We expect to incur $1.0 million for various development projects scheduled
to be undertaken by us in 2004 (including $0.3 million related to projects at
PlanVista). Additionally, we anticipate spending approximately $5.8 million
(including the $0.2 licensing commitment above and $1.1 million at PlanVista)
primarily for hardware and software costs related to enhancements to our
technical infrastructure and administrative systems. At the time we acquired MedUnite at the end of 2002, MedUnite had incurred
significant losses since its inception and was utilizing cash significantly in
excess of amounts it was generating primarily due to technical and research and
development activities related to their various processing platforms. As a
result, there were substantial liabilities and obligations as well as future
commitments (both known and unknown at December 31, 2002) associated with the
business in addition to the transaction and exit costs associated with the
acquisition. In an effort to immediately curtail and reduce the expenditure
levels, MedUnites senior management team was terminated along with
approximately 20% of the general workforce, and in February 2003, and we moved
our Atlanta facility into MedUnites Norcross facility. While we did not
achieve the expected reductions in MedUnites cost early in the first quarter,
we did exit the first quarter on an expense run rate in line with our
expectations. Furthermore, during the second and third quarters of 2003, we
continued expense reductions by successfully eliminating or renegotiating
substantial telecommunication expenses and eliminating duplicative contact
management, human resources and customer relationship management systems.
Additionally, in April 41




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##### 



2003, we terminated the San Diego facility lease effective July 1, 2003 in
return for a $0.8 million letter of credit held by the current landlord and
furniture at the facility. By December 31, 2003, we had paid all but $0.2 million of the transaction
and exit costs associated with the MedUnite acquisition. As a result of our
negotiations, the original $8.3 million in transaction and exit costs were
ultimately settled for approximately $6.7 million, representing a savings of
$1.6 million. Additionally, other MedUnite contractual obligations have been canceled or
renegotiated with the respective vendors. We have entered into financing
agreements with certain major vendors as a means of settling liabilities that
existed at December 31, 2002, and to date have financed $3.4 million of
liabilities to one vendor; $2.0 million in net liabilities to a former owner of
MedUnite; and $0.4 million for a required insurance policy as part of the
acquisition. Between these financing agreements, existing capital leases, and
the convertible notes issued in the acquisition, we incurred significant
interest expense charges in 2003. 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 of December
31, 2003, there were no borrowings against this line of credit. However, as a
result of our acquisition of PlanVista, we drew down $4.4 million against this
line at the end of February 2004. At this time, the assets of PlanVista are
not eligible collateral for this line of credit due to covenants of the senior
debt in place at PlanVista. As noted above, with our acquisition of PlanVista on March 2, 2004, 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 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
(at an interest rate of 6% until December 2004 when the interest rate increases
to 10%). While it is our intent to satisfy this debt either through
refinancing, obtaining a senior line of credit, or possible equity raise, we
will incur substantial additional cash interest charges until we do so. We may
be unable to raise additional funds. 42




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##### 



The
following table represents our contractual cash obligations due over
the next several years (including a separate table for PlanVista
commencing after the acquisition). At the present time, none of our
contractual cash obligations extend beyond 2006 except for the
maturity of our $13.1 million in convertible notes on December 31,
2008 (assuming no prior conversion). Operating leases are shown net
of any sublease agreements. In thousands
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Interest on convertible notes (1)
    
    $
    525
    
    
    $
    525
    
    
    $
    525
    
    
    $
    525
    
    
    $
    525Convertible notes (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,137Notes payable
    
    
    1,890
    
    
    
    1,758
    
    
    
    354
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    218
    
    
    
    96
    
    
    
    6
    
    
    
    
    
    
    
    Operating leases
    
    
    1,275
    
    
    
    451
    
    
    
    9
    
    
    
    
    
    
    
    Acquisition related costs
    
    
    865
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other obligations
    
    
    164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal ProxyMed
    
    
    4,937
    
    
    
    2,830
    
    
    
    894
    
    
    
    525
    
    
    
    13,662Interest on senior and other debt
    
    
    1,195
    
    
    
    744
    
    
    
    
    
    
    
    
    
    
    
    Senior debt
    
    
    2,000
    
    
    
    18,395
    
    
    
    
    
    
    
    
    
    
    
    Notes payable
    
    
    1,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    389
    
    
    
    101
    
    
    
    56
    
    
    
    53
    
    
    
    11Subtotal PlanVista
    
    
    4,668
    
    
    
    19,240
    
    
    
    56
    
    
    
    53
    
    
    
    11Grand total
    
    $
    9,605
    
    
    $
    22,070
    
    
    $
    950
    
    
    $
    578
    
    
    $
    13,673
    We
believe that we have sufficient cash and cash equivalents on hand to
fund our future operational capital requirements and expenditures, and
a sufficient level of capital in order to fund specific research
and development projects or to pursue smaller additional
strategic acquisitions. Even with the positive cash flow expected to
be generated from our operations, we anticipate that we will need to
refinance the PlanVista debt, obtain a senior line of credit, or
raise capital in order to satisfy this debt on or before maturity.
However, 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. Critical Accounting Policies and Estimates Our
discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which
have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of our financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions
but we believe that any variation in results would not have a
material effect on our financial condition. We evaluate our estimates
on an ongoing basis. 43




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##### 



We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a detailed discussion on the application of these
and other accounting policies, see Note 1 in the Notes to Consolidated
Financial Statements beginning on Page F-7. Revenue Recognition  Transaction Services fee revenue is recorded in the
period the service is rendered. Certain transaction fee revenue may be subject
to revenue sharing per agreements with resellers, vendors or gateway partners
and are recorded as gross revenues. Revenue from sales of inventory and
manufactured goods is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable and
collectibility is probable. Revenue from certain up-front fees is amortized
ratably over the expected life of the customer or contract. Revenue from
hardware leases, network access and maintenance fees is recognized ratably over
the applicable period. Goodwill  We adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets effective January 1, 2002. Under SFAS No. 142, goodwill is
reviewed at least annually for impairment. This adoption resulted in the
reduction of approximately $0.8 million of amortization relating to its
existing goodwill each quarter, which would have otherwise been recorded
through the first quarter of 2004. SFAS No. 142 requires that goodwill be
tested for impairment at the reporting unit level at adoption and at least
annually thereafter, utilizing a fair value methodology versus an
undiscounted cash flow method required under previous accounting rules. In
accordance with our adoption of SFAS No. 142, we completed our annual tests at
December 31, 2003 and 2002 utilizing various valuation techniques including a
market value analysis. No impairment charges were recorded as a result of
these tests. Capitalized Software Development and Research and Development  Costs
incurred internally and fees paid to outside contractors and consultants during
the application development stage of our internally used software products are
capitalized. Costs of upgrades and major enhancements that result in
additional functionality are also capitalized. Costs incurred for maintenance
and minor upgrades are expensed as incurred. All other costs are expensed as
incurred as research and development expenses (which are included in Selling,
general and administrative expenses). Application development stage costs
generally include software configuration, coding, installation to hardware and
testing. Once the project is completed, capitalized costs are amortized over
their remaining estimated economic life. Our judgment is used in determining
whether costs meet the criteria for immediate expense or capitalization. We
periodically review projected cash flows and other criteria in assessing the
impairment of any internal-use capitalized software and take impairment charges
as needed. Equity Transactions  Over the past three years, we have engaged in
various equity transactions. These transactions were first aimed at providing
capital to continue to operate and grow our business and then became a critical
step aimed at simplifying our capital structure. These transactions are
complex and require the application of various accounting rules and standards
that have resulted in significant cash and non-cash charges reflected primarily
as deemed dividend charges included our net loss applicable to common
shareholders. Additionally, the valuation of the PlanVista warrant was based
on a series of assumptions that are used in a complex financial model. This
warrants value of $0.5 million was written off upon its expiration in December
2003. Bad Debt Estimates  We rely on estimates to determine the bad debt
expense and the adequacy of the reserve for doubtful accounts receivable.
These estimates are based on our historical experience and the industry in
which we operate. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. 44




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##### 



New Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest Entities. FIN No. 46 expands upon and
strengthens existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. A variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights; or (b) has equity investors
that do not provide sufficient financial resources for the entity to support
its activities. FIN No. 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or is entitled to
receive a majority of the entitys residual returns or both. The consolidation
requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning after June 15,
2003. Disclosure requirements apply to any financial statements issued after
January 31, 2003. Currently we do not have variable interest entities,
therefore we do not believe that the implementation of FIN No. 46 will have a
material effect on our consolidated financial statements and related
disclosures. In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, except for certain
provision that relate to SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003 and for hedging
relationships designated after June 30, 2003. We do not believe that the
implementation SFAS No. 149 will have a material effect on its consolidated
financial statements and related disclosures. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. SFAS No. 150 specifies that instruments within its
scope embody obligations of the issuer and that, therefore, the issuer must
classify them as liabilities. SFAS No. 150 requires issuers to classify as
liabilities the following three types of freestanding financial instruments:
(1) mandatory redeemable financial instruments; (2) obligations to repurchase
the issuers equity shares by transferring assets; and (3) certain obligations
to issue a variable number of shares. SFAS No. 150 defines a freestanding
financial instrument as a financial instrument that (1) is entered into
separately and apart from any of the entitys other financial instruments or
equity transactions; or (2) is entered into in conjunction with some other
transaction and can be legally detached and exercised on a separate basis. For
all financial instruments entered into or modified after May 31, 2003, SFAS No.
150 is effective immediately. For all other instruments of public companies,
SFAS No. 150 goes into effect at the beginning of the first interim period
beginning after June 15, 2003. For contracts that were created or modified
before May 31, 2003 and still exist at the beginning of the first interim
period beginning after June 15, 2003, entities should record the transition to
SFAS No. 150 by reporting the cumulative effect of a change in an accounting
principle. SFAS No. 150 prohibits entities from restating financial statements
for earlier years presented. We do not expect the adoption of SFAS No. 150 to
have a material impact on our financial statements. 45




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Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995 Statements contained in the Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this report may
contain information that includes or is based upon forward-looking statements
within the meaning of the Securities Litigation Reform Act of 1995.
Forward-looking statements present our expectations or forecasts of future
events. These statements can be identified by the fact that they do not relate
strictly to historical or current facts. They frequently are accompanied by
words such as anticipate, estimate, expect, project, intend, plan,
believe, and other words and terms of similar meaning. In particular, these
include statements relating to: our ability to identify suitable acquisition
candidates; our successful integration of PlanVista, MedUnite and any other
future acquisitions; our ability to successfully develop, market, sell,
cross-sell, install and upgrade our clinical and financial transaction services
and applications to new and current physicians, payers, medical laboratories
and pharmacies; our ability to compete effectively on price and support
services; our ability to increase revenues and revenue opportunities; and our
ability to meet expectations regarding future capital needs and the
availability of credit and other financing sources. 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 23 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We own no derivative financial instruments or derivative commodity
instruments. We derive no revenues from international operations and do not
believe that we are exposed to material risks related to foreign currency
exchange rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and schedule are included beginning at Page F-1. 46




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##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE We have not had any change in or disagreement with our accountants on
accounting and financial disclosures during our two most recent fiscal years or
any later interim period. ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company evaluated
the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)), under the
supervision and with the participation of the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer. Based upon
such evaluation, management has concluded that the Companys disclosure
controls and procedures are effective to ensure that the information the
Company is required to disclose in reports that it files or submits under the
Exchange Act is communicated to management, including, the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure, and is recorded, processed, summarized and
reported within the time periods specified in the Commission rules and forms. 47




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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 Managers and Equity Compensation
Plan Information), Item 13 (Certain Relationships and Related Transactions),
and Item 14 (Principal Accountant Fees and Services) is incorporated by
reference to the Companys definitive proxy statement for the 2004 Annual
Meeting of Shareholders to be filed with the Securities and Exchange
Commission. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our Companys directors and executive officers are as follows: Name
    
    Age
    
    PositionWilliam L. Bennett
    
    
    54
    
    
    DirectorEdwin M. Cooperman (1)
    
    
    60
    
    
    DirectorPhillip S. Dingle
    
    
    42
    
    
    Executive Vice President and Chief Executive Officer -
PlanVistaGregory J. Eisenhauer, CFA
    
    
    45
    
    
    Executive Vice President and Chief Financial OfficerMichael S. Falk (2)
    
    
    42
    
    
    DirectorJohn Paul Guinan
    
    
    43
    
    
    Executive Vice President and Chief Technology OfficerNancy J. Ham
    
    
    42
    
    
    President and Chief Operating OfficerLonnie W. Hardin
    
    
    49
    
    
    Senior Vice President  Payer ServicesA. Thomas Hardy
    
    
    50
    
    
    Senior Vice President  Laboratory Services and
President  Key Communications Service, Inc.Thomas E. Hodapp (2)
    
    
    45
    
    
    DirectorMichael K. Hoover
    
    
    48
    
    
    Chairman of the Board and Chief Executive OfficerBraden R. Kelly (2)
    
    
    33
    
    
    DirectorJeffrey L. Markle
    
    
    55
    
    
    Senior Vice President and President /Chief Operating
Officer  PlanVistaKevin M. McNamara (1)
    
    
    48
    
    
    DirectorJudson E. Schmid
    
    
    42
    
    
    Executive Vice President, Chief Accounting Officer and
TreasurerEugene R. Terry (1)
    
    
    65
    
    
    DirectorTimothy J. Tolan
    
    
    45
    
    
    Executive Vice President  Sales and Account ManagementThomas C. Wohlford
    
    
    50
    
    
    Senior Vice President  Submitter Services
   (1)
    
    Member of the Audit Committee, the Chairman of which is Mr. McNamara.(2)
    
    Member of the Compensation Committee, the Chairman of which is Mr. Falk. 48




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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 Comdial Corporation and Grannum
Value Mutual Fund. Phillip S. Dinglejoined ProxyMed in March 2004 and currently serves as
Executive Vice President of ProxyMed and Chief Executive Officer of PlanVista.
Prior to joining ProxyMed, Mr. Dingle served as Chairman of the Board, and
Chief Executive Officer of PlanVista since May 2001, and was President and
Chief Executive Officer from October 2000 to May 2001. Mr. Dingle served as
President and Chief Operating officer of PlanVista from June 2000 to September
2000, as Executive Vice President and Chief Financial Officer from January 1999
to May 2000, and as Senior Vice President and Chief Counsel from August 1996 to
December 1998. Prior to August 1996, Mr. Dingle was a partner with the law
firm of Hill, Ward & Henderson, P.A. in Tampa, Florida. Gregory J. Eisenhauer, CFAjoined ProxyMed in December 2003 and currently
serves as Executive Vice President and Chief Financial Officer of ProxyMed.
Mr. Eisenhauer has extensive experience in healthcare, mergers and
acquisitions, and investor relations. 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.
Among other accomplishments, Mr. Eisenhauer was responsible for acquisitions
that contributed significantly to the growth. In 2000, RehabCare was the
number one percentage gaining company on the New York Stock Exchange. 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. 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. 49




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##### 



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 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 with Mr. Michael K. Hoover, ProxyMeds
Chairman and CEO, 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 in connection with its
acquisition of US Healthdata Interchange, Inc. (USHDI), 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. A. Thomas Hardyjoined ProxyMed in December 1998 in conjunction with
ProxyMeds acquisition of Key Communications Service, Inc. and since January
2000, has served as President and Chief Operating Officer of Key
Communications. From October 2000, Mr. Hardy has also served as Senior Vice
President of Laboratory Services of ProxyMed. Mr. Hardy joined Key
Communications in 1995 where he served as Key Communications Executive Vice
President and Chief Financial Officer. Mr. Hardy is a certified public
accountant and has a BBA in Business from Georgia College & State University
and a MBA degree from the University of Arkansas. 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. Michael K. Hooverwas appointed Chairman of the Board and Chief Executive
Officer of ProxyMed in July 2000. He served as President and director of
Healtheon/WebMD Corporation after Healtheon acquired ActaMed Corporation, an
eHealth information systems and transaction company similar to ProxyMed in May
1998. Mr. Hoover co-founded ActaMed in May 1992 and served as its President
from its inception to May 1998, and as its President and Chief Executive
Officer from December 1995 to May 1998. From 1989 to 50




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##### 



1992, Mr. Hoover served as the Executive Director of Financial Services of the
MicroBilt Division of First Financial Management Corporation. Prior to that,
he founded FormMaker Software Corporation, a producer of electronic forms
automation systems, and served as its Chief Executive Officer from 1982 to
1988. 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, 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. McNamara was appointed as a director of ProxyMed in September
2002. Mr. McNamara currently serves as Chief Financial Officer of HCCA
International, Inc., a healthcare management and recruitment company. 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 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. Judson E. Schmidjoined ProxyMed in April 1996 and currently serves as
Executive Vice President, Chief Accounting Officer and Treasurer 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). 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
health care 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. 51




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##### 



Mr. Terry is
also a director of Medical Nutrition, a nutritional products company and
Intercept, an implantable drug delivery pump company. Timothy J. Tolanjoined ProxyMed in January 2001 and currently serves as
Executive Vice President  Sales and Account Management. 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 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. 52




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##### 



PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K Page(a)
    
    
    (1
    )
    
    The following financial statements are included in Part II,
Item 8:Consolidated Financial Statements:Report of Independent Certified Public Accountants
    
    F-2Consolidated Balance Sheets  December 31, 2003 and 2002
    
    F-3Consolidated Statements of Operations  Years Ended December 31,
2003, 2002 and 2001
    
    F-4Consolidated Statements of Stockholders Equity  Years Ended
December 31, 2003, 2001 and 2001
    
    F-5Consolidated Statements of Cash Flows  Years Ended December 31,
2003, 2002 and 2001
    
    F-6Notes to Consolidated Financial Statements
    
    F-7  F-41(2
    )
    
    The following schedule for the years 2003, 2002 and 2001 is
submitted herewith:Schedule II  Valuation and Qualifying Accounts -
Years Ended December 31, 2003, 2002 and 2001
    
    F-42(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 55 through 60.(b)
    
    
    
    
    
    Reports on Form 8-K:A Form 8-K was filed on October 31, 2003, announcing the issuance
of a press release setting forth the Companys earnings and
condensed balance sheet for the three and nine months ended
September 30, 2003.A Form 8-K was filed on December 9, 2003, announcing the issuance
of a joint press release regarding the Companys execution of an
Agreement and Plan of Merger by and among the Company, PlanVista
Corporation, and Planet Acquisition Corp.
 53




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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 30, 2004
    
    PROXYMED, INC.By:      /s/ Michael K. Hoover
Michael K. Hoover
Chief Executive Officer
 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael K. Hoover and 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/ Michael K. Hoover

Michael K. Hoover
    
    Chairman of the Board and
Chief Executive Officer
(principal executive
officer)
    
    March 30, 2004/s/ Gregory J. Eisenhauer

Gregory J. Eisenhauer
    
    Executive Vice President
and Chief Financial
Officer (principal
financial and accounting
officer)
    
    March 30, 2004/s/ William L. Bennett

William L. Bennett
    
    Director
    
    March 30, 2004/s/ Edwin M. Cooperman

Edwin M. Cooperman
    
    Director
    
    March 30, 2004/s/ Michael S. Falk

Michael S. Falk
    
    Director
    
    March 30, 2004/s/ Thomas E. Hodapp

Thomas E. Hodapp
    
    Director
    
    March 30, 2004/s/ Braden R. Kelly

Braden R. Kelly
    
    Director
    
    March 30, 2004/s/ Kevin M. McNamara

Kevin M. McNamara
    
    Director
    
    March 30, 2004/s/ Eugene R. Terry

Eugene R. Terry
    
    Director
    
    March 30, 2004
 54




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##### 



EXHIBIT INDEX ExhibitNo.
    
    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).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 effective August 22, 2002.3.5
    
    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).
 55




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##### 



ExhibitNo.
    
    Description3.7
    
    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).3.8
    
    Articles of Amendment to Articles of Incorporation of the
Registrant effective July 14, 2000.3.9
    
    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).
 56




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##### 



ExhibitNo.
    
    Description10.2
    
    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).10.4
    
    Registration Rights Agreement dated December 31, 2002 among
ProxyMed, Inc. and the holders of the 4% ConvertiblePromissory 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.*10.9
    
    Employment Agreement between
ProxyMed and Gregory J. Eisenhauer dated December 8, 2003.*10.10
    
    Employment Agreement between ProxyMed and Tom Wohlford dated
May 13, 2003.*10.11
    
    Employment Agreement between ProxyMed and Rafael G. Rodriguez
dated January 2, 2003 (incorporated by reference to Exhibit
10.53 of Form 10-K for the period ended December 31, 2002).*10.12
    
    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).*
 57




---



##### 



ExhibitNo.
    
    Description10.13
    
    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).*10.14
    
    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).*10.15
    
    Amendment to Employment Agreement between ProxyMed and Timothy
J. Tolan effective January 1, 2004.*10.16
    
    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).*10.17
    
    Amendment to Employment Agreement between ProxyMed and Michael
K. Hoover effective January 1, 2004.*10.18
    
    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).*10.19
    
    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).*10.20
    
    Amendment to Employment Agreement between ProxyMed and Nancy
J. Ham effective January 1, 2004.*10.21
    
    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).*10.22
    
    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).*10.23
    
    2002 Stock Option Plan, as amended.*10.24
    
    2001 Stock Option Plan (incorporated by reference to Exhibit B
of the Proxy Statement filed on June 22, 2001).*10.25
    
    2000 Stock Option Plan (incorporated by reference to Exhibit B
of the Proxy Statement filed on July 7, 2000).*10.26
    
    2000-1/2 Stock Option Plan (incorporated by reference to
Exhibit C of the Proxy Statement filed on July 7, 2000).*
 58




---



##### 



ExhibitNo.
    
    Description10.27
    
    1997 Stock Option Plan (incorporated by reference to Exhibit A
of the Proxy Statement filed on May 6, 1997).*10.28
    
    Amended 1993 Stock Option Plan (incorporated by reference to
Exhibit A of ProxyMeds Proxy Statement for its 1994 Annual
Meeting of Shareholders).*10.29
    
    1995 Stock Option Plan (incorporated by reference to Exhibit
3.1 of the Registration Statement on Form SB-2, File No.
333-2678).*10.30
    
    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).10.31
    
    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).10.32
    
    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).10.33
    
    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).10.34
    
    Loan and Security Agreement by and between ProxyMed, Key
Communications Service, Inc., MedUnite Inc. and Wachovia Bank,
National Association dated December 4, 2003.10.35
    
    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, 2003.10.36
    
    Patent and Trademark Security Agreement effective as of
December 4, 2003 between ProxyMed, Key Communications Service,
Inc., MedUnite Inc. and Wachovia Bank, National Association.21
    
    Subsidiaries of the Registrant.23
    
    Consent of PricewaterhouseCoopers LLP.31.1
    
    Certification by Michael K. Hoover, Chief Executive Officer,
pursuant to Exchange Act Rules 13a-14 and 15d-14.
 59




---



##### 



ExhibitNo.
    
    Description31.2
    
    Certification Gregory J. Eisenhauer, Chief Financial Officer,
pursuant to Exchange Act Rules 13a-14 and 15d-14.32.1
    
    Certification by Michael K. Hoover, 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. 60




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##### 



PROXYMED, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements and Schedule

PAGEConsolidated Financial StatementsReport of Independent Certified Public Accountants
    
    F-2Consolidated Balance Sheets  December 31, 2003 and 2002
    
    F-3Consolidated Statements of Operations -
Years Ended December 31, 2003, 2002 and 2001
    
    F-4Consolidated Statements of Stockholders Equity -
Years Ended December 31, 2003, 2002 and 2001
    
    F-5Consolidated Statements of Cash Flows -
Years Ended December 31, 2003, 2002 and 2001
    
    F-6Notes to Consolidated Financial Statements
    
    F-7  F-41Schedule II
 Valuation and Qualifying Accounts -
Years Ended December 31, 2003, 2002, and 2001
    
    F-42


F-1



---



##### 



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and the
Shareholders of ProxyMed, Inc. In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 53 present fairly, in all material
respects, the financial position of ProxyMed, Inc. and its subsidiaries (the
Company) at December 31, 2003 and December 31, 2002, and the results of
their operations and their cash flows for each of the three 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 53 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. 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, Florida
March 25, 2004 F-2




---



##### 



PROXYMED, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2003 and 2002
(amounts in thousands except for share and per share data)
 2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,333
    
    
    $
    16,378Accounts receivable  trade, net of allowance for
doubtful accounts of $882 and $1,096 respectively
    
    
    10,434
    
    
    
    10,060Other receivables
    
    
    187
    
    
    
    503Inventory
    
    
    3,347
    
    
    
    2,774Other current assets
    
    
    1,908
    
    
    
    1,022Total current assets
    
    
    21,209
    
    
    
    30,737Property and equipment, net
    
    
    4,772
    
    
    
    5,719Goodwill, net
    
    
    30,775
    
    
    
    32,797Purchased technology, capitalized software and
other intangible assets, net
    
    
    15,884
    
    
    
    18,220Restricted cash
    
    
    291
    
    
    
    825Other assets
    
    
    199
    
    
    
    406Total assets
    
    $
    73,130
    
    
    $
    88,704LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable and current portion of long-term debt
    
    $
    1,712
    
    
    $
    Accounts payable and accrued expenses and other current liabilities
    
    
    8,264
    
    
    
    21,472Deferred revenue
    
    
    721
    
    
    
    516Total current liabilities
    
    
    10,697
    
    
    
    21,988Convertible notes
    
    
    13,137
    
    
    
    13,400Other long term debt
    
    
    2,057
    
    
    
    Long-term deferred revenue and other long-term liabilities
    
    
    1,461
    
    
    
    2,581Total liabilities
    
    
    27,352
    
    
    
    37,969Commitments and contingencies  see Note 18Stockholders equity:Series C 7% Convertible preferred stock  $.01 par value Authorized 300,000
shares; issued 253,265 shares; outstanding 2,000; liquidation preference
$13,333Common stock  $.001 par value. Authorized 13,333,333 shares;
issued and outstanding 6,784,118 and 6,782,938 shares, respectively
    
    
    7
    
    
    
    7Additional paid-in capital
    
    
    146,230
    
    
    
    146,187Accumulated deficit
    
    
    (100,273
    )
    
    
    (95,273
    )Note receivable from stockholder
    
    
    (186
    )
    
    
    (186
    )Total stockholders equity
    
    
    45,778
    
    
    
    50,735Total liabilities and stockholders equity
    
    $
    73,130
    
    
    $
    88,704 The accompanying notes are an integral part of the consolidated financial statements. F-3




---



##### 



PROXYMED, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended December 31, 2003, 2002 and 2001
(amounts in thousands except for share and per share data)
 2003
    
    2002
    
    2001Revenues:Transaction fees, services and license fees
    
    $
    51,813
    
    
    $
    28,455
    
    
    $
    23,366Communication devices, computer systems
and other tangible goods
    
    
    19,743
    
    
    
    21,727
    
    
    
    19,86471,556
    
    
    
    50,182
    
    
    
    43,230Costs and expenses:Cost of transaction fees, services and license fees
    
    
    15,917
    
    
    
    8,858
    
    
    
    6,530Cost of tangible goods
    
    
    16,504
    
    
    
    17,158
    
    
    
    16,896Selling, general and administrative expenses
    
    
    35,809
    
    
    
    20,152
    
    
    
    18,249Depreciation and amortization
    
    
    6,316
    
    
    
    2,636
    
    
    
    8,176Loss on disposal of assets
    
    
    111
    
    
    
    
    
    
    
    Write-off of impaired and obsolete assets
    
    
    541
    
    
    
    38
    
    
    
    9175,198
    
    
    
    48,842
    
    
    
    49,942Operating income (loss)
    
    
    (3,642
    )
    
    
    1,340
    
    
    
    (6,712
    )Other income (expense), net
    
    
    (496
    )
    
    
    265
    
    
    
    40Interest income (expense), net
    
    
    (862
    )
    
    
    345
    
    
    
    (126
    )Net income (loss)
    
    
    (5,000
    )
    
    
    1,950
    
    
    
    (6,798
    )Deemed dividends and other charges
    
    
    
    
    
    
    612
    
    
    
    12,262Net income (loss) applicable to common shareholders
    
    $
    (5,000
    )
    
    $
    1,338
    
    
    $
    (19,060
    )Basic weighted average shares outstanding
    
    
    6,783,742
    
    
    
    6,322,086
    
    
    
    2,162,352Basic earnings per share
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    )Diluted weighted average shares outstanding
    
    
    6,783,742
    
    
    
    6,396,893
    
    
    
    2,162,352Diluted earnings per share
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    ) The accompanying notes are an integral part of the consolidated financial statements. F-4




---



##### 



PROXYMED, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders Equity Years Ended
December 31, 2003, 2002 and 2001
(amounts in thousands except for share and per share data)
 Series B
    
    Series CPreferred Stock
    
    Preferred stock
    
    Common stock
    
    
    
    
    
    
    
    
    
    NoteAdditional
    
    
    
    
    
    receivableNumber
    
    Par
    
    Number
    
    Par
    
    Number
    
    Par
    
    paid-in
    
    Accumulated
    
    fromof shares
    
    value
    
    of shares
    
    value
    
    of shares
    
    value
    
    capital
    
    deficit
    
    stockholder
    
    TotalBalances, January 1, 2001
    
    
    110
    
    
    $
    
    
    
    
    253,265
    
    
    $
    2
    
    
    
    1,372,898
    
    
    $
    1
    
    
    $
    113,235
    
    
    $
    (90,425
    )
    
    $
    (436
    )
    
    $
    22,377Sales of common stock, net
of expenses of $729,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    483,414
    
    
    
    1
    
    
    
    7,247
    
    
    
    
    
    
    
    
    
    
    
    7,248Conversion of Series B
preferred stock
    
    
    (110
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,766
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversions of Series C
preferred stock
    
    
    
    
    
    
    
    
    
    
    (49,466
    )
    
    
    
    
    
    
    329,773
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Conversions of Series C
preferred stock pursuant
to Conversion Offer
    
    
    
    
    
    
    
    
    
    
    (169,149
    )
    
    
    (2)
    
    
    
    1,296,126
    
    
    
    1
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    (33
    )Exchange of Series B warrants
into common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218,828
    
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    
    
    
    
    (73
    )Exchange of Series C warrants
into common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,050,691
    
    
    
    1
    
    
    
    (54
    )
    
    
    
    
    
    
    
    
    
    
    (53
    )Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,937
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )Repayment of note from
stockholder
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    250Other, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    
    
    
    
    
    
    
    
    (39
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,798
    )
    
    
    
    
    
    
    (6,798
    )Balances, December 31, 2001
    
    
    
    
    
    
    
    
    
    
    34,650
    
    
    
    
    
    
    
    4,894,433
    
    
    
    5
    
    
    
    120,277
    
    
    
    (97,223
    )
    
    
    (186
    )
    
    
    22,873Sales of common stock, net
of expenses of $139,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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 income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,000
    )
    
    
    
    
    
    
    (5,000
    )Balances, December 31, 2003
    
    
    
    
    
    $
    
    
    
    
    2,000
    
    
    $
    
    
    
    
    6,784,118
    
    
    $
    7
    
    
    $
    146,230
    
    
    $
    (100,273
    )
    
    $
    (186
    )
    
    $
    45,778 The accompanying notes are an integral part of the consolidated financial statements. F-5




---



##### 



PROXYMED, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended December 31, 2003, 2002 and 2001
(amounts in thousands except for share and per share data)
 2003
    
    2002
    
    2001Cash flows from operating activities:Net income (loss)
    
    $
    (5,000
    )
    
    $
    1,950
    
    
    $
    (6,798
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    6,316
    
    
    
    2,636
    
    
    
    8,176Provision for doubtful accounts
    
    
    152
    
    
    
    38
    
    
    
    70Provision for obsolete inventory
    
    
    28
    
    
    
    
    
    
    
    (50
    )Non-cash interest expense
    
    
    54
    
    
    
    
    
    
    
    Write-off of obsolete and impaired assets
    
    
    541
    
    
    
    38
    
    
    
    91Compensatory stock options and warrants
and stock compensation awards issued
    
    
    
    
    
    
    
    
    
    
    433Write-off of investment
    
    
    496
    
    
    
    
    
    
    
    Loss on disposal of fixed assets
    
    
    111
    
    
    
    
    
    
    
    Changes in assets and liabilities, net of
effect of acquisitions and dispositions:Accounts and other receivables
    
    
    (498
    )
    
    
    (1,445
    )
    
    
    (614
    )Inventory
    
    
    (601
    )
    
    
    747
    
    
    
    (612
    )Other current assets
    
    
    430
    
    
    
    (30
    )
    
    
    20Accounts payable and accrued expenses
    
    
    (1,173
    )
    
    
    (1,150
    )
    
    
    576Deferred revenue
    
    
    222
    
    
    
    76
    
    
    
    (264
    )Other, net
    
    
    440
    
    
    
    (12
    )
    
    
    (9
    )Net cash provided by operating activities
    
    
    1,518
    
    
    
    2,848
    
    
    
    1,019Cash flows from investing activities:Acquisition of businesses, net of cash acquired
    
    
    
    
    
    
    (14,453
    )
    
    
    (3,000
    )Acquisition of assets
    
    
    
    
    
    
    (700
    )
    
    
    Short term investments
    
    
    
    
    
    
    (15,000
    )
    
    
    Redemption of short term investments
    
    
    
    
    
    
    15,000
    
    
    
    Capital expenditures
    
    
    (2,601
    )
    
    
    (1,561
    )
    
    
    (1,325
    )Capitalized software
    
    
    (1,426
    )
    
    
    (445
    )
    
    
    (120
    )Collection of notes receivable
    
    
    120
    
    
    
    65
    
    
    
    298Proceeds from sale of fixed assets
    
    
    395
    
    
    
    
    
    
    
    Decrease in restricted cash
    
    
    534
    
    
    
    
    
    
    
    Payments for acquisition-related costs
    
    
    (6,623
    )
    
    
    (96
    )
    
    
    (42
    )Net cash used in investing activities
    
    
    (9,601
    )
    
    
    (17,190
    )
    
    
    (4,189
    )Cash flows from financing activities:Net proceeds from sale of common stock
    
    
    
    
    
    
    24,886
    
    
    
    7,248Preferred stock conversion offer and warrant exchange costs
    
    
    
    
    
    
    
    
    
    
    (158
    )Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    (7
    )Proceeds from exercise of stock options and warrants
    
    
    7
    
    
    
    450
    
    
    
    Payment of note payable related to acquisition of business
    
    
    
    
    
    
    (7,000
    )
    
    
    Payment of notes payable, long-term debt and capital leases
    
    
    (2,969
    )
    
    
    (217
    )
    
    
    (153
    )Net cash provided by (used in) financing activities
    
    
    (2,962
    )
    
    
    18,119
    
    
    
    6,930Net increase (decrease) in cash and cash equivalents
    
    
    (11,045
    )
    
    
    3,777
    
    
    
    3,760Cash and cash equivalents at beginning of year
    
    
    16,378
    
    
    
    12,601
    
    
    
    8,841Cash and cash equivalents at end of year
    
    $
    5,333
    
    
    $
    16,378
    
    
    $
    12,601 The accompanying notes are an integral part of the consolidated financial statements. F-6




---



##### 



PROXYMED, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Business and Summary of Significant Accounting Policies  (a)
    
    Business of ProxyMed  ProxyMed, Inc. (ProxyMed or the Company)
is an electronic healthcare transaction processing services company
providing connectivity services and related value-added products to
physician offices, payers, medical laboratories, pharmacies and other
healthcare providers. With its acquisition of PlanVista Corporation
(PlanVista) on March 2, 2004 (see Note 20), the Company now offers
claims repricing and cost containment services to its existing and
prospective payer customers. ProxyMeds corporate headquarters are
located in Norcross, 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.  In May 2002, the Company acquired all of the capital stock of KenCom
Communications & Services, Inc., a privately-owned provider of laboratory
communication solutions, for $3.2 million in cash and 30,034 shares of
unregistered ProxyMed common stock (valued at $0.6 million (see Note
2(b)).  In August 2002, the Company acquired substantially all of the assets of
MDIP, Inc., a privately owned company providing institutional claims
processing services for $2.4 million in cash (see Note 2(c)).  On December 31, 2002, the Company acquired all of the capital stock of
MedUnite, Inc., a privately-held company providing healthcare claims
processing services founded by seven of the nations largest health
insurers, for $10.0 million in cash and $13.4 million in 4% convertible
debt. The operations of MedUnite are reflected with those of the Company
during 2003 (see Note 2(a)).  (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. F-7




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (d)
    
    Revenue Recognition Transaction fee revenue is recorded in the
period the service is rendered. Certain transaction fee revenue is
subject to revenue sharing pursuant to agreements with resellers,
vendors or gateway partners and are recorded as gross revenues. Revenue
from sales of inventory and manufactured goods is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the
price is fixed or determinable and collectibility is probable. Revenue
from certain up-front fees is amortized ratably over the expected life
of the customer. Revenue from hardware leases and maintenance fees is
recognized ratably over the applicable period.  (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.  (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)
    
    Inventory  Inventory, consisting of component parts, materials,
supplies and finished goods (including direct labor and overhead) used
to manufacture laboratory communication devices, is stated at the lower
of cost (first-in, first-out method) or market. Reserves for obsolete,
damaged and slow-moving inventory are maintained and are periodically
reviewed by management.  (h)
    
    Property and Equipment  Property and equipment is stated at cost and
includes revenue earning equipment. Depreciation of property and
equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or the estimated
useful lives of the assets.  Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the accounts and any
resulting gains or losses are reflected in other income for the period;
upon sale or retirement of revenue earning equipment, the gross proceeds
are included in net revenues and the undepreciated cost of the equipment
sold is included in cost of sales. Maintenance and repair of property and
equipment are charged to expense as incurred. Renewals and betterments
are capitalized and depreciated. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for
Impairment or Disposition of Long-lived Assets, management periodically
examines the Companys fixed assets for obsolescence, damage and
impairment. F-8




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (i)
    
    Intangible Assets  Goodwill  Goodwill representing the excess of cost over the estimated
fair value of net assets acquired was amortized on the straight-line basis
over 3 to 15 years until December 31, 2001, at which time the Company
adopted SFAS No. 142 (see Note 8(a) below).  Other Intangibles  Other acquired intangible assets, consisting of
customer relationships, are being amortized on a straight-line basis over
their estimated useful lives of 4.6 to 10 years.  The Company regularly reviews the recoverability of goodwill, other
intangible assets and other long-lived assets for indications that the
carrying value may be impaired or that the useful lives assigned may be
excessive. In performing such review, goodwill associated with
acquisition of the intangible assets is included in the analysis of the
impairment of such intangible assets. When indications exist that
impairment may have occurred, the carrying values are assessed based upon
an analysis of estimated future cash flows on an undiscounted basis and
before interest charges, or useful lives are changed prospectively.  Purchased Technology and Capitalized Software  The Company has recorded
amounts related to various software and technology that it has purchased
or capitalized 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.  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.  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
$4.4 million in 2003, $3.2 million in 2002 and $2.0 million in 2001 was
recorded in selling, general and administrative expenses. F-9




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (j)
    
    Income Taxes  Deferred income taxes are determined based upon
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Deferred tax assets are also established for the future tax benefits of
loss and credit carryovers. Valuation allowances are established for
deferred tax assets when, based on the weight of available evidence, it
is deemed more likely than not that such amounts will not be realized.  (k)
    
    Net 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 per share reflects the potential
dilution from the exercise or conversion of securities into common
stock; however, 2,887,664 stock options and warrants as well as 13,333
shares issuable upon conversion of Series C preferred stock for the year
ended December 31, 2003 were excluded from the calculation of diluted
net loss per share because their effect was antidilutive. Stock options
and warrants totaling 1,130,596 shares for the year ended December 31,
2002 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, stock options and warrants totaling 1,018,713
shares as well as 231,000 shares issuable on conversion of Series C
preferred stock for the year ended December 31, 2001 were excluded from
the calculation of diluted per share results because their effect was
antidilutive.  The following schedule sets forth the computation of basic and diluted net
income (loss) per share for the years ending December 31, 2003, 2002 and
2001: In thousands except for share and per share data
    
    2003
    
    2002
    
    2001Net income (loss) applicable to common shareholders
    
    $
    (5,000
    )
    
    $
    1,338
    
    
    $
    (19,060
    )Common shares outstanding:Weighted average common shares used in computing
basic net income (loss) per share
    
    
    6,783,742
    
    
    
    6,322,086
    
    
    
    2,162,352Plus incremental shares from assumed conversions:Convertible preferred stock
    
    
    
    
    
    
    13,833
    
    
    
    Stock options
    
    
    
    
    
    
    11,464
    
    
    
    Warrants
    
    
    
    
    
    
    49,510
    
    
    
    
    
    
    
    74,807
    
    
    
    Weighted average common shares used in computing
diluted net income (loss) per share
    
    
    6,783,742
    
    
    
    6,396,893
    
    
    
    2,162,352Net income (loss) per common share:Basic
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    )Diluted
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    ) F-10




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (l)
    
    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 14. 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, 2003, 2002 and 2001 would have been adjusted to the pro forma amounts
indicated as follows: In thousands except for per share data
    
    2003
    
    2002
    
    2001Net income (loss) applicable to
common shareholders, as reported
    
    $
    (5,000
    )
    
    $
    1,338
    
    
    $
    (19,060
    )Total stock-based employee pro forma compensation
expense determined under fair value based
method for all awards, net of related tax benefits
    
    
    (4,378
    )
    
    
    (6,814
    )
    
    
    (5,881
    )Pro forma net loss applicable to common shareholders
    
    $
    (9,378
    )
    
    $
    (5,476
    )
    
    $
    (24,941
    )Basic net income (loss) per common share:As reported
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    )Pro forma
    
    $
    (1.38
    )
    
    $
    (0.87
    )
    
    $
    (11.54
    )Diluted net income (loss) per common share:As reported
    
    $
    (0.74
    )
    
    $
    0.21
    
    
    $
    (8.81
    )Pro forma
    
    $
    (1.38
    )
    
    $
    (0.87
    )
    
    $
    (11.54
    ) F-11




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (m)
    
    New Accounting Pronouncements  In January 2003, the FASB issued
Interpretation No. 46 (FIN No. 46), Consolidation of Variable
Interest Entities. FIN No. 46 expands upon and strengthens existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another
entity. A variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights; or (b) has
equity investors that do not provide sufficient financial resources for
the entity to support its activities. FIN No. 46 requires a variable
interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest
entitys activities or is entitled to receive a majority of the entitys
residual returns or both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January
31, 2003. The consolidation requirements apply to older entities in the
first fiscal year or interim period beginning after June 15, 2003.
Disclosure requirements apply to any financial statements issued after
January 31, 2003. Since currently the Company does not have variable
interest entities, the Company does not believe that the implementation
of FIN No. 46 will have a material effect on the Companys consolidated
financial statements and related disclosures.  In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is effective for contracts entered into
or modified after June 30, 2003, except for certain provisions that relate
to SFAS No. 133 implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003 and for hedging relationships
designated after June 30, 2003. The Company does not believe that
implementation of SFAS N0. 149 will have a material effect on the
Companys consolidated financial statements and related disclosures. F-12




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. SFAS No. 150 specifies that instruments within
its scope embody obligations of the issuer and that, therefore, the issuer
must classify them as liabilities. SFAS No. 150 requires issuers to
classify as liabilities the following three types of freestanding
financial instruments: (1) mandatory redeemable financial instruments; (2)
obligations to repurchase the issuers equity shares by transferring
assets; and (3) certain obligations to issue a variable number of shares.
SFAS No. 150 defines a freestanding financial instrument as a financial
instrument that (1) is entered into separately and apart from any of the
entitys other financial instruments or equity transactions; or (2) is
entered into in conjunction with some other transaction and can be legally
detached and exercised on a separate basis. For all financial instruments
entered into or modified after May 31, 2003, SFAS No. 150 is effective
immediately. For all other instruments of public companies, SFAS No. 150
goes into effect at the beginning of the first interim period beginning
after June 15, 2003. For contracts that were created or modified before
May 31, 2003 and still exist at the beginning of the first interim period
beginning after June 15, 2003, entities should record the transition to
SFAS No. 150 by reporting the cumulative effect of a change in an
accounting principle. SFAS No. 150 prohibits entities from restating
financial statements for earlier years presented. The Company does not
expect the adoption of SFAS No. 150 to have a material impact on its
financial statements.  (n)
    
    Reclassifications  Certain prior year amounts have been reclassified
to conform to the current year presentation. Such reclassifications
include the movement of direct labor and manufacturing overhead from
selling, general and administrative expenses to cost of tangible
products sold in the Laboratory Communications Solutions segment to
better reflect the production of tangible products in this segment. F-13




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (2) Acquisitions of Businesses  (a)
    
    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: AsIn thousands
    
    Originally
    
    AsReported
    
    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 8). The weighted average
useful life of the customer relationships is 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 an
independent third-party appraisal of the assets 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-14




---



##### 



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, 2003 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 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 know 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-15




---



##### 



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%.  In June 2003, the Company paid $0.8 million to the leasing company as a
result of terminating MedUnites facility lease in San Diego, California
effective June 30, 2003. As part of the consideration, the landlord was
given the furniture at the facility with a value of approximately $0.2
million. The Company incurred other costs in connection with the
termination of the lease. As a replacement for this facility, the Company
subleased office space in the same geographic area at a significantly
lower monthly rent per month through September 2004.  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. At December 31, 2002, $0.8 million
was accrued towards this minimum annual amount and was included in accrued
expenses. 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-16




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (b)
    
    KenCom Communications & Services  In May 2002, the Company acquired
all of the capital stock of KenCom Communications & Services, Inc.
(KenCom), a privately-owned provider of laboratory communication
solutions, for $3.2 million in cash ($3.275 million original cash
portion of the purchase price less purchase price adjustments of $38,000
upon settlement of cash holdback), 30,034 shares of unregistered
ProxyMed common stock (valued at $0.6 million), and 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.  The purchase price was allocated as follows: In thousandsCommon stock issued
    
    $
    600Cash paid, net of settlement of cash holdback
    
    
    3,237Acquisition-related costs
    
    
    52Total purchase price
    
    
    3,889Allocation of purchase price:Cash
    
    
    (305
    )Other current assets
    
    
    (694
    )Property and equipment
    
    
    (338
    )Customer relationships
    
    
    (1,690
    )Purchased technology
    
    
    (95
    )Other long-term assets
    
    
    (14
    )Current liabilities
    
    
    797Other long-term liabilities
    
    
    22Goodwill
    
    $
    1,572  The excess of the consideration paid over the estimated fair value of net
assets acquired in the amount of $1.6 million was recorded as goodwill,
none of which is deductible for income tax purposes. The weighted average
useful life of the customer relationships is approximately 9.5 years and
the weighted average useful life of the purchased technology is 3 years.
Additionally, the Company entered into 20-month employment agreements with
the former owners of KenCom and one technical employee. In October 2002,
one former owner separated from the Company and in January 2003 the other
former owner terminated her employment agreement and was retained as a
consultant through December 2003. The results of KenComs operations have
been included in the Companys consolidated financial statements since May
1, 2002 in its Laboratory Communications Solutions segment.  (c)
    
    MDIP  In August 2002, the Company acquired substantially all of the
assets of MDIP, Inc. (MDIP and d/b/a Medical Data Insurance
Processing), a privately-owned company providing institutional claims
processing services for $2.4 million in cash and acquisition related
costs of $9,000. F-17




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  The purchase price was allocated as follows: In thousandsCash paid
    
    $
    2,400Acquisition-related costs
    
    
    9Total purchase price
    
    
    2,409Allocation of purchase price:Other current assets
    
    
    (20
    )Property and equipment
    
    
    (34
    )Customer relationships
    
    
    (1,150
    )Purchased technology
    
    
    (300
    )Goodwill
    
    $
    905  The excess of the consideration paid over the estimated fair value of net
assets acquired in the amount of $0.9 million was recorded as goodwill,
all of which is deductible for income tax purposes. The weighted average
useful life of the customer relationships is 7 years and the weighted
average useful life of the purchased technology is 3 years. Additionally,
the Company entered into 17-month employment agreements with the former
owners of MDIP and one technical employee. At the end of December 2003,
one former owner declined to renew her employment agreement; the other
former owner is still employed by the Company. The results of MDIP have
been included in the Companys consolidated financial statements since
August 1, 2002 in its Transaction Services segment. (3) Equity Transactions  (a)
    
    Sales of Common Stock  On December 21, 2001, the Company sold
483,414 shares of common stock at $16.50 per share in a private
placement to nine U.S. and Canadian institutional and accredited
investors, resulting in net proceeds of $7.2 million after total costs
of $0.7 million (including a 7% cash fee and reimbursement of
out-of-pocket expenses totaling $0.6 million to Commonwealth Associates,
L.P. (Commonwealth) who acted as placement agent in the transaction).
Certain executive officers, directors and controlling persons of the
Company had agreed to a lock-up on all shares owned or beneficially
owned by them until a registration statement covering the shares sold in
the private placement was declared effective. On February 14, 2002, a
registration statement filed by the Company under Form S-3 covering the
above shares was declared effective. F-18




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  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.  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.  (b)
    
    Series B Preferred Stock  In October 2001, the last 110 shares of 6%
Series B non-voting, non-redeemable convertible preferred stock (the
Series B Preferred) originally issued in December 1999 were converted
into 8,766 shares of common stock. Additionally, during 2001, cash
dividends of $5,000 were paid on the Series B Preferred.  (c)
    
    Series B Warrants  As a result of certain anti-dilution provisions
triggered in June 2000, 7,111 warrants issued in conjunction with the
original Series B Preferred at an exercise price of $180.75 were
converted into 85,689 warrants with an exercise price of $15.00 per
share. In December 2001, these warrants were reset into 98,493 warrants
at an exercise price of $13.05 per share as a result of a conversion
offer to convert the Companys Series C 7% Convertible Preferred Stock
(see Note 3(g) below). In December 2002, 34,500 of these warrants were
converted into an equivalent number of common shares for $0.5 million in
cash. The balance of 63,993 warrants subsequently expired without
conversion.  (d)
    
    Series B Warrant Exchange  In April 2001, the Company entered into
an exchange agreement (the Series B Exchange Agreements) with the
holders of 13,000 shares of Series B Preferred originally issued in
December 1999. Under the Series B Exchange Agreements, the Company
canceled and exchanged all outstanding warrants (46,222 warrants at an
exercise price of $180.75 and previously referred to as Exchanged
Warrants and 43,333 warrants at an exercise price of $22.50 and
previously referred to as New Warrants) for an aggregate of 218,828
shares of common stock. In accordance with the terms of the Series B
Exchange Agreements, the Company registered these shares under Form S-3
effective on June 25, 2001. For this transaction, the Company recorded
a deemed dividend charge of $1.9 million in the quarter ended June 30,
2001. In connection with the cancellation and exchange of these
warrants, the holders of the Series B Preferred and the holders of
Series C 7% Convertible Preferred Stock agreed to waive certain
anti-dilution rights afforded by certain outstanding warrants, the
Series B Preferred and the Series C 7% Convertible Preferred Stock. F-19




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (e)
    
    Series C Preferred Stock  Through December 12, 2001, 49,466 shares
of Series C 7% Convertible Preferred Stock (the Series C Preferred)
originally issued in June and August 2000 had been converted into
329,773 shares of common stock under terms in the Series C Preferred.
On December 13, 2001, the Company offered to convert any of the 203,799
outstanding shares of Series C Preferred at a reduced conversion rate
(see Note 3(g) below).  Dividends on the Series C Preferred for 2001 valued at $1.7 million were
paid with 108,434 shares of common stock (of which 104,254 shares were
distributed by December 31, 2001), plus cash for fractional shares of
$2,000. Dividends were paid through the date of conversion for all
conversions of Series C Preferred.  (f)
    
    Series C Warrant Exchange  In June 2001, the Company offered to
exchange into shares of common stock (the Series C Exchange Offer) (i)
843,667 warrants (the Investor Warrants) that were issued to holders
of the Series C Preferred; (ii) 552,867 warrants (the Agents
Warrants) that were issued to Commonwealth in connection with the
private placement of the Series C Preferred; and (iii) 66,667 warrants
(the Advisory Warrants) that were issued to Commonwealth for certain
advisory services that Commonwealth provided to the Company. Under the
terms of the Series C Exchange Offer, the Company would issue 0.75
shares of its common stock for each Investor Warrant, 0.75 shares of its
common stock for each Agents Warrant, and 0.625 shares of its common
stock for each Advisory Warrant. The Investor Warrants, the Agents
Warrants and the Advisory Warrants are collectively known as the Series
C Warrants.  On August 15, 2001, the Company canceled and exchanged 1,412,033, or
96.5%, of the 1,463,201 Series C Warrants for 1,050,691 shares of common
stock. As required in accordance with terms of the original Subscription
Agreement dated June 15, 2000, these shares were registered under a Form
S-3 on February 14, 2002. In connection with the cancellation and
exchange of the Series C Warrants, the exchanged shares were subject to an
additional lock-up period through February 15, 2002. Additionally, for
this transaction, the Company recorded a deemed dividend charge of $3.2
million in 2001. In 2002, 8,333 Series C Warrants were converted into
1,190 shares of common stock. As of both December 31, 2003 and 2002,
42,833 of the Series C Warrants remain outstanding. F-20




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (g)
    
    Series C Preferred Conversion Offer  On December 13, 2001, the
Company offered to convert its then outstanding Series C Preferred into
shares of common stock at a reduced conversion price (the Conversion
Offer). For a period of sixty days ending February 11, 2002, the
holders of the Series C Preferred shares were able to convert such
shares at a reduced conversion price of $13.05 per share instead of the
original conversion price of $15.00. As of December 31, 2001, holders
of 83.0% of the outstanding Series C Preferred had converted their
shares into 1,296,126 shares of common stock and, as a result, the
Company recorded a deemed dividend charge of $3.4 million included in
the net loss applicable to common shareholders in the fourth quarter of
2001. At the conclusion of the Conversion Offer on February 11, 2002,
holders of 98.5% of the outstanding Series C Preferred had converted
their shares into a total of 1,538,636 common shares. A deemed dividend
charge of $0.6 million was recorded in the first quarter of 2002 for
conversions consummated after the 2001 year-end. Subsequent to February
22, 2002, 1,000 shares of Series C Preferred were converted into 6,667
shares of common stock. As of both December 31, 2003 and 2002, there
were 2,000 unconverted shares of Series C Preferred, which are
convertible into 13,333 shares of common stock.  In addition, holders of more than two-thirds of the outstanding Series C
Preferred had voted to amend the Articles of Designation governing the
Series C Preferred and the Subscription Agreement dated as of June 15,
2000. These amendments eliminated certain rights of the Series C
Preferred shareholders, including anti-dilution provisions, voting rights
and certain restrictive covenants agreed to by the Company, and apply to
those Series C Preferred shareholders who decided not to participate in
the Conversion Offer.  As noted above, a registration statement filed by the Company under Form
S-3 was declared effective on February 14, 2002 covering the resale of the
December 2001 private placement shares of the investors, the additional
shares that would have been required to be issued to the investors under
that private placement if a registration statement was not declared
effective by March 20, 2002, and the resale of the additional shares
issuable to the holders of the Series C Preferred shares electing to
convert at the reduced conversion price pursuant to the Conversion Offer.  As a result of the reduced conversion price in the Conversion Offer,
85,689 warrants with an exercise price of $15.00 per share issued to the
Remaining Holder in connection with the Companys Series B Preferred were
reset into 98,493 warrants with a new exercise price of $13.05 per share
as a result of anti-dilution provisions relating to the Series B
Preferred. As a result of this reset, the Company recorded a deemed
dividend charge of approximately $0.2 million in the fourth quarter of
2001. F-21




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (h)
    
    Warrants   In conjunction with a joint marketing agreement entered
into between the Company and a subsidiary of First Data Corporation
(FDC), an electronic commerce and payment services company, in July
2003, the Company issued to FDC a warrant agreement under which FDC may
be entitled to purchase up to 600,000 of the Companys common stock at
$16.50 per share. The ability of FDC to exercise under the warrant
agreement is dependent upon the Company achieving certain revenue-based
thresholds under such joint marketing agreement over a three and
one-half year period. Additionally, in connection with this agreement,
four entities affiliated with General Atlantic Partners (GAP), current
investors in the Company, received an aggregate of 243,882 warrants, as
a result of pre-emptive rights relating to their investment in the
Company in April 2002. The GAP warrant agreements are subject to the
same terms and conditions as those issued to FDC and are exercisable
only if FDCs right to exercise under its warrant agreement is
perfected. At the time any of the revenue thresholds is met, the
Company may have to record a charge in its statement of operations for
the value of the FDC warrants.  (i)
    
    Other Warrants  At December 31, 2003, there are 25,000 warrants
exercisable at prices ranging from $113.40 to $181.50 at various times
through June 2007 issued in connection with prior equity and other
business transactions consummated by ProxyMed.  (j)
    
    Treasury shares  In October 2002, the Companys Board of Directors
voted to cancel and retire 15,061 shares held by the Company in its
treasury related to the 2000 sale of its discontinued operations.  (k)
    
    Other  ProxyMed has remaining 1,555,000 authorized but unissued
shares of preferred stock, par value $0.01 per share, which are entitled
to rights and preferences to be determined at the discretion of the
Board of Directors.  The value of any stock options and warrants issued in connection with the
sales of common stock and convertible preferred stock are netted against
the proceeds within stockholders equity, and have no impact on earnings. F-22




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (4) Segment Information  ProxyMed operates in two reportable segments that are separately
managed: Transaction Services (formerly known as Electronic healthcare
transaction processing) and Laboratory Communication Solutions. Transaction
Services includes transaction and value-added services principally between
physicians and insurance companies (Payer Services) and physicians and
pharmacies (Prescription Services); and Laboratory Communication Solutions
includes the sale, lease and service of communication devices principally to
laboratories and the contract manufacturing of printed circuit boards
(Laboratory Services). The results for the Transaction Services and
Laboratory Communication Solutions segments do not include an allocation of
Corporate overhead in assessing the operating performance of the respective
segments. Inter-segment sales are not material and there were no foreign
sales for any periods presented. In thousands
    
    Year Ending December 31,2003
    
    2002
    
    2001Net revenues:Transaction Services
    
    $
    46,673
    
    
    $
    22,439
    
    
    $
    16,938Laboratory Communication Solutions
    
    
    24,883
    
    
    
    27,743
    
    
    
    26,292$
    71,556
    
    
    $
    50,182
    
    
    $
    43,230Operating income (loss):Transaction Services
    
    
    (920
    )
    
    $
    597
    
    
    $
    (6,859
    )Laboratory Communication Solutions
    
    
    1,119
    
    
    
    3,535
    
    
    
    3,686Corporate
    
    
    (3,841
    )
    
    
    (2,792
    )
    
    
    (3,539
    )$
    (3,642
    )
    
    $
    1,340
    
    
    $
    (6,712
    )Depreciation and amortization:Transaction Services
    
    
    4,754
    
    
    $
    1,581
    
    
    $
    7,285Laboratory Communication Solutions
    
    
    1,369
    
    
    
    857
    
    
    
    561Corporate
    
    
    193
    
    
    
    198
    
    
    
    330$
    6,316
    
    
    $
    2,636
    
    
    $
    8,176Capital expenditures and capitalized software:Transaction Services
    
    $
    3,467
    
    
    $
    1,291
    
    
    $
    771Laboratory Communication Solutions
    
    
    602
    
    
    
    693
    
    
    
    628Corporate
    
    
    80
    
    
    
    22
    
    
    
    46$
    4,149
    
    
    $
    2,006
    
    
    $
    1,445 December 31,2003
    
    2002Total assets:Transaction Services
    
    $
    54,052
    
    
    $
    58,957Laboratory Communication Solutions
    
    
    12,053
    
    
    
    12,904Corporate
    
    
    7,025
    
    
    
    16,843$
    73,130
    
    
    $
    88,704 F-23




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (5) 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 initial value of the warrant of approximately $0.5 million (calculated
using a Black Scholes model) along with additional amounts of $0.4 million
received by the Company under the agreement are being amortized as a
reduction of cost of sales over 36 months. For the year ended December 31,
2003, such amortized amount totaled $0.2 million. Upon the consummation of
its acquisition of PlanVista on March 2, 2004, the Company wrote off any
remaining unamortized amounts as part of the purchase price of the
acquisition. During the term the warrant was outstanding, the value of the
warrant was evaluated at the end of each calendar quarter. On September 30,
2003, the value of the warrant increased to approximately $5.3 million
primarily as a result of an increase in the market value of PlanVista stock
and this increase was reflected as other income in the statement of
operations during the third quarter of 2003. Upon expiration of the warrant
in December 2003, the Company recorded an impairment loss in the amount of
$5.3 million. For the year ended December 31, 2003, the Company recorded a
net impairment loss in the amount of $0.5 million (representing the original
value of the warrant) which is reflected in other expense in the Companys
consolidated statement of operations. (6) Inventory  Inventory consists of the following at December 31, 2003 and 2002: In thousands
    
    2003
    
    2002Materials, supplies and component parts
    
    $
    2,013
    
    
    $
    2,015Work in process
    
    
    590
    
    
    
    261Finished goods
    
    
    744
    
    
    
    498$
    3,347
    
    
    $
    2,774 F-24




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (7) Property and Equipment EstimatedIn thousands
    
    2003
    
    2002
    
    Useful LivesFurniture, fixtures and equipment
    
    $
    2,394
    
    
    $
    2,553
    
    
    4 to 7 yearsComputer hardware and software
    
    
    6,022
    
    
    
    5,109
    
    
    2 to 5 yearsService vehicles
    
    
    211
    
    
    
    230
    
    
    5 yearsLeasehold improvements
    
    
    986
    
    
    
    887
    
    
    Life of leaseRevenue earning equipment
    
    
    1,243
    
    
    
    1,357
    
    
    3 to 5 years10,856
    
    
    
    10,136Less accumulated depreciation
    
    
    6,084
    
    
    
    4,417Property and equipment, net
    
    $
    4,772
    
    
    $
    5,719 Property and equipment consists of the following at December 31, 2003 and
2002: Depreciation expense was $3.1 million in 2003, $1.8 million in 2002 and
$1.5 million in 2001. Accumulated depreciation for revenue earning equipment
at December 31, 2003 and 2002 was $0.6 million and $0.6 million, respectively.
As a result of managements periodic review for impairment, the Company wrote
off $0.1 million of remaining book value in 2001 related to damaged and
obsolete computer hardware and software. (8) 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, the Company completed its annual tests at
December 31, 2003 and 2002 utilizing various valuation techniques
including a market value analysis. No impairment charges were recorded
as a result of these tests. F-25




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  The changes in the carrying amounts of goodwill, net, for 2003 by
operating segment are as follows: LaboratoryTransaction
    
    CommunicationIn thousands
    
    Services
    
    Solutions
    
    TotalBalance as of December 31, 2002
    
    $
    30,695
    
    
    $
    2,102
    
    
    $
    32,797Post-acquisition adjustments
    
    
    (2,022
    )
    
    
    
    
    
    
    (2,022
    )Balance as of December 31, 2003
    
    $
    28,673
    
    
    $
    2,102
    
    
    $
    30,775  In accordance with SFAS No. 142, a reconciliation of the previously
reported net income (loss) applicable to common shareholders and net
income (loss) per share to the amounts adjusted for the exclusion of
goodwill amortization, net of any related income tax effect, is as
follows: 2001Reported net loss applicable to common shareholders
    
    $
    (19,060
    )Goodwill amortization
    
    
    4,637Adjusted net loss applicable to common shareholders
    
    $
    (14,423
    )Basic weighted average common shares outstanding
    
    
    2,162,352Basic net loss per share of common stock:Reported net loss applicable to common shareholders
    
    $
    (8.81
    )Goodwill amortization
    
    
    2.14Adjusted net loss applicable to common shareholders
    
    $
    (6.67
    )Diluted weighted average common shares outstanding
    
    
    2,162,352Diluted net loss per share of common stock:Reported net loss applicable to common shareholders
    
    $
    (8.81
    )Goodwill amortization
    
    
    2.14Adjusted net loss applicable to common shareholders
    
    $
    (6.67
    ) F-26




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (b)
    
    Other Intangible Assets  The carrying amounts of other intangible
assets as of December 31, 2003 and 2002 by category, are as follows: In thousands
    
    December 31, 2003
    
    
    December 31, 2002Carrying
    
    Accumulated
    
    
    
    
    
    Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    NetCapitalized software
    
    $
    1,193
    
    
    $
    (156
    )
    
    $
    1,037
    
    
    $
    527
    
    
    $
    (58
    )
    
    $
    469Purchased technology
    
    
    9,721
    
    
    
    (3,221
    )
    
    $
    6,500
    
    
    
    9,127
    
    
    
    (1,315
    )
    
    $
    7,812Customer relationships
    
    
    9,793
    
    
    
    (1,446
    )
    
    $
    8,347
    
    
    
    10,251
    
    
    
    (312
    )
    
    $
    9,939$
    20,707
    
    
    $
    (4,823
    )
    
    $
    15,884
    
    
    $
    19,905
    
    
    $
    (1,685
    )
    
    $
    18,220  In mid-September 2002, the Company acquired the customer relationships and
related Internet-based revenue stream from Claimsnet.com, a provider of
claims processing services, for $0.7 million cash. As part of its
acquisition of MedUnite (see Note 2(a)), the Company recorded $6.6 million
in customer relationships, and $1.2 million and $4.8 million for the
legacy and real-time technology platforms, respectively.  As a result of managements periodic review for impairment in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company wrote off $0.5 million in customer
relationships and $0.1 million in capitalized software during the year
ended December 31, 2003. Additionally, for the year ended December 31,
2002, $38,000 of previously capitalized real-time software development
costs were determined to be impaired as the Company acquired the same
functionality through the software platform acquired from MedUnite.  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.
Intangible assets are being amortized over their estimated useful lives as
follows: Estimateduseful livesCapitalized software
    
    3 yearsPurchased technology
    
    1 - 12 yearsCustomer relationships
    
    4.6 - 10 years F-27




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  Amortization expense of other intangible assets was $3.2 million, $0.8
million and $2.0 million for the years ended December 31, 2003, 2002 and
2001, respectively.  As of December 31, 2003, estimated future amortization expense of other
intangible assets in each of the years 2004 through 2008 is as follows: In thousands2004
    
    $
    2,8662005
    
    
    2,8082006
    
    
    2,6402007
    
    
    2,3272008
    
    
    1,944$
    12,585 (9) Restricted Cash  At December 31, 2003, restricted cash includes $0.2 million to support a
letter of credit used as collateral for a financed liability insurance
policy. Restricted cash of $0.8 million at December 31, 2002 includes a
certificate of deposit of $0.7 million that had been pledged as security for
an outstanding letter of credit but was released upon termination of
MedUnites San Diego operating facility (see Note 2(a)). Restricted cash is
included in other assets in the accompanying consolidated balance sheet. (10) Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consists of the following at
December 31, 2003 and 2002: In thousands
    
    2003
    
    2002Accounts payable
    
    $
    2,956
    
    
    $
    9,949Accrued payroll and related costs
    
    
    3,058
    
    
    
    3,091Acquisition related costs
    
    
    459
    
    
    
    7,149Other accrued expenses
    
    
    1,791
    
    
    
    1,283Total accounts payable and accrued expenses
    
    $
    8,264
    
    
    $
    21,472 Other accrued expenses include the current portion of capital leases
payable, customer deposits, estimated property and other taxes. F-28




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (11) Debt Obligations  (a)
    
    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 (see Note 2(a)).
After an offsetting claim by the Company in October 2003 in the amount
of $0.3 million, as of December 31, 2003, 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.  (b)
    
    Other notes payable  In February 2003, the Company financed $0.4
million for a certain liability insurance policy over 7 months at 4.76%
to a third-party. This note was unsecured and was paid in full by
December 31, 2003.  Also 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. At December 31, 2003, the note is
collateralized by a letter of credit in the amount of $0.2 million
(supported with restricted cash) and has an outstanding balance of $0.2
million.  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. At December 31, 2003, the balance of this note
payable is $2.0 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, 2003, the balance of this note payable is $1.5 million.  In June 2003, the Company financed $0.1 million of liability insurance
policy premium with another unsecured note, payable over 9 months at 5.4%
to a third party. At December 31, 2003, the balance of this note payable
is $28,000.  In January 2002, the Company paid in full its $7.0 million promissory note
related to its May 2001 acquisition of MDP Corporation. F-29




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  (c)
    
    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 2005 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. Borrowings under such facility are subject to eligible
cash, accounts receivable, and inventory and other conditions.
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 is payable monthly. As of December 31,
2003, no amounts had been drawn against this facility. Costs related to
this facility totaling $0.1 million are being amortized as interest
expense over a one-year period. In March 2004, the Company drew down
$4.4 million on this facility to fund its acquisition of PlanVista (see
Note 20). (12) Other Long-term Obligations  Other long-term obligations at December 31, 2003, include $0.9 million
representing the present value of an obligation acquired in the MedUnite
acquisition. This obligation is due in January 2006 and is being accreted
to its maturity value using an imputed interest rate of 6%. For the year
ended December 31, 2003, the Company recorded a non-cash interest charge
of $54,000 associated with this obligation. F-30




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (13) Income Taxes The company did not recognize an income tax provision or benefit for any
of the years in the three year period ended December 31, 2003. This differed 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, 2003 due to the following: In thousands
    
    2003
    
    2002
    
    2001Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Federal income tax benefit at statutory rate
    
    
    (1,700
    )
    
    
    (34.0
    )%
    
    
    663
    
    
    
    34.0
    %
    
    
    (2,311
    )
    
    
    (34.0
    )%State income tax benefit
    
    
    (174
    )
    
    
    (3.5
    )
    
    
    80
    
    
    
    4.1
    
    
    
    (245
    )
    
    
    (3.6
    )Non-deductible items
    
    
    205
    
    
    
    4.1
    
    
    
    21
    
    
    
    1.1
    
    
    
    238
    
    
    
    3.5Increase (decrease) in valuation allowance
    
    
    1,669
    
    
    
    33.4
    
    
    
    (764
    )
    
    
    (39.2
    )
    
    
    2,318
    
    
    
    34.1Total provision
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    
    
    
    
    
    % The significant components of the deferred tax asset account is as follows
at December 31, 2003 and 2002: In thousands
    
    2003
    
    2002Net operating losses  Federal
    
    $
    35,674
    
    
    $
    42,456Net operating losses  State
    
    
    4,155
    
    
    
    7,172Depreciation and amortization
    
    
    5,070
    
    
    
    4,770Capitalized start up costs
    
    
    6,447
    
    
    
    9,789Acquisiton costs
    
    
    
    
    
    
    2,716Other  net
    
    
    681
    
    
    
    (833
    )Total deferred tax assets
    
    
    52,027
    
    
    
    66,070Less valuation allowance
    
    
    (52,027
    )
    
    
    (66,070
    )Net deferred tax assets
    
    $
    
    
    
    $
     Based on the weight of available evidence, a valuation allowance has been
provided to offset the entire deferred tax asset amount. Total net operating loss carryforwards at December 31, 2003 are $104.9
million, of which $32.6 million is attributed to the acquisition of MedUnite
and may only be used to reduce the future taxable income of MedUnite due to the
Separate Return Limitation Year (SRLY) income tax regulations. These net
operating losses will expire between 2008 and 2023. Due to the changes in ownership
control of the Company at various dates, as defined under Internal Revenue Code
Section 382, net operating losses of $93.7 million ($61.1 million for ProxyMed
and $32.6 million for MedUnite) are limited in their availability to offset
current and future taxable income. The combined annual limitation is $5.1
million ($3.5 million for ProxyMed and $1.6 million for MedUnite). As
a result of the change in ownership of MedUnite, the deferred asset
attributable to MedUnites required net operating loss
carryforward was adjusted by approximately $21 million, which
represents the amount of net operating loss that will expire
unutilized. F-31




---



##### 



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 1,281,017
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, 2003, options for the purchase of 407,027 shares
to newly-hired employees remained outstanding. Stock options issued by
ProxyMed generally vest within three 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, 2003: Options
    
    
    
    
    
    Weighted averageavailable
    
    Options
    
    exercise pricefor grant
    
    outstanding
    
    of optionsBalance, December 31, 2000
    
    
    30,252
    
    
    
    748,329
    
    
    $
    34.50Options authorized
    
    
    292,131
    
    
    
    
    
    
    
    Options granted
    
    
    (101,236
    )
    
    
    101,236
    
    
    $
    15.97Options expired/forfeited
    
    
    11,320
    
    
    
    (19,794
    )
    
    $
    74.58Balance, 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
    
    
    $
    19.26 The following table summarizes information regarding outstanding and
exercisable options as of December 31, 2003: Options outstanding
    
    Options exercisableRange of exercise
    
    Number
    
    Weighted average remaining
    
    Weighted average
    
    Number
    
    Weighted averageprices
    
    outstanding
    
    contractual life (years)
    
    exercise price
    
    exercisable
    
    exercise price$  7.28
- $  15.00
    
    
    271,417
    
    
    
    8.5
    
    
    $
    10.92
    
    
    
    106,010
    
    
    $
    12.94$15.01 -
$  18.00
    
    
    534,571
    
    
    
    9.2
    
    
    $
    16.09
    
    
    
    126,423
    
    
    $
    16.44$18.01 - $
 23.00
    
    
    594,314
    
    
    
    6.6
    
    
    $
    21.78
    
    
    
    566,759
    
    
    $
    21.83$23.01 - $203.40
    
    
    26,367
    
    
    
    1.1
    
    
    $
    112.52
    
    
    
    26,256
    
    
    $
    112.151,426,669
    
    
    
    
    
    
    
    
    
    
    
    825,448
 F-32




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued The following table summarizes information regarding options exercisable
as of December 31: 2003
    
    2002
    
    2001Number exercisable
    
    
    825,448
    
    
    
    624,075
    
    
    
    355,747Weighted average exercise price
    
    $
    22.73
    
    
    $
    26.64
    
    
    $
    41.06 The weighted average grant date fair value of options granted ($10.63 in
2003, $13.37 in 2002 and $12.65 in 2001) was estimated using the Black-Scholes
option pricing model with the following weighted average assumptions: 2003
    
    2002
    
    2001Risk-free interest rate
    
    
    4.08
    %
    
    
    4.46
    %
    
    
    4.75
    %Expected life
    
    10.0 years
    
    9.9 years
    
    9.9 yearsExpected volatility
    
    
    80.8
    %
    
    
    81.0
    %
    
    
    82.8
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    % In April 2001, the Companys Board of Directors authorized the issuance of
65,000 options to purchase the Companys common stock to ProxyMeds executive
and senior management as part of their compensation plan for the 2001 year. Of
these options granted, 19,333 options were issued with an exercise price of
$15.15 under available stock option plans, and the balance of 45,667 options
were granted under the Companys proposed 2001 Stock Option Plan, subject to
approval by the Companys shareholders at its annual meeting on July 25, 2001.
In July 2001, the shareholders of the Company approved the 2001 Stock Option
Plan pursuant to which options to purchase 333,333 shares of common stock may
be issued to employees, officers and directors and, as a result, the 45,667
options were issued with an exercise price of $13.80 per share. These options
are for a ten-year term and vest after five years. In addition, these options
contained a clause which enabled the accelerated vesting of a portion or all of
the options if specific, pre-determined individual performance goals were met
during the 2001 year and, as a result of these performance goals being met,
4,978 options with an exercise price of $15.15 and 11,757 options with an
exercise price of $13.80 were accelerated to vest on December 31, 2001. 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 have 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
cancellation and reissuance program. F-33




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued 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 20). 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 (see Note 18(d)), and the remaining 6,250
sub-committee grants vested in 2003. 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. F-34




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued 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. 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, 2003 and the remaining 3,750 sub-committee
grants are expected to vest 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
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. (15) Supplemental Disclosure of Cash Flow Information In thousands
    
    Year Ending December 31,2003
    
    2002
    
    2001Cash paid for interest
    
    $
    932
    
    
    $
    63
    
    
    $
    368Common stock issued for payment of preferred stock dividends
    
    $
    
    
    
    $
    
    
    
    $
    1,658Acquisition of businesses:Common stock issued for businesses acquired
    
    
    
    
    
    $
    600
    
    
    $
    Debt issued for businesses acquired
    
    
    
    
    
    
    13,400
    
    
    
    7,000Other acquisition costs accrued
    
    
    
    
    
    
    8,382
    
    
    
    30Details of acquisitions:Working capital components, including cash acquired
    
    
    
    
    
    
    4,609
    
    
    
    (303
    )Property and equipment
    
    
    
    
    
    
    (2,165
    )
    
    
    (165
    )Goodwill
    
    
    
    
    
    
    (24,837
    )
    
    
    (9,558
    )Intangible assets acquired:
    
    
    
    
    
    
    
    
    
    
    Customer Relationships
    
    
    
    
    
    
    (9,440
    )
    
    
    Purchased Technology
    
    
    
    
    
    
    (6,395
    )
    
    
    Other long term liabilities, net
    
    
    
    
    
    
    209
    
    
    
    (4
    )
    
    
    
    (15,637
    )
    
    
    (3,000
    )Cash acquired in acquisitions
    
    
    
    
    
    
    1,184
    
    
    
    Net cash used in acquisitions
    
    $
    
    
    
    $
    (14,453
    )
    
    $
    (3,000
    ) F-35




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (16) Concentration of Credit Risk Substantially all of ProxyMeds accounts receivable are due from
physicians and various healthcare institutional suppliers (payers, laboratories
and pharmacies). Collateral is not required. For the year ended December 31,
2003, approximately 15% of consolidated revenues were from a former shareholder
of MedUnite. As a group, the eight former MedUnite shareholders represented
approximately 30% of 2003 consolidated revenues. Additionally, for the years
ended December 31, 2003 and 2002, approximately 12% and 10%, respectively, of
consolidated revenues was from a single customer for the sale, lease and
service of communication devices. For the year ended December 31, 2001,
approximately 10% of consolidated revenues were from another customer for the
sale, lease and service of communication devices. (17) Employee Benefit Plans 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 by employees up to 15% of their annual compensation.
Discretionary matching contributions paid to all eligible employees for 2001
were made in February 2002. Such discretionary matching contributions were
based on 1% of eligible wages up to $1,000 and limited by the employees actual
contribution into the plan. Matching contributions totaling $0.1 million for
the year ended December 31, 2001, have been expensed. There were no matching
contributions for 2003 and 2002. Funding of matching contributions each year
may be offset by forfeitures from terminated employees. The 401(k) retirement plan acquired with the purchase of MedUnite, Inc.
was maintained for substantially all employees who met certain minimum lengths
of employment and minimum age requirements. Contributions were made by
employees based on the lesser of 60% of eligible compensation or the deferral
limit set by the government. Previously non-discretionary employer matching
contributions were eliminated under this plan. The MedUnite 401(k) plan was
combined with the ProxyMed 401(k) plan in 2003. F-36




---



##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (18) Commitments, Contingencies and Other  (a)
    
    Leases  ProxyMed leases certain computer and office equipment used
in its transaction services business and also leases equipment used in
its contract manufacturing business that have been classified as capital
leases. The Company also leases premises, operating and office
equipment under operating leases which expire on various dates through
2006. The leases for the premises contain renewal options, and require
ProxyMed to pay such costs as property taxes, maintenance and insurance.
At December 31, 2003, 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: In Thousands
    
    Capital
    
    OperatingLeases
    
    Leases2004
    
    $
    218
    
    
    $
    1,2752005
    
    
    96
    
    
    
    4512006
    
    
    6
    
    
    
    9Total minimum lease payments
    
    
    320
    
    
    $
    1,735Less amount representing interest
    
    
    19Present value of minimum lease payments
    
    $
    301  The Company recognizes rent expense on a straight-line basis over the
related lease term. Total rent expense for all operating leases amounted
to $2.1 million in 2003, $1.5 million in 2002 and $1.4 million in 2001.
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, 2002 and 2003.  (b)
    
    Settlement of Litigation  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. Under the terms of the
promissory note, payments of $25,000 will be made each quarter over the
next three years starting October 2002. All payments due have been
received to date and as of December 31, 2003, the unpaid balance is $0.2
million.  (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 $1.1 million at December 31, 2003.  (d)
    
    Resignation of Director  In February 2003, a director of the Company
resigned for personal reasons, and as a result, one vacancy remained
unfilled on the Companys Board of Directors until it was filled by a
former director of PlanVista Corporation as part of the merger on March
2, 2004 (see Note 20). F-37




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued (19) 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 7
3/4% per annum. On June 30, 2000, the Company amended the terms of these notes
whereby interest on the notes ceased to accrue subsequent to July 1, 2000 and
the loan plus accrued interest, totaling $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 prepaid all interest through the maturity
date. Through December 31, 2003, no additional principal payments have been
received on this note. 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 current employer) in conjunction with the Companys
acquisition of PlanVista (see Note 20). 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. F-38




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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, 2003, the unpaid
principal balance of the note is approximately $14,000 and is included in other
receivables. In June 2003, prior to its acquisition of PlanVista (see Note 20),
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 senior executive of ProxyMed had an
immaterial ownership interest in PlanVista. (20) Subsequent Events  (a)
    
    Acquisition of PlanVista  On December 5, 2003, the Company entered
into a definitive agreement to acquire all of the outstanding capital
stock of PlanVista Corporation (PlanVista), 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. The
merger was subject to regulatory and shareholder approval of both
companies. The Company also raised an additional $24.1 million in a
private equity transaction to various entities affiliated with GAP and
Commonwealth Associates to pay off certain debts of PlanVista and other
obligations as a result of the acquisition. The acquisition enables the
Company to enter into a new line of business, 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. The Company had
previously entered into a joint marketing agreement for the sale of
PlanVistas services back in June 2003 (see Note 5). F-39




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  On March 2, 2004, shareholders of both companies approved the merger and
ProxyMed acquired all of the outstanding stock of PlanVista by effecting a
merger of Planet Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Company (the Acquisition Subsidiary),
with and into PlanVista (the Merger) upon the terms and conditions set
forth in the Agreement and Plan of Merger, dated as of December 5, 2003,
by and among the Company, the Acquisition Subsidiary and PlanVista (the
Merger Agreement). Pursuant to the Merger Agreement and as a result of
the Merger, each outstanding share of PlanVista common stock, par value
$.01 per share, at the effective time of the Merger was converted into the
right to receive 0.08271 of a fully paid and non-assessable share of
common stock, par value $.001 per share, of the Company. Following
consummation of the Merger, PlanVistas common stock was delisted from the
Over the Counter Bulletin Board. Pursuant to the Merger Agreement and as
a result of the Merger, each outstanding share of PlanVista series C
preferred stock, par value $.01 per share, at the effective time of the
Merger was converted into the right to receive 51.5292 fully paid and
non-assessable shares of common stock, par value $.001 per share, of the
Company. In addition, the Company provided funds necessary to satisfy
$27.4 million of PlanVistas debt and other obligations outstanding as of
the effective time of the Merger. The Company used available cash, a
$4.4 million draw on its asset-based line of credit and cash raised
through the issuance of shares of common stock in a private placement to
fund the acquisition.  The issuance of the Companys common stock under the Merger Agreement 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 Securities and Exchange
Commission (the SEC) and declared effective on February 2, 2004.  On December 5, 2003, the Company agreed to sell an aggregate of 1,691,229
shares of unregistered common stock at $14.25 per share in a private
placement to 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 (the
Purchasers). No placement agent was used in this transaction. The
Company has agreed to grant the Purchasers certain demand and piggy back
registration rights. On March 2, 2004 and concurrently with the closing of
the Merger, the Company closed on the transactions with the Purchasers and
received gross proceeds of $24.1 million.  In connection with this merger, 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
1/3 shares to 30,000,000 shares; (2) the issuance of 1,691,229 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 for the 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 ProxyMeds board
of directors. F-40




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##### 



PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued  As noted above, upon completion of the merger, 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, representing approximately 23% of the Companys common
stock on a fully converted basis, and the holders of the Companys
outstanding stock, options and warrants retained approximately 77% of the
Company.  PlanVista will be operated as a wholly-owned subsidiary of ProxyMed and
its operations will be included in its Transaction Services segment
commencing March 2004. All officers and employees of PlanVista, with the
exception of the PlanVistas chief financial officer, continued employment
with the Company.  Additionally, certain officers, directors and employees of PlanVista were
granted options to purchase an aggregate of 200,000 shares of ProxyMed
common stock at $17.74 per share. Of these options, 173,120 will vest
two-thirds on the first anniversary date of the grant and one-third on the
third anniversary date of the grant. The balance of 26,880 options 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 each vest after three
and six months. The Company expects to recognize approximately
$0.1 million in compensation expense associated with this grant in 2004.  As described above, to acquire PlanVista the Company issued 3,600,000
shares of its common stock to PlanVista shareholders valued at $68.4
million (based on the closing price of ProxyMeds common stock on March
2, 2004), assumed debt and other liabilities of PlanVista, and estimated
approximately $1.3 million in acquisition-related costs. Additionally,
ProxyMed raised $24.1 in a private placement sale of its common stock to
partially fund repayment of PlanVistas debts and other obligations
outstanding at the time of the acquisition. Of the total estimated
transaction costs expected to be incurred by the Company, $0.9 million
are included in other current assets in the consolidated balance sheet at
December 31, 2003.  (b)
    
    Exercise of Warrants  On March 25, 2004, the GAP Warrants were
exercised and the Company issued 549,279 shares of common stock for
$8.75 million cash. F-41




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##### 



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 year2003
    
    $
    1,096
    
    
    
    152
    
    
    
    803
    
    
    
    1,169
    
    
    $
    8822002
    
    $
    228
    
    
    
    38
    
    
    
    1,008
    
    
    
    178
    
    
    $
    1,0962001
    
    $
    691
    
    
    
    70
    
    
    
    84
    
    
    
    617
    
    
    $
    228
  (1)
    
    Includes amounts charged against revenue in 2001 ($65), 2002 ($346) and 2003 ($803)(2)
    
    Includes amounts acquired through acquisitions in 2001 ($19), 2002 ($662) and 2003 ($-0-)(3)
    
    Primarily write-off of bad debts and amounts charged against revenues, net of recoveries F-42