UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
or
[ ] TRANSACTION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-22052
PROXYMED, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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FLORIDA 65-0202059
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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2555 DAVIE ROAD, SUITE 110, FORT LAUDERDALE, FLORIDA 33317-7424
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (954) 473-1001
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
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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 if
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant computed using $10.00 per share, the closing price of the
registrant's common stock on the Nasdaq National Market on March 5, 1999, was
$78,359,380.
As of March 5, 1999, 17,818,372 shares of the registrant's common stock
were issued and outstanding.
Documents Incorporated By Reference: NONE
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PART I
ITEM 1. BUSINESS
THE COMPANY
ProxyMed, Inc. is a healthcare information services company operating
in three business segments: healthcare EDI and communication devices, network
integration services and prescription drug dispensing.
We were incorporated in the State of Florida in 1989. Our principal
executive offices are located at 2555 Davie Road, Suite 110, Fort Lauderdale,
Florida 33317-7424. Our telephone number is (954) 473-1001. Our Internet address
is http://www.proxymed.com.
HEALTHCARE EDI AND COMMUNICATION DEVICES SEGMENT
ProxyMed provides healthcare electronic data interchange
("EDI") products and services to physicians, independent physician associations
("IPAs"), insurance payers, pharmacies, commercial and hospital laboratories and
nursing homes. Our connectivity solutions and transaction processing services
support a broad range of both clinical and financial transactions. To facilitate
these services, we have developed and operate ProxyNet(TM), our national
electronic healthcare information network, which provides physicians with direct
connectivity and PC-based interfaces to the industry's second largest list of
payers, the largest list of chain and independent pharmacies, and the largest
list of clinical laboratories.
The healthcare industry generates billions of clinical and
financial transactions each year, including but not limited to prescription
orders, refill authorizations, lab orders and results, radiology orders and
results, medical insurance claims, insurance eligibility inquiries, encounter
notifications, and referral requests and authorizations. We believe that the
healthcare industry lags behind many other transaction intensive industries
such as travel, securities and banking in the number of transactions processed
electronically, with the vast majority of healthcare transactions being
performed manually and on paper. For physicians, payers, labs and pharmacies to
meet the clinical and financial demands of our evolving managed care system, we
believe that all participants in the healthcare system will need to process all
of these types of transactions electronically. We also believe that because of
the number of participants, the lack of standards 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.
Physicians control most healthcare decisions and so, in this
role, are a center point for the patient related clinical and financial
transactions generated each year. Because of our broad range of both clinical
and financial transaction capabilities, we are uniquely positioned to provide
"one stop shopping" for all of a physician's transaction processing
requirements. ProxyMed's goal is to become the nation's leading provider of
physician office connectivity and transaction processing services. To gain
access to the greatest number of physicians, we maintain four sales and
distribution channels for our healthcare EDI and communication devices segment:
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ProxyMed Software ProxyMed has a nationally deployed sales Software and Communication Products:
and Communication force which calls directly on physicians, Financial - EZ-Claim software
Devices payers, pharmacies and labs. ProxyMed Pharmacy - PreScribe software
licenses its proprietary software products Lab - ClinScan software & systems
for use on physician desktops for access Lab - Kit series of intelligent
to ProxyNet, transaction creation and printers
communication between healthcare Nursing Home - ProxyCare software
participants.
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Electronic Commerce ProxyMed has established its ECP program Agreements:
Partners to work with the nation's leading Medical Manager Corp.
providers of physician desktop software, IDX Systems Corporation
so that they may enable their existing Eclipsys Corporation
applications to communicate through Epic Systems Corporation
ProxyNet to payers, pharmacies and labs.
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Gateway Agreements ProxyMed connects other EDI networks to Gateways:
ProxyNet so that the participants on both Kinetra
networks can communicate with each other. National Data Corp.
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Internet/World Wide ProxyMed is establishing itself as an ASP Services Planned for Release
Web Application Service Provider of clinical by mid-1999:
and financial EDI services hosted on the Lab Results Reporting
web, which may be accessed by any Prescription Refill Authorization
physician with an Internet connection.
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We have three primary revenue streams. Physicians and nursing
homes, which we describe as "front-end" customers, pay recurring network access
and database subscription fees, as well as software license, purchases and
service fees for our desktop equipment, software and communication devices.
Payers, laboratories and pharmacies, which we describe as "back-end" customers,
pay for transaction processing services on a per transaction basis.
In prior years a significant portion of our revenue was
generated by our other business segments. In 1998, however, the EDI and
communication devices segment accounted for the majority of our revenues and is
expected to increase as a percentage of revenues in 1999.
See Note 14 of the Notes to the Consolidated Financial
Statements for more financial information about our segments.
NETWORK INTEGRATION SERVICES SEGMENT
We provide client server software development services,
Internet access services and commercial software packages to public and private
sector organizations. We also sell and support a variety of systems integration
products and services from major network equipment manufacturers in a variety of
technological niches, including hubs, routers, switches, remote access devices,
servers, storage devices and network operating systems. Our Internet access
division provides a wide range of Internet related products and services. We are
a full service Internet access provider with points of presence in Tallahassee,
Tampa and Fort Myers, Florida. We purchase computer hardware products for resale
from a variety of suppliers and are not dependent upon any one supplier.
PRESCRIPTION DRUG DISPENSING SEGMENT
Our wholly-owned subsidiary, ProxyCare, Inc., is a pharmacy
business operated by us since 1994 in South Florida that dispenses and delivers
unit dose oral prescription drugs to patients residing in long term
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care facilities, primarily in assisted care living facilities in South Florida.
Prescriptions are delivered monthly to such facilities utilizing a variety of
packaging systems, including a unique packaging system called
"Medicine-On-Time", which is licensed from an unaffiliated third party. We are
considering whether this segment fits within our long-term business plan.
CONTINUING ACQUISITION PROGRAM
Since 1997, we have consummated the following mergers and
acquisitions:
o In March 1997, we acquired substantially all of the assets of
Clinical MicroSystems, Inc. ("CMS"), a laboratory software
company.
o In April 1997, we acquired substantially all of the assets of
Hayes Computer Systems, Inc. ("HCS"), a network integration
services company.
o In June 1997, we acquired from Walgreen Co., owner of the
Walgreens pharmacy chain ("Walgreens"), the proprietary
electronic prescription software known as PreScribe.
o In November 1997, we acquired substantially all of the assets
of US HealthData Interchange, Inc. ("USHDI"), a provider of
healthcare financial EDI services.
o In May 1998, we acquired all of the capital stock of WPJ, Inc.,
which did business as Integrated Medical Services ("IMS"), also
a provider of healthcare financial EDI services.
o In December 1998, we acquired all of the capital stock of Key
Communications Service, Inc. ("Key"), a provider of laboratory
communication devices.
o In January 1999, we acquired the EDI assets of Specialized
Medical Management, Inc. ("SMMI"), also a provider of
healthcare financial EDI services.
PRODUCT DEVELOPMENT
We believe that our future success will depend in large part on our
ability to enhance our current line of EDI products and services, develop new
EDI products and services, maintain technological competitiveness and satisfy an
evolving range of customers' requirements. We intend to expand our products and
services through acquisition and internal development. Our product development
group is responsible for improving and upgrading existing products and services,
exploring applications of core technologies and incorporating new technologies
into our products and services.
We are currently broadening our offerings to include Internet-based
clinical and financial EDI services to be imbedded in a web-based physician
office suite of applications. All applications will have a common user interface
and will be easily accessed via the Internet. We plan to establish relationships
with national Internet service providers to ease the set-up costs to access the
Internet. Planned services will include complete clinical transactions such as
electronic prescription orders and refills, formulary messaging, laboratory
orders and results, financial transactions such as
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claims processing, encounters, eligibility verification, referrals and
electronic remittance advices, and office applications such as secure e-mail.
The first two applications that will be available in approximately May 1999 will
be laboratory results reporting and pharmacy prescription refill authorizations.
The total amount capitalized for purchased technology and capitalized
software as of December 31, 1998, is $13,026,000, net of amortization. Research
and development expense was approximately $2,978,000 in 1998, $1,908,000 in
1997, and $177,000 in 1996. See Note 1 of Notes to Consolidated Financial
Statements.
COMPETITION
We face competition from many healthcare information systems companies
and other technology companies. Many of our competitors are significantly larger
and have greater financial resources than we do and have established reputations
for success in implementing healthcare information service systems. The
healthcare EDI transaction industry has been targeted for growth by many
companies, including companies developing new technologies utilizing an
Internet-based system.
GOVERNMENT REGULATION
Except for our drug dispensing business, our products and services are
not directly subject to governmental regulation. Our customers, however, are
subject to extensive and frequently changing federal and state laws and
regulations.
We believe that we are in compliance in all material respects with the
federal and state laws and regulations governing our operations and have
obtained all licenses necessary for the operation of our business.
INTELLECTUAL PROPERTY
We regard certain features of our products, services and documentation
as proprietary, and rely on a combination of contract, copyright, trademark and
trade secret laws and other measures to protect our proprietary information. We
are not aware that our products, services, trademarks or other proprietary
rights infringe the proprietary rights of third parties.
EMPLOYEES
As of March 5, 1999, we employed 324 full-time employees. We are not
and never have been a party to a collective bargaining agreement. We consider
our relationship with our employees to be good.
ITEM 2. PROPERTIES
We lease various properties as described below. We are also obligated
under several other operating leases for certain operating facilities which are
for periods of less than one year or are otherwise immaterial. Our leases
generally contain renewal options and require us to pay costs such as property
taxes, maintenance and insurance. We consider our present facilities adequate
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for our operations and believe that alternative and additional facilities are
readily available in the event that a particular lease is not renewed.
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SQUARE
INDUSTRY SEGMENT LOCATION FOOTAGE
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Corporate, Healthcare EDI Fort Lauderdale, FL 20,484
and Communication Devices
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Healthcare EDI and New Albany, IN 43,560
Communication Devices
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Healthcare EDI and Santa Ana, CA 7,732
Communication Devices
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Network Integration Tallahassee, FL 7,000
Services
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Prescription Drug Fort Lauderdale, FL 4,700
Dispensing
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ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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, 1998.
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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. The common stock has
traded on The Nasdaq National Market since November 8, 1996. Previously, the
common stock traded on the SmallCap tier of the Nasdaq Stock Market.
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HIGH LOW
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1997:
First Quarter $ 9.50 $ 5.38
Second Quarter 11.25 4.13
Third Quarter 10.81 7.00
Fourth Quarter 10.63 6.50
1998:
First Quarter $15.75 $ 5.25
Second Quarter 17.13 8.38
Third Quarter 10.81 6.75
Fourth Quarter 11.88 6.63
1999:
First Quarter $12.00 $ 8.50
(through March 5, 1999)
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On March 5, 1999, the last reported sale price of the common stock was
$10.00 per share. As of March 5, 1999, there were 203 holders of record of the
common stock. We believe that many of these holders of record are in "street
name" and that the number of individual shareholders is over 2,500.
We have not paid any dividends on our common stock. We intend to retain
all earnings for use in our operations and the expansion of our business, and do
not anticipate paying any dividends on the common stock in the foreseeable
future. The payment of dividends is within the discretion of our Board of
Directors. Any future decision with respect to dividends will depend on future
earnings, future capital needs and our operating and financial condition, among
other factors.
In December 1998, we issued 1,968,106 shares of our common stock in
connection with the Key merger. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial
information for us as of and for each of the five years in the period ended
December 31, 1998, and have been derived from our audited consolidated financial
statements. Since March 1995, our business focus changed from primarily the sale
of prescription drugs to healthcare EDI and communication devices. The data set
forth below should be read in conjunction with
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and related notes.
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Year Ended December 31,
1998 1997 1996 1995 1994
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STATEMENT OF OPERATIONS DATA:
Revenues $ 37,767,677 $ 10,931,969 $ 3,054,151 $ 7,622,803 $16,533,006
Operating loss $(11,681,614) $(18,784,262) $(4,305,293) $(2,626,882) $(4,126,165)
Net loss $(11,788,185) $(18,517,122) $(2,853,735) $(2,848,887) $(4,265,657)
Net loss applicable to
common shareholders $(11,788,185) $(18,517,122) $(2,949,538) $(2,962,249) $(4,265,657)
PER SHARE DATA:
Basic and diluted net loss
per share of common stock $ (.75) $ (1.75) $ (.39) $ (.61) $ (1.01)
Weighted average common
shares outstanding 15,653,374 10,589,333 7,660,383 4,816,980 4,209,876
DIVIDEND DATA:
Dividends on cumulative
preferred stock $ - $ - $ 95,803 $ 113,362 $ -
December 31,
1998 1997 1996 1995 1994
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BALANCE SHEET DATA:
Working capital (deficiency) $ 7,564,488 $ 1,966,406 $12,426,178 $ 990,734 $( 469,097)
Long-term obligations $ 1,367,193 $ 1,049,630 $ - $ 199,393 $ 425,256
Total assets $ 48,836,574 $19,603,121 $15,695,055 $ 4,993,337 $ 9,217,934
Stockholders' equity $ 40,279,119 $13,151,752 $14,915,305 $ 2,593,620 $ 3,336,035
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IN GENERAL
ProxyMed is a healthcare information services company providing
financial and clinical EDI transaction processing services and healthcare
technology software products to physicians and other healthcare providers such
as nursing homes, pharmacies, commercial and hospital laboratories, insurance
companies and managed care organizations. In addition, we derive revenues from
network integration services and related computer hardware sales principally to
state government agencies, sales and leasing of computer peripheral equipment to
various healthcare and non-healthcare customers, contract manufacturing of
circuit boards to non-healthcare customers, and the dispensing of prescription
drugs to patients who are residing in long-term care facilities. Our products
and services are provided from our four principal operating facilities located
in Fort Lauderdale and Tallahassee, Florida; Santa Ana, California; and New
Albany, Indiana.
Business combinations were consummated during the periods presented and
are included in the financial statements after their respective dates of
acquisition. Key merged with ProxyMed in December 1998 (accounts of Key are
includable as of May 1, 1998); IMS was acquired in May 1998; USHDI was acquired
in November 1997; and CMS was acquired in March 1997. These four entities are
reportable under the healthcare EDI and communication devices segment. HCS was
acquired in April 1997 and is reportable under the network integration services
segment.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUES. Consolidated net revenues for 1998 increased by
$26,835,708, or 245%, to $37,767,677 from consolidated net revenues of
$10,931,969 in 1997.
The healthcare EDI and communication devices segment revenues increased
by $20,412,204, or 1123%, to $22,229,326 in 1998 from $1,817,122 in 1997. This
increase was primarily due to the acquisitions of IMS in 1998 and USHDI in late
1997, the merger with Key in 1998, and three significant software licenses sold
for our ProxyCare and ClinScan products.
The network integration services segment revenues increased by
$6,075,671, or 78%, to $13,855,458 in 1998 from $7,779,787 in 1997. This
increase was primarily due to a new agency of the State of Florida which became
a new customer in 1998 and a full year of revenue in 1998 as compared to eight
months of revenue in 1997, as HCS was acquired in April 1997. In 1998 and 1997,
approximately 87% and 91%, respectively, of the network integration services
revenues were from the State of Florida and its related agencies. Approximately
84% and 81%, in 1998 and 1997, respectively, of this segment's revenues are from
sales of hardware and third-party software products.
The prescription drug dispensing segment revenues increased by
$347,833, or 26%, to $1,682,893 in 1998 from $1,335,060 in 1997, primarily as a
result of increased marketing efforts to obtain new customers.
COST OF SALES AND GROSS PROFIT MARGIN. Cost of services and license
fees includes labor and travel costs, third-party support arrangements,
third-party EDI transaction processing costs and Internet related communication
fees. Cost of sales for computer systems, prescription drugs and other tangible
goods includes hardware, third-party software, prescription and non-prescription
drugs, manufactured goods and direct labor and consumable materials used in
contract manufacturing.
Consolidated gross profit margin for 1998 was 56% compared to 37% in
1997. The increase is primarily due to the impact of a higher percentage of
total sales arising from increased EDI transaction revenues and other revenues
due to our acquisitions in the healthcare EDI and communication devices segment,
as well as the sales of higher margin software licenses for the ProxyCare and
ClinScan products. The gross profit margin for the healthcare EDI and
communication devices segment was 79% in 1998 and 1997. The gross profit margin
in the network integration services segment was 23% in 1998 compared to 27% in
1997. This decrease was primarily due to a higher amount of lower margin
hardware products, as compared to the sales of services. The gross profit margin
in the drug dispensing segment was 32% in 1998 compared to 37% in 1997. This
decrease was due to a change in the mix of customers from private pay patients
to lower margin third-party payers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for 1998 increased by $9,580,726, or 72%, to
$22,874,079 from consolidated selling, general and administrative expenses of
$13,293,353 in 1997. Consolidated selling, general and administrative expenses
as a percentage of consolidated net sales decreased to 61% in 1998, from 122% in
1997, as we established a higher revenue base through our
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acquisitions. In addition, the rate of increase in sales in 1998 exceeded the
rate of increase in selling, general and administrative expenses.
Selling, general and administrative expenses for the healthcare EDI and
communication devices segment increased by $8,336,518, or 105%, to $16,268,058
in 1998 from selling, general and administrative expenses of $7,931,540 in 1997.
The increase consisted primarily of selling, general and administrative expenses
of Key, IMS and USHDI ($8,858,000) and net decreases of $521,000 in selling,
general and administrative expenses from existing segment operations.
Selling, general and administrative expenses for the network
integration services segment increased by $953,791, or 52%, to $2,778,758 in
1998 from selling, general and administrative expenses of $1,824,967 in 1997.
This increase resulted from a full year of operations included in 1998, whereas
only eight months was included in the prior year as the acquisition of HCS
occurred in April 1997.
Selling, general and administrative expenses for the drug dispensing
segment increased by $95,141, or 20%, to $561,186 in 1998 from selling, general
and administrative expenses of $466,045 in 1997. This increase primarily
resulted from payroll, commissions and related costs to support the increase in
revenues.
Corporate related selling, general and administrative expenses
increased by $195,276, or 6%, to $3,266,077 in 1998 from $3,070,801 in 1997.
This increase was primarily a result of the net effect of various costs and
expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$7,802,973, or 724%, to $8,881,273 in 1998 from $1,078,300 in 1997. This
increase was due to the following: (i) amortization charges for goodwill
associated with our acquisitions completed in 1997 and 1998 which are being
amortized over 3 years ($3,971,000); (ii) amortization of purchased technology
and capitalized software costs for healthcare EDI and communication devices
($3,021,000); (iii) depreciation charges associated with the Company's internal
systems and related equipment ($424,000); (iv) amounts payable to Walgreens
associated with the acquisition of PreScribe ($250,000); and (v) amortization
charges for other intangibles associated with our acquisitions ($137,000).
IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY. As a result of a
contingent payment made to the former owner of HCS in 1998, we recorded a charge
of $742,623 in 1998 related to the expensing of in-process research and
development technology. In 1997, we recorded a charge of $8,467,098 for
in-process research and development technology. See Note 2 of Notes to the
Consolidated Financial Statements for a full description of such charges.
INTEREST, NET. We incurred net interest expense for 1998 of $106,571,
whereas we earned net interest income for 1997 of $267,140. The 1998
amount reflects interest expense incurred on the debt of Key ($206,000) and
interest expense on the debt issued for the acquisition of CMS ($122,000) offset
by interest earned on invested funds ($221,000). In connection with the merger
with Key, the debt guaranteed by Key was retired.
OTHER. As a result of its merger with Key, we recorded $426,970 in
merger related expenses in 1998.
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NET LOSS. As a result of the foregoing, we recorded a net loss of
$11,788,185 in 1998, as compared to a net loss of $18,517,122 in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Consolidated revenues for 1997 increased by $7,877,818,
or 258%, to $10,931,969 from consolidated revenues of $3,054,151 in 1996.
The healthcare EDI and communication devices segment revenues decreased
by $68,885, or 4%, to $1,817,122 in 1997 from $1,886,007 in 1996. This decrease
was primarily due to the net effect of two factors. First, as a result of the
acquisitions of CMS, USHDI and PreScribe in 1997, segment revenues increased by
$1,646,218 over 1996 levels. Revenues for these acquisitions include the
processing of certain clinical and financial transactions, proprietary computer
software and hardware, and annual software support contracts. Second, segment
revenues in 1996 include one-time license fee revenue from Bergen Brunswig Drug
Corporation and Blue Cross and Blue Shield of Massachusetts, Inc. totaling
$1,204,000, whereas no such license fee income was received in 1997.
The network integration services segment revenues were $7,779,787 in
1997 compared to no such revenues in 1996, due to the acquisition of HCS in
April 1997. Approximately 91% of the network integration services revenues were
to the State of Florida and its related agencies. Approximately 81% of this
segment's revenues are from sales of hardware and third-party software products.
The prescription drug dispensing segment revenues increased by
$166,916, or 14%, to $1,335,060 in 1997 from $1,168,144 in 1996, primarily as a
result of increased marketing efforts to obtain new customers.
COST OF SALES AND GROSS PROFIT MARGIN. Cost of services and license
fees includes labor and travel costs, third-party support arrangements,
third-party EDI transaction processing costs and Internet related communication
fees. Cost of sales for computer systems and prescription drugs includes
hardware, third-party software, and prescription and non-prescription drugs.
Consolidated gross profit margin for 1997 was 37% compared to 57% in
1996. The gross profit margin for the healthcare EDI and communication devices
segment was 79% in 1997 compared to 70% in 1996. This increase is primarily
attributable to the contribution in 1997 from our lab software products and
annual software support contracts, which typically carry high gross profit
margins. The gross profit margin in the network integration services segment was
27% in 1997 due to the high concentration of lower margin hardware products. The
gross profit margin in the prescription drug dispensing segment was 37% in 1997
compared to 34% in 1996. This increase was due to a change in the mix of
customer from third-party payers to higher margin private pay patients.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling,
general and administrative expenses for 1997 increased by $7,583,920, or 133%,
to $13,293,353 in 1997 from consolidated selling, general and administrative
expenses of $5,709,433 in 1996. Consolidated selling, general and administrative
expenses as a percentage of consolidated net revenues decreased to 122% in 1997
from 187% in 1996, as the rate of increase in revenues in 1997 exceeded the rate
of increase in selling, general and administrative expenses.
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Selling, general and administrative expenses for the healthcare EDI and
communication devices segment increased by $5,217,656, or 192%, to $7,931,540 in
1997 from selling, general and administrative expenses of $2,713,884 in 1996.
The increase resulted from acquisitions of CMS and USHDI, and internal growth in
order to support this core business of ProxyMed. The increase consisted
primarily of the following: (i) additional payroll and related costs for sales,
product development, customer service, implementation services, technical
operations and management personnel ($3,866,000); (ii) additional marketing
expenses including attendance at national and local trade shows, print ads, and
travel to potential customers ($721,000); (iii) telecommunication costs related
to our further development of our ProxyNet network costs including direct
connectivity with our strategic partners ($293,000); (iv) consulting fees to
various software and business consultants ($160,000); (v) occupancy costs
primarily associated with the acquisitions of CMS and USHDI and additional
facilities for product development and sales ($105,000); (vi) write-off of
certain capitalized software that we determined had no continuing future benefit
to its operations ($202,000); (vii) charges related to certain compensatory
stock options and warrants issued in 1996, whereas there were no such charges in
1997 (decrease of $300,000); and (viii) net increases in various other selling,
general and administrative expenses which were individually less than $100,000
($171,000).
Selling, general and administrative expenses for the network
integration services segment were $1,824,967 in 1997 and resulted from the
acquisition of HCS in 1997. These expenses consisted primarily of payroll and
related costs ($1,345,000), occupancy costs ($144,000), telecommunications costs
($114,000), and marketing related costs including travel to potential customers
($82,000).
Selling, general and administrative expenses for the prescription drug
dispensing segment increased by $114,927, or 33%, to $466,045 in 1997 from
selling, general and administrative expenses of $351,118 in 1996. This increase
primarily resulted from payroll, commissions and related costs to support the
increase in business.
Corporate related selling, general and administrative expenses
increased by $426,370, or $16%, to $3,070,801 in 1997 from $2,644,431 in 1996.
This increase was primarily a result of the following: (i) termination and
separation payments for certain employees ($235,000); (ii) the write-off of
certain computer hardware that we determined that we will no longer
utilize in our corporate operations ($161,000); and (iii) a net increase in
various other selling, general and administrative expenses ($30,000).
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$755,712 in 1997, or 234%, to $1,078,300 from $322,588 in 1996. This increase
was primarily due to the following: (i) amortization of capitalized software
costs for healthcare EDI and communication devices ($214,000); (ii) depreciation
charges associated with ProxyNet and related systems ($100,000); (iii) amounts
payable to Walgreens associated with the acquisition of PreScribe ($250,000);
(iv) amortization charges for goodwill and other intangible assets associated
with our acquisitions completed in 1997 ($84,000); and (v) other general
depreciation increases ($108,000).
INTEREST, NET. Net interest income decreased $169,429, or 39%, to
$267,140 in 1997 from $436,569 in 1996. The decrease in net interest income is
due primarily to interest expense of approximately $136,000 in 1997 on the debt
issued for the acquisition of CMS, which was not present in 1996.
12
<PAGE>
IN-PROCESS RESEARCH AND DEVELOPMENT TECHNOLOGY. As a result of the
acquisitions of CMS and HCS, we recorded charges totaling $8,467,098 in 1997
related to the expensing of in-process research and development technology. See
Note 2 of Notes to Consolidated Financial Statements for a full description of
such charges.
OTHER. In 1996, we earned $1,014,989 from the sale of certain assets of
our drug dispensing operations to Eckerd Corporation in 1995.
NET LOSS. As a result of the foregoing, we recorded a net loss of
$18,517,122 in 1997, as compared to a net loss of $2,853,735 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
In 1998, cash used in operating activities totaled $4,916,287. This was
primarily due to our net loss partially offset by depreciation and amortization
charges. These activities were financed through available cash resources,
private placement sales of 3,013,416 shares of our common stock resulting in net
proceeds of $29,118,505 and $1,451,700 in proceeds from the exercise of stock
options and warrants. During this period, we acquired IMS for $25,965,325 in
cash plus common stock, made $406,556 in debt and interest payments for notes
payable acquired with IMS and Key, and made several cash payments related to
acquisitions completed in 1997 including: a debt payment under our obligation to
the former owner of CMS for $750,000, a contingent payment to the former owner
of HCS in the amount of $500,000 for meeting defined operating criteria in the
12 months subsequent to the acquisition, and $500,000 to Walgreens under our
contract for the purchase of PreScribe. Additionally, we incurred approximately
$400,000 in net costs (principally leasehold improvements, relocation expenses
and rent deposits) for the relocation of our corporate offices and our network
and development operations in Fort Lauderdale in September 1998. After these
receipts and expenditures, we had cash and cash equivalents totaling $4,681,671
as of December 31, 1998. These available funds continue to be used for
operations, the further development and marketing of our products and services,
equipment and other general corporate purposes. In addition, we are continuously
evaluating acquisition opportunities and other strategic alternatives that add
synergies to our product offerings and business strategy. Pursuant to this
strategy, we purchased the healthcare EDI assets of SMMI for $1,000,000 in cash
in January 1999.
We have a revolving bank line of credit of up to $5,000,000, subject to
availability of suitable collateral, which was renewed in August 1998.
Borrowings, if any, are due on demand, collateralized by certificates of deposit
and U.S. Treasury Notes, and bear interest at the prime rate less 3/4%. There
were no outstanding borrowings on this line of credit as of December 31, 1998.
As a result of the acquisitions of CMS, HCS and PreScribe in 1997, we
are obligated to make certain payments in the next 12 months. These payments are
as follows: $500,000 for CMS, $1,000,000 for HCS, and $500,000 for PreScribe.
The CMS and HCS payments may be made at least 50% in cash and the balance, if
any, in common stock.
We do not have any material commitments for capital expenditures.
13
<PAGE>
The ratio of current assets to current liabilities was 2.1 times in
1998 compared to 1.4 times in 1997. This increase is attributable to the
additional cash and accounts receivable generated from our recent acquisitions.
Accounts receivable turnover for us was 6.3 times in the 1998 period which was
comparable to 6.6 times in 1997. Inventory turnover 5.6 times in the 1998 period
compared to 7.4 times in the 1997 period; this decrease is attributable to
slower inventory turnover at Key.
We expect to continue to incur negative net cash flow from operations
until we begin receiving higher levels of revenues from our healthcare EDI and
communication devices segment and/or from cash generated by our network
integration services segment. Management is committed to the strategy of
investing funds in further marketing and development of our products and
services and may pursue additional acquisitions which are deemed to be in
accordance with our business strategy, both of which may require additional
equity or debt financing. However, there can be no assurances that such
financing will be available under terms and conditions acceptable to us.
FUTURE OUTLOOK
We continue to grow through strategic acquisitions and concentration on
our core healthcare EDI and communication devices segment, our strategic
relationships and other plans to increase the usage of our healthcare
information technology products and services to achieve requisite economies of
scale. We have successfully reduced our operating losses before non-cash
charges. Such non-cash charges are significant and result primarily from
amortization expenses related to our acquisitions. However, we anticipate that
we will continue to incur operating losses until we generate sufficient
recurring revenues from our products and services to cover the total of our cash
and non-cash expenses. There can be no assurance that we will realize an
adequate level of recurring revenues from the sale of our products and services,
or that revenues from its operations or those of our recently acquired
businesses and any future acquisitions will ultimately result in achievement of
profitability.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, we adopted and are reporting in accordance
with SFAS No. 130, "Reporting Comprehensive Income," and SOP No. 97-2, "Software
Revenue Recognition." There were no differences between our net loss and
comprehensive loss under SFAS No. 130 and the adoption of SOP No. 97-2 did not
have a material effect on the timing of our revenue recognition.
YEAR 2000 COMPLIANCE
GENERAL. Many currently installed computer systems and software
products are coded to accept only two digit dates. Such systems may not be able
to distinguish 20th century dates from 21st century dates. To address these and
any other Year 2000 operational issues which may affect us, in September 1998 we
appointed a Year 2000 Committee and hired a Year 2000 project manager to review
our internal computer systems and our products and services as well as review
the progress of our principal customers, vendors and resellers.
14
<PAGE>
The Committee has developed a priority order list of our products and
services and has commenced the Year 2000 project plan in accordance with this
list. Our Year 2000 project plan consists of four phases: assessment,
remediation, validation and distribution.
The primary purpose of the assessment phase is to list and analyze the
inventory of our products sold and supported. The major issues encountered
during this phase are the identification of language the software is written in,
the source code and any third-party libraries in a product. The remediation
phase is where changes to the programs and codes are actually made. The
validation phase is where the remediated products are tested and then submitted
for independent verification and validation. The distribution phase,
specifically for proprietary products, is where the remediated products are
provided to our customers.
PRODUCTS AND SERVICES. With respect to our products and services,
except those recently acquired from our business combinations with Key and SMMI,
the assessment phase is substantially complete. The assessment and remediation
phases for our three top priority products have been fully completed, with two
products currently in the distribution phase. We expect that all of our software
products and our clinical and financial transaction processing networks will be
Year 2000 ready by July 1999.
Based on representations made at time of our merger with Key, we
believe that Key's products and services will operate satisfactorily in a Year
2000 environment. We have begun the assessment phase to verify those
representations. Based on procedures performed to date, we do not expect any
additional actions to be required.
Concerning our acquisition of SMMI, we have identified three potential
Year 2000 issues. First, all of SMMI's customers require a software upgrade. We
are in the process of replacing their software with our Year 2000-ready products
and expect that this will be completed by May 1, 1999. Second, SMMI's financial
transactions network is being combined with our existing financial transactions
network, which is Year 2000 compliant, by July 1999. Third, certain financial
transaction services currently provided to a certain payer will either be
remediated or we will purchase a replacement.
Concurrently, we have contacted all third party vendors whose
proprietary tools and library products are incorporated into our products in
order to determine their respective Year 2000 readiness status. Certain of those
third parties have required actions to be taken by us. Such actions have been
performed in accordance with instructions provided by the vendor.
Finally, we have contacted our customers to inform them of our Year
2000 readiness status. Updates to that information are posted on our website
when necessary. Our website address is www.proxymed.com.
INTERNAL SYSTEMS, VENDORS AND SUPPLIERS. We have completed the
assessment phase with respect to our internal administrative systems, our
vendors and suppliers, and we are in various stages of remediation. We plan to
complete the Year 2000 compliance for these areas by the end of the third
quarter of 1999. We also plan to have contacted all of our significant clinical
and financial transaction processing partners by the end of the first quarter of
1999 in order to assess their Year 2000 readiness status.
15
<PAGE>
COSTS. Since the formation of the Year 2000 Committee in September
1998, we have spent $32,000 through December 31, 1998 primarily for personnel
costs. The total estimated budget for expenditures directly related to our Year
2000 effort is approximately $500,000. The budget includes staffing costs for
employees hired specifically to address Year 2000 issues; however, it does not
include the internal staff costs incurred or to be incurred as these costs are
considered part of the normal release structure of our products. The estimated
budget also includes hardware upgrade costs much of which would have been
incurred in our normal equipment replacement plans. As such, anticipated total
spending for the Year 2000 effort is not expected to have a significant impact
on our ongoing results of operations.
CONTINGENCY PLAN. While some "worst case scenarios" are associated with
risks outside our control (including power and communications), we have started
assessing those scenarios within our control. The Year 2000 Committee identified
the major areas of concern to be the handling of data formatting and
transmitting compliant data and our customers' usage of our software products.
To deal with some of these concerns, we have informed our financial network
users of the availability of an algorithm to allow those with non-compliant
formats to continue transmitting to payers in a Year 2000 compatible format.
During the second quarter of 1999, we will be formulating documented scenarios
for our customer service representatives to assist our hardware and software
users if they have Year 2000 related issues.
We expect that by the fourth quarter 1999 we will have a documented
business continuity plan to cover all aspects of our customer and internal
concerns, including our products and services, alternative vendors/suppliers,
backup power sources and staffing issues to assure coverage immediately before
and after the millennium. However, due to the general uncertainty inherent in
the Year 2000 issue, there can be no assurance that all Year 2000 problems will
be foreseen and corrected on a timely basis.
FORWARD-LOOKING STATEMENTS. The foregoing Year 2000 discussion and the
information contained herein are provided as a "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act of 1998
(Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements, including without limitation,
anticipated costs and the dates by which we expect to complete certain
actions, are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third parties
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the ability to identify and remediate all relevant systems, results
of Year 2000 testing, adequate resolution of Year 2000 issues by governmental
agencies, businesses and other third parties who are outsourcing service
providers, suppliers, and vendors of ours, unanticipated system costs, the
adequacy of and the ability to implement contingency plans and uncertainties.
The "forward-looking statements" made in the foregoing Year 2000 discussion
speak only as of the date on which such statements are made, and we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events.
16
<PAGE>
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document contains "forward-looking statements" within the meaning
of the federal securities laws. These forward-looking statements include
assumptions, beliefs and opinions relating to our growth strategy based upon our
interpretation and analysis of healthcare industry trends and management's
ability to successfully develop, implement, market and sell our secure network
transaction processing services, software programs, clinical databases and
financial transaction services to physicians and other healthcare providers.
This strategy assumes that physicians will prefer "one-stop shopping" for our
products and services and that we will be able to successfully develop, acquire,
maintain and upgrade competitive clinical and financial transaction sets and
successfully integrate them with our existing products and services. This
strategy also assumes that we will be able to successfully develop and execute
our strategic relationships, especially with the providers of information
systems to physicians under our electronic partnership program and with medical
laboratories, pharmacy chains, independent pharmacy owners and pharmacy
information system vendors. Many known and unknown risks, uncertainties and
other factors, including general economic conditions, healthcare reform
initiatives, millennium compliance issues that may arise, and risk factors
detailed from time to time in our Securities and Exchange Commission filings,
may cause these forward-looking statements to be incorrect, and may cause actual
results to be materially different from any future results expressed or implied
by these assumptions, opinions and beliefs. We expressly disclaim any intent or
obligation to update any forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules are included herein beginning at
Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTSON 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.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Harold S. Blue 37 Chairman of the Board, Chief
Executive Officer
John Paul Guinan 38 Co-President and Director
Bennett Marks 50 Co-President, Chief Financial
Officer and Director
James Pickering 44 Co-President and Chief
Operating Officer
Frank M. Puthoff 53 Executive Vice President,
Chief Legal Officer and
Secretary
Bruce S. Roberson 50 Executive Vice President -
Sales and Marketing
Samuel X. Kaplan(2) 76 Director
Bertram J. Polan(1)(2) 47 Director
Peter A. A. Saunders(1)(2) 57 Director
Eugene R. Terry(1) 60 Director
<FN>
- --------------------------
(1) Member of the Audit Committee, the Chairman of which is Mr. Saunders.
(2) Member of the Compensation Committee, the Chairman of which is Mr. Polan.
</FN>
</TABLE>
HAROLD S. BLUE joined ProxyMed in 1993 and currently serves as
Chief Executive Officer and Chairman of the Board. From 1992 to 1996, Mr. Blue
was also President and Chief Executive Officer of Health Services Inc., a
physician practice management company which was sold to InPhyNet Medical
Management, Inc. From 1979 to 1984, Mr. Blue was President and Chief Executive
Officer of Budget Drugs, Inc., a retail discount pharmacy chain located in South
Florida. In September 1984, Mr. Blue founded Best Generics, Incorporated. Best
Generics was later sold to pharmaceutical manufacturer, Ivax Corporation, where
Mr. Blue served as a member of Ivax's Board of Directors from 1988 to 1990. He
currently serves as a director of three publicly-held companies, iMall, Inc.,
the largest independent mall on the Internet, Windsor Capital Corp., a specialty
regional mall based retailer, and AccuMed International, Inc., a global
diagnostics information company.
JOHN PAUL GUINAN has been Co-President and a director of the Company
since June 1995. He was its Chief Operating Officer from August 1996 to January
1998. He was an Executive Vice President of the Company from July 1993 until
June 1995. From March 1993 to June 1993, Mr. Guinan was the Chief Executive
Officer and co-founder of ProxyScript, Inc. (f/k/a Medical
18
<PAGE>
Containment Systems, Inc.), which the Company acquired in June 1993. From 1989
until April 1993, Mr. Guinan founded and developed two companies: The Desktop
Professionals, Inc., a company which supplied automation systems to South
Florida professional offices; and POSitive Thinking, Inc., a software
development company which specialized in point of sale systems.
BENNETT MARKS was appointed Co-President in November 1998 and has been
Executive Vice President - Finance, Chief Financial Officer and a director of
the Company since October 1993. From May 1991 to October 1993, Mr. Marks was
Vice President - Finance and a director of another public company engaged in the
manufacturing and marketing of network management systems for use by
telecommunication companies. From 1981 to April 1991, Mr. Marks was an audit
partner with KPMG, an international accounting and consulting firm. While with
KPMG, Mr. Marks was the partner on audits of numerous public companies and
served as an Associate SEC Reviewing Partner. He also served as the
Administrative Partner in charge of KPMG's West Palm Beach office. Mr. Marks is
a certified public accountant.
JAMES PICKERING was appointed Co-President in November 1998 and was
appointed Executive Vice President-Operations and Chief Operating Officer in
January 1998. From September 1995 to January 1998, Mr. Pickering served as
President of Med-Link Technologies, Inc., a healthcare EDI transaction company
and a subsidiary of SPS Payment Systems, Inc., a New York Stock Exchange company
and affiliate of Morgan Stanley, Dean Witter Discover and Co. From October 1991
to September 1995, Mr. Pickering was Vice President-Systems for National
Electronic Information Corporation (NEIC), also a healthcare EDI transaction
company. Prior to that, Mr. Pickering served as a consultant for Metropolitan
Life Insurance Company and the Prudential Insurance Company designing and
implementing claims administration, utilization review and managed care
capitation systems.
FRANK M. PUTHOFF was appointed Executive Vice President, Chief Legal
Officer and Secretary of the Company in August 1996. From July 1994, he was Vice
President, General Counsel and Secretary for Miami Subs Corporation. Between
July 1990 and July 1994, he held several executive positions with Ground Round
Restaurants, Inc., an affiliate of Hanson PLC, serving most recently as Senior
Vice President, General Counsel and Secretary. Prior thereto, he served as
Division Counsel for PepsiCo, Inc. and held various executive positions with
Marriott Corporation.
BRUCE S. ROBERSON was appointed Executive Vice President - Sales and
Marketing of the Company in October 1996. From June 1994 to October 1996, he
served as Vice President - Sales and Marketing for Health Care Information for
National Data Corporation, a healthcare EDI transaction company. From December
1993 to June 1994, he was Director of Business Development for First Consulting
Group and from September 1990 to December 1993, he was Vice President of Sales
and Marketing for IBAX Healthcare, a joint venture of International Business
Machine Corp. and Baxter International, Inc., which marketed healthcare
information systems. From 1988 to September 1990, he was manager of the Florida
operations of the American Express Health Systems Group and from June 1984 to
November 1988, he was Senior Sales Executive of McDonald Douglas Health Systems
Company.
SAMUEL X. KAPLAN has been a director of the Company since August 1995.
Since 1987, Mr. Kaplan has been a healthcare management consultant. He has also
been the President of U.S. Care, Inc., a California-based company which designs
and administers long-term care insurance programs, since 1987, when he
19
<PAGE>
founded that company. In 1962, he founded U.S. Administrators, Inc., a
healthcare management company, which he served as President and Chairman until
1987.
BERTRAM J. POLAN has been a director of the Company since August 1995.
Mr. Polan is the founder and President of Gemini Bio-Products, Inc., a
California-based supplier of biological products used in medical schools,
private medicine research institutes and the bio-technology industry, which he
founded in 1985. From 1973 to 1985, Mr. Polan was employed in various executive
capacities, most recently as vice president of sales and marketing, with North
American Biologicals, Inc., one of the world's largest independent providers of
human plasma products.
PETER A. A. SAUNDERS, F.R.S.A. (Fellow of Royal Society of Arts) is the
owner and Chairman of Pass Consultants, a marketing and business consulting firm
he founded in Surrey, England in 1988. From 1992 through 1994, he also served as
Managing Director of United Artist Communications (London-U.K.), Ltd. From 1959
to 1984, Mr. Saunders held various executive and directorship positions with
Allders Department Stores, a subsidiary of United Drapery Department Stores
Group, and, after its acquisition by Hanson Trust, P.L.C. in 1984, continued as
a Director until 1988. Since 1989, Mr. Saunders has been serving as a Director
of Theragenics Corporation, a public company specializing in the treatment of
prostate cancer located in Norcross, Georgia; as a non-executive Director of
Mayday Healthcare NHS Trust, a 700-bed hospital in Surrey, England from 1992
to 1998; and as a non-executive Director of Eurobell (Sussex) Limited, a United
Kingdom cable television and telecommunications company from 1993 to 1998.
EUGENE R. TERRY has been a director of the Company since August 1995.
Mr. Terry is a pharmacist and the founder and Chairman of Bloodline, Inc., a New
Jersey-based company engaged in the blood services business, which he founded in
1980. In 1971, Mr. Terry founded Home Nutritional Support, Inc. ("HNSI"), one of
the first companies established in the home infusion industry. In 1984, HNSI was
sold to Healthdyne, Inc. HNSI was later sold to the W.R. Grace Group. From 1975
to 1984, Mr. Terry was also founder and Chief Executive Officer of Paramedical
Specialties, Inc., a respiratory and durable medical equipment company, which
was also sold to Healthdyne, Inc.
AUDIT COMMITTEE - Our Audit Committee consists of three non-employee
directors: Peter A. A. Saunders (Chair), Bertram J. Polan and Eugene R. Terry.
The Audit Committee is responsible for meeting with representatives of our
independent accountants and with representatives of senior management to review
the general scope of our annual audit, matters relating to internal audit
control systems and the fee charged by the independent accountants. In addition,
the Audit Committee is responsible for reviewing and monitoring the performance
of non-audit services by our independent accountants and for recommending the
engagement or discharge of our independent accountants.
COMPENSATION COMMITTEE - Our Compensation Committee consists of three
non-employee directors: Bertram J. Polan (Chair), Samuel X. Kaplan and Peter A.
A. Saunders. The Compensation Committee is responsible for approving and
reporting to the Board on the annual compensation for all officers, including
salary, stock options and other consideration, if any. The Committee is also
responsible for granting stock awards, stock options and other awards to be made
under our existing plans.
20
<PAGE>
Directors are elected annually at our annual meeting of shareholders.
Each director serves until his successor is elected and qualified or until the
earlier death, resignation, removal or disqualification of the director. The
officers are elected annually by the directors.
We have "key person" life insurance policies on the lives of Mr. Blue
and Mr. Guinan in the amount of $1,000,000 each.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 (the "Exchange
Act") requires our officers and directors, and persons who own more than 10% of
the registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC").
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file.
Based on our review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, we believe that, during our fiscal year ended
December 31, 1998, all filing requirements applicable to our officers and
directors, and greater than 10% beneficial owners were complied with, except
that we have not received from Bellingham Industries Inc. a Form 5 or a written
representation that no Form 5 is required.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during
the past three fiscal years to our Chief Executive Officer and our other four
most highly compensated executive officers with annual compensation for such
years over $100,000 (the "named executive officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
----------------------------------------
LONG-TERM COMPENSATION
- -------------------------- ------ ------------------------------------- ----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ----------------------------- ----------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
- --------------------- ---- ------ ----- ------- -------- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harold S. Blue 1998 145,033 -- -- -- -- -- --
Chairman and CEO 1997 125,000 -- -- -- -- -- --
1996 100,983 -- -- -- 150,000 -- --
John Paul Guinan 1998 163,943 15,063 -- -- -- -- --
Co-President 1997 125,000 -- -- -- -- -- --
1996 127,792 -- -- -- 15,000 -- --
Bennett Marks 1998 145,305 20,000 -- -- 20,000 -- --
Co-President and CFO 1997 128,646 15,000 -- -- -- -- --
1996 107,542 -- 10,625(1) -- 86,250 -- --
James H. Pickering 1998 165,456(2) 10,000 47,182(4) -- 130,000 -- --
Co-President and
COO
Bruce S. Roberson 1998 177,693 55,063 -- -- 20,000 -- --
Exec. V.P. 1997 180,000 50,000 22,506(4) -- -- -- --
1996 30,000(3) -- 24,759(4) -- 100,000 -- --
- -------------------------- ------ -------------- --------- ------------ --------------- ------------- ---------- -------------
</TABLE>
21
<PAGE>
(1) Mr. Marks received a non-accountable expense allowance of $15,000 (net of
taxes) per year through September 15, 1996.
(2) Mr. Pickering joined us on January 5, 1998.
(3) Mr. Roberson joined us on October 28, 1996.
(4) Consists of reimbursement of relocation expenses.
The following table provides information on stock option grants during
fiscal year 1998 to each of the named executive officers:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
OPTION TERM
- ---------------------------------------------------------------------------------------------------------------------
# OF % OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE OR
UNDERLYING GRANTED TO BASE PRICE
OPTIONS/ EMPLOYEE IN EXPIRATION
NAME SARS GRANTED FISCAL YEAR DATE 5% 10%
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Harold S. Blue -- -- -- -- -- --
John Paul Guinan -- -- -- -- -- --
Bennett Marks 20,000 5% $7.19 9/1/08 $ 90,435 $ 229,180
James H. Pickering 100,000 26% $7.00 1/5/08 $440,226 $1,115,620
James H. Pickering 30,000 8% $7.19 9/1/08 $135,653 $ 343,770
Bruce S. Roberson 20,000 5% $7.19 9/1/08 $ 90,435 $ 229,180
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth certain information concerning
unexercised options held by each of the named executive officers:
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FY-END (#) OPTIONS/SARS AT FY-END ($)*
---------------------------------------------------------------------
# OF SHARES
ACQUIRED ON $ VALUE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harold S. Blue 30,000 $266,400 150,000 -- $1,171,500 --
John Paul Guinan -- -- 217,500 -- $1,571,775 --
Bennett Marks 60,000 $190,200 101,250 20,000 $ 681,263 $ 82,400
James H. Pickering -- -- 17,000 113,000 $ 73,270 $481,330
Bruce S. Roberson -- -- 100,000 20,000 $ 437,000 $ 87,400
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
*Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end market
value of the common stock, which was $11.31 on December 31, 1998.
</FN>
</TABLE>
There were no awards made to named executive officers in the last
completed fiscal year under any long-term incentive plan for performance to
occur over a period longer than one fiscal year. We do not have any defined
benefit or actuarial plans for our employees. No stock options for named
executive officers were amended, cancelled, replaced or otherwise repriced
during the past ten years.
COMPENSATION OF DIRECTORS
Our employee directors are not compensated for their services as
directors. Outside directors receive $2,000 for each regularly scheduled board
meeting personally attended, $500 for each telephonic board meeting, and $500
each quarter for each committee a director is a member. All directors are
reimbursed for reasonable expenses incurred in attending board meetings.
22
<PAGE>
In addition, non-employee directors receive stock options under the 1995 Outside
Plan (described below) upon the directors' initial election or appointment to
the Board of Directors. In 1995 and 1996, Messrs. Kaplan, Polan and Terry, upon
joining the Board, were each granted options to purchase 75,000 shares of common
stock at an exercise price equal to the market price on the date of grant. These
options are now fully vested and expire five years after the dates of grant.
Upon joining the Board in 1998, Mr. Saunders received 20,000 options at $7.19
price per share. Half of these options vested in September 1998, and the other
half vest in September 1999. These options expire ten years after the date of
grant.
EMPLOYMENT AGREEMENTS WITH THE NAMED EXECUTIVE OFFICERS
On April 1, 1996, we entered into an employment agreement with Mr. Blue
for a period of three years, which is automatically extended from year to year
unless terminated by either party upon 60 days' written notice. Mr. Blue
receives an annual base salary of $200,000 and is entitled to such bonuses as
may be awarded from time to time by the Board of Directors and to participate in
any stock option or bonus plans which we may now have or in the future develop.
Mr. Blue may be terminated for "cause," as defined in the agreement. If he is
terminated for cause, he will be entitled to base salary earned, and he will
retain all vested stock options which shall remain exercisable for 90 days after
the date of termination. If he is terminated "without cause," then he will be
entitled to receive an amount equal to his base salary plus bonus, if any, and
continuation of health insurance for six months following termination. In
addition, the agreement contains confidentiality and non-competition covenants.
Mr. Guinan has an employment agreement with us for a three-year term commencing
on December 5, 1995, which is substantially similar to Mr. Blue's, with an
annual base salary of $180,000. The employment agreement was renewed by its
terms for an additional year.
In November 1996, we entered into employment agreements with Mr. Marks
and Mr. Roberson. In November 1997, we entered into an employment agreement with
Mr. Pickering. The agreements are for a three-year term and automatically extend
from year to year thereafter unless terminated by us upon 90 days written notice
or by the employee upon 30 days written notice prior to the end of the initial
term or any extension. They receive an annual base salary of $180,000, $180,000
and $200,000, respectively, and are entitled to such bonuses as may be awarded
from time to time and to participate in any stock option or bonus plans which we
may now have or in the future develop. They may be terminated for "cause" as
defined in their agreements. If terminated for cause, they will be entitled to
base salary earned, and they will retain all vested stock options which shall
remain exercisable for 90 days after the date of termination. If, upon 90 days
prior written notice, they are terminated "without cause," they will be entitled
to receive an amount equal to their base salary plus bonus, if any, and
continuation of health insurance for six months following termination, plus any
unvested options shall vest. In addition, the agreements contain confidentiality
and non-competition covenants.
LIABILITY AND INDEMNIFICATION OF OUR DIRECTORS AND OFFICERS
We have entered into indemnification agreements with each of our
directors and executive officers limiting their personal liability for monetary
damages for breach of their fiduciary duties as officers and directors, except
for liability that cannot be eliminated under the Florida Business Corporation
Act. The Florida Business Corporation Act provides that
23
<PAGE>
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duty as directors, except for liability (i) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (ii) for any unlawful payment of a dividend or
unlawful stock repurchase or redemption, as provided in Section 607.0834 of the
Florida Business Corporation Act, (iii) for any transaction from which the
director derived an improper personal benefit, or (iv) for a violation of
criminal law. Our Restated Articles of Incorporation and Bylaws also provide
that we shall indemnify our directors and officers to the fullest extent
permitted by Section 607.0831 of the Florida Business Corporation Act, including
circumstances in which indemnification is otherwise discretionary. We have
procured and maintains a policy of insurance under which our directors and
officers are insured, subject to the limits of the policy, against certain
losses arising from claims made against such directors and officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of March 5, 1999, with respect to (i) each
person known to us to be the beneficial owner of more than 5% of our common
stock, (ii) each director, (iii) each executive officer named in the Summary
Compensation Table, and (iv) all of our directors and officers as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS(1) # OF SHARES (2) % OF CLASS
- ---------------- --------------- ----------
<S> <C> <C>
Harold S. Blue(3) 794,132 4.4%
John Paul Guinan(4) 217,500 1.2%
Bennett Marks(5) 169,750 *
James H. Pickering(4) 34,000 *
Frank M. Puthoff(4) 54,779 *
Bruce S. Roberson(4) 100,000 *
Samuel X. Kaplan(4) 75,000 *
Bertram J. Polan(6) 82,500 *
Peter A. A. Saunders(7) 20,000 *
Eugene R. Terry(4) 75,000 *
Bellingham Industries Inc.(8) 6,514,842 36.1%
Urraca Building
Frederico Boyd Avenu
Panama City, Panama
All directors and officers 4,839,563 25.6%
as a group (30 persons)(9)
</TABLE>
- --------------------------
*Less than 1%
24
<PAGE>
(1) The address for each person, unless otherwise noted, is 2555 Davie Road,
Suite 110, Fort Lauderdale, Florida 33317-7424.
(2) In accordance with Rule 13d-3 of the Exchange Act, shares that are not
outstanding, but that are subject to options, warrants, rights or conversion
privileges exercisable within 60 days from March 5, 1999, have been deemed
to be outstanding for the purpose of computing the percentage of outstanding
shares owned by the individual having such right, but have not been deemed
outstanding for the purpose of computing the percentage for any other
person.
(3) Includes 644,132 shares held of record, and 150,000 shares issuable upon the
exercise of currently exercisable stock options.
(4) Represents shares issuable upon the exercise of currently exercisable stock
options.
(5) Includes 68,500 shares held of record, and 101,250 shares issuable upon the
exercise of currently exercisable stock options.
(6) Includes 7,500 shares held of record, and 75,000 shares issuable upon
exercise of currently exercisable stock options.
(7) Includes 10,000 held of record, plus 10,000 shares issuable upon exercise of
currently exercisable stock options.
(8) Includes 6,264,842 shares held of record, and 250,000 shares issuable upon
the exercise of currently exercisable stock options. Share amounts were
determined by ProxyMed from sources we believe to be reliable.
(9) Includes 3,717,592 shares held of record, and 1,121,971 shares issuable upon
the exercise of currently exercisable stock options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 30, 1997, we loaned a total of $350,000 to Mr. Blue. The funds
were advanced pursuant to two demand promissory notes with recourse in the
principal amounts of $290,000 and $60,000, respectively, each bearing interest
at a rate of 7-3/4% per year. Mr. Blue has agreed to collateralize the notes
pursuant to pledges of securities, including shares of our common stock,
satisfactory to our Board of Directors.
On September 1, 1998, we loaned Mr. Marks a total of $259,800 in
connection with his exercise of certain stock options that were to expire in
lieu of selling his stock to the public in a cashless exercise. The funds were
advanced pursuant to a promissory note with recourse bearing interest at the
rate of 5% per year. The promissory note is collateralized pursuant to a Stock
Pledge Agreement with 60,000 shares of our stock owned by Mr. Marks.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a) (1) The following financial statements are included in
Part II, Item 8:
Consolidated Financial Statements
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1998 F-3
and 1997
Consolidated Statement of Operations - Years Ended F-4
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity - F-5
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended F-6
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-7 - F-22
(2) The following schedule for the years 1998 and 1997 are
submitted herewith:
Report of Independent Accountants F-23
Schedule II - Valuation and Qualifying Accounts - F-24
Years Ended December 31, 1998 and 1997
(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 28 through 30.
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, a Form 8-K report was
filed by ProxyMed with the Securities and Exchange Commission
on January 14, 1999, reporting an event dated December 31,
1998, regarding the exchange of common stock and merger with
Key.
</TABLE>
26
<PAGE>
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 15, 1999 PROXYMED, INC.
By: /s/ HAROLD S. BLUE
---------------------------------------
Harold S. Blue, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities 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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ HAROLD S. BLUE Chairman of the Board and Chief March 15, 1999
- ---------------------------- Executive Officer (principal
Harold S. Blue executive officer)
/s/ JOHN PAUL GUINAN Co-President and Director March 15, 1999
- ---------------------------
John Paul Guinan
/s/ BENNETT MARKS Co-President, Chief Financial March 15, 1999
- ---------------------------- Officer and Director (principal
Bennett Marks financial and accounting officer)
/s/ SAMUEL X. KAPLAN Director March 15, 1999
- ---------------------------
Samuel X. Kaplan
/s/ BERTRAM J. POLAN Director March 15, 1999
- ---------------------------
Bertram J. Polan
/s/ PETER A. A. SAUNDERS Director March 15, 1999
- ----------------------------
Peter A. A. Saunders
/s/ EUGENE R. TERRY Director March 15, 1999
- ---------------------------
Eugene R. Terry
</TABLE>
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- -----------
<S> <C>
3.1 Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form SB-2, File No. 333-2678).
3.2 Bylaws, as amended (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form SB-2,
File No. 333-2678).
10.1 License Agreement between the Company and Blue Cross and Blue Shield of Massachusetts, Inc., dated March
1, 1996 (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form SB-2, File No.
333-2678).
10.2 Strategic Marketing Agreement among the Company, IntePlex, Inc. and Bergen Brunswig Drug Company dated
February 1, 1996 (incorporated by reference to Exhibit 1 of Form 8-K, File No. 000-22052, reporting an
event dated February 1, 1996).
10.3 Agreement for Acquisition of Stock between the Company and National Health Care Affiliates, Inc. dated
September 6, 1995 (incorporated by reference to Exhibit 1 of Form 8-K, File No. 000-22052, reporting an
event dated August 28, 1996).
10.4 Asset Purchase Agreement between the Company and Eckerd Corporation (incorporated by reference to
Exhibit 1 to the Form 8-K, File No. 000-22052, reporting an event dated February 7, 1995).
10.5 *Employment Agreement between the Company and Harold S. Blue (incorporated by reference to Exhibit 3.1 of
the Registration Statement on Form SB-2, File No. 333-2678).
10.6 *Employment Agreement between the Company and John Paul Guinan (incorporated by reference to
Exhibit 3.1 of the Registration Statement on Form SB-2, File No. 333-2678).
10.7 *Employment Agreement between the Company and Bennett Marks dated November 11, 1996 (incorporated by
reference to Exhibit 10.7 of the Form 10-KSB for the period ending December 31, 1996).
10.8 Asset Purchase Agreement between the Company and Clinical MicroSystems, Inc. and Glenn Gilchrist
(incorporated by reference to Exhibit 1 of Form 8-K, File No.000-22052, reporting an event dated
March 14, 1997).
10.9 *Employment Agreement between the Company and Frank M. Puthoff dated November 11, 1996 (incorporated by
reference to Exhibit 10.7 of the Form 10-KSB for the period ending December 31, 1996).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.10 *Amended 1993 Stock Option Plan (incorporated by reference to Exhibit A of the Company's Proxy Statement
for its 1994 Annual Meeting of Shareholders).
10.11 *1995 Stock Option Plan (incorporated by reference to Exhibit 3.1 of the Registration Statement on Form
SB-2, File. No. 333-2678).
10.12 *1995 Outside Director Stock Option Plan (incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form SB-2, File No. 333-2678).
10.13 *Employment Agreement between the Company and Bruce Roberson dated October 17, 1996 (incorporated by
reference to Exhibit 10.1 of the 10-QSB for the period ending September 30, 1996).
10.14 Form of Indemnification Agreement for All Officers and Directors (incorporated by reference to
Exhibit 10.3 of the 10-QSB for the period ending September 30, 1996).
10.15 Stock Purchase Agreement between the Company and WPJ, Inc. and Robert Weinberger and Mark Pehl
(incorporated by reference to Exhibit 2.1 of Form 8-K, File No. 000-22052, reporting an event dated
May 19, 1998).
10.16 Asset Purchase Agreement between the Company and Hayes Computer Systems, Inc. and Danny Hayes
(incorporated by reference to Exhibit 1 of Form 8-K, File No. 000-22052, reporting an event dated
April 30, 1997).
10.17 Asset Purchase Agreement between the Company and U.S. HealthData Interchange, Inc. (incorporated by
reference to Exhibit 2.1 of Form 8-K, File No. 000-22052, reporting an event dated November 19, 1997).
10.18 *1997 Stock Option Plan (incorporated by reference to Exhibit A of the Company's Proxy Statement for its
1997 Annual Meeting of Shareholders).
10.19 *Employment Agreement between the Company and James Pickering dated November 10, 1997 (incorporated by
reference to Exhibit 10.19 of the 10-K for the period ending December 31, 1997).
10.20 Agreement and Plan of Merger between ProxyMed Acquisition Corp., Key Communications Service, Inc.,
Jeff K. Carpenter, A. Thomas Hardy and Carl W. Garmon (incorporated by reference to Exhibit 2.1 of
Form 8-K,. File #000-22052, reporting an event dated December 31, 1998).
10.21 *Employment Agreement between the Company and Jeff K. Carpenter dated December 31, 1998 (incorporated by
reference to Exhibit 2.5 of Form 8-K, File No. 000-22052, reporting an event on December 31, 1998).
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.22 Asset Purchase Agreement between ProxyMed and Specialized Medical Management, Inc. and its parent, Texas
Health Management Services, Inc., dated January 12, 1999.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
</TABLE>
- ---------------------------------
*Denotes employment agreement or compensatory plan.
30
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1998 and 1997 F-3
Consolidated Statements of Operations - F-4
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity - F-5
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - F-6
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-7 - F-22
Financial Statement Schedule
Report of Independent Accountants F-23
Schedule II - Valuation and Qualifying Accounts - F-24
Years Ended December 31, 1998 and 1997
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
February 19, 1999
To the Stockholders of ProxyMed, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of ProxyMed,
Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
F-2
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,681,671 $ 2,654,423
Accounts receivable - trade, net of allowance for
doubtful accounts of $594,854 and $242,549, respectively 6,383,996 2,364,455
Other receivables 463,894 826,998
Inventory 2,970,210 1,202,431
Other current assets 254,979 319,838
------------ ------------
Total current assets 14,754,750 7,368,145
Property and equipment, net 4,335,944 2,323,174
Goodwill, net 15,539,821 4,338,515
Purchased technology, capitalized software and
other intangible assets, net 13,654,399 5,530,226
Other assets 551,660 43,061
------------ ------------
Total assets $ 48,836,574 $ 19,603,121
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 498,453 $ 735,980
Accounts payable and accrued expenses 6,244,631 4,239,073
Deferred revenue 447,178 426,686
------------ ------------
Total current liabilities 7,190,262 5,401,739
Long-term debt 667,193 1,049,630
Long-term deferred revenue 700,000 --
------------ ------------
Total liabilities 8,557,455 6,451,369
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock - $.001 par value. Authorized
50,000,000 shares; issued and outstanding
17,808,172 and 11,781,872 shares (after deducting
110,000 shares in treasury in 1997), respectively 17,808 11,782
Additional paid-in capital 82,427,262 42,695,386
Accumulated deficit (41,906,151) (29,555,416)
Note receivable from stockholder (259,800) --
------------ ------------
Total stockholders' equity 40,279,119 13,151,752
------------ ------------
Total liabilities and stockholders' equity $ 48,836,574 $ 19,603,121
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Services and license fees $ 18,562,066 $ 3,073,085 $ 1,433,505
Computer systems, prescription drugs
and other tangible goods 19,205,611 7,858,884 1,620,646
------------ ------------ ------------
37,767,677 10,931,969 3,054,151
------------ ------------ ------------
Costs and expenses:
Cost of services and license fees 3,316,068 726,800 59,722
Cost of tangible goods 13,208,278 6,150,680 1,267,701
Selling, general and administrative expenses 22,874,079 13,293,353 5,709,433
Depreciation and amortization 8,881,273 1,078,300 322,588
In-process research and development technology 742,623 8,467,098 --
Merger related expenses 426,970 -- --
------------ ------------ ------------
49,449,291 29,716,231 7,359,444
------------ ------------ ------------
Operating loss (11,681,614) (18,784,262) (4,305,293)
Other income (expense):
Gain on sale of assets -- -- 1,014,989
Interest, net (106,571) 267,140 436,569
------------ ------------ ------------
Net loss (11,788,185) (18,517,122) (2,853,735)
Dividends on cumulative preferred stock -- -- 95,803
------------ ------------ ------------
Net loss applicable to
common shareholders $(11,788,185) $(18,517,122) $ (2,949,538)
============ ============ ============
Weighted average common shares outstanding 15,653,374 10,589,333 7,660,383
============ ============ ============
Basic and diluted net loss per share of common stock $ (.75) $ (1.75) $ (.39)
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK NOTE
---------------- ---------------------- RECEIVABLE
NUMBER PAR NUMBER PAR ADDITIONAL ACCUMULATED FROM
OF SHARES VALUE OF SHARES VALUE PAID-IN CAPITAL DEFICIT STOCKHOLDER TOTAL
------- ----- ----------- -------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 83,000 $ 830 4,945,595 $ 4,946 $ 10,772,403 $ (8,184,559) $ -- $ 2,593,620
Sale of common stock, net
of expenses of $1,831,816 -- -- 3,367,500 3,367 13,037,942 -- -- 13,041,309
Exercise of stock options
and warrants -- -- 432,610 433 1,860,469 -- -- 1,860,902
Common stock issued
for services -- -- 15,000 15 55,985 -- -- 56,000
Compensatory stock options -- -- -- -- 300,172 -- -- 300,172
Preferred stock dividends -- -- -- -- (82,963) -- -- (82,963)
Conversion of preferred
stock to common stock (83,000) (830) 780,905 781 49 -- -- --
Net loss -- -- -- -- -- (2,853,735) -- (2,853,735)
------- ----- ----------- -------- ------------ ------------ --------- ------------
Balances, December 31, 1996 -- -- 9,541,610 9,542 25,944,057 (11,038,294) -- 14,915,305
Sales of common stock, net
of expenses of $664,863 -- -- 1,625,000 1,625 13,389,762 -- -- 13,391,387
Exercise of stock options
and warrants -- -- 211,261 211 1,102,440 -- -- 1,102,651
Common stock issued for
acquired businesses -- -- 514,001 514 2,055,937 -- -- 2,056,451
Warrants issued for acquisition
of assets -- -- -- -- 731,938 -- -- 731,938
Compensatory stock options -- -- -- -- 26,100 -- -- 26,100
Purchase of treasury stock -- -- (110,000) (110) (554,848) -- -- (554,958)
Net loss -- -- -- -- -- (18,517,122) -- (18,517,122)
------- ----- ----------- -------- ------------ ------------ --------- ------------
Balances, December 31, 1997 -- -- 11,781,872 11,782 42,695,386 (29,555,416) -- 13,151,752
Sales of common stock, net
of expenses of $1,091,360 -- -- 3,013,416 3,013 29,115,492 -- -- 29,118,505
Exercise of stock options
and warrants -- -- 422,639 423 1,711,077 -- (259,800) 1,451,700
Common stock issued for pooled
and acquired businesses -- -- 2,590,245 2,590 5,287,894 554,848 -- 5,845,332
Retirement of debt for
pooled company -- -- -- -- 3,015,505 -- -- 3,015,505
Tax distributions for
pooled company -- -- -- -- (515,490) -- -- (515,490)
Reclassification of retained
earnings of pooled
company upon termin-
ation of S Corporation
tax status -- -- -- -- 1,117,398 (1,117,398) -- --
Net loss -- -- -- -- -- (11,788,185) -- (11,788,185)
------- ----- ----------- -------- ------------ ------------ --------- ------------
Balances, December 31, 1998 -- $-- 17,808,172 $ 17,808 $ 82,427,262 $(41,906,151) $(259,800) $ 40,279,119
======= ===== =========== ======== ============ ============ ========= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,788,185) $(18,517,122) $ (2,853,735)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,977,127 1,078,300 322,588
Acquired in-process research and
development technology 742,623 8,467,098 --
Provision for doubtful accounts 355,757 76,963 8,105
Amortization of covenant not-to-compete (20,000) (80,000) (80,000)
Write-off of retired assets -- 363,237 --
Compensatory options and warrants issued -- 26,100 300,172
Common stock issued for services -- -- 56,000
Gain on sale of assets -- -- (1,014,989)
Changes in assets and liabilities, net of effect of acquisitions and
dispositions:
Accounts and other receivables (2,004,119) (1,126,398) (203,113)
Inventory (336,054) (570,027) 42,299
Accounts payable and accrued expenses (1,657,362) 1,839,643 (58,102)
Deferred revenue 626,304 (323,861) (115,000)
Other, net 187,622 (60,278) 46,660
------------ ------------ ------------
Net cash used in operating activities (4,916,287) (8,826,345) (3,549,115)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (19,933,922) (9,909,551) --
Payment of prior acquisition contingency (500,000) -- --
Capital expenditures (1,526,060) (1,386,154) (665,891)
Purchased technology and capitalized software (510,132) (3,182,288) (570,557)
Purchases of U.S. Treasury Notes -- -- (8,541,153)
Maturities of U.S. Treasury Notes -- 6,008,698 2,532,455
Proceeds from sale of dispensary assets -- -- 1,300,000
Proceeds from sale of subsidiary -- -- 649,275
------------ ------------ ------------
Net cash used in investing activities (22,470,114) (8,469,295) (5,295,871)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from sale of equity securities 29,118,505 13,391,387 13,041,309
Proceeds from exercise of stock options and warrants 1,451,700 1,102,651 1,860,902
Payment of notes payable, long-term debt and capital leases (1,156,556) (9,375) (417,884)
Purchase of treasury stock -- (554,958) --
Draw on line of credit -- 2,500,000 --
Repayment of line of credit -- (2,500,000) --
Payment of preferred stock dividends -- -- (82,963)
------------ ------------ ------------
Net cash provided by financing activities 29,413,649 13,929,705 14,401,364
------------ ------------ ------------
Net increase (decrease) in cash 2,027,248 (3,365,935) 5,556,378
Cash and cash equivalents at beginning of period 2,654,423 6,020,358 463,980
------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,681,671 $ 2,654,423 $ 6,020,358
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS OF THE COMPANY - ProxyMed, Inc. ("the Company") is a
healthcare information services company providing financial and
clinical electronic data interchange ("EDI") transaction processing
services and healthcare technology software products to physicians and
other healthcare providers such as nursing homes, pharmacies,
commercial and hospital laboratories, insurance companies and managed
care organizations. In addition, the Company derives revenues from
network integration services and related computer hardware sales
principally to state government agencies, sales and leasing of computer
peripheral equipment to various healthcare and non-healthcare
customers, contract manufacturing of circuit boards to non-healthcare
customers, and the dispensing of prescription drugs to patients who are
residing in long-term care facilities. The Company's products and
services are provided from its four principal operating facilities
located in Fort Lauderdale and Tallahassee, Florida; Santa Ana,
California; and New Albany, Indiana.
(b) PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany transactions have been eliminated in
consolidation.
(c) USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(d) REVENUE RECOGNITION - EDI transaction fee revenue is recorded in the
period the service is rendered. Revenue from sales of software,
software licenses, computer hardware and manufactured goods is
recognized when persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed or determinable and collectibility is
probable. The same criteria is applied to each element of multiple
element arrangements after allocating the amounts paid to individual
elements based on vendor-specific objective evidence of fair value.
Revenue from hardware leases, software rentals and maintenance fees is
recognized ratably over the applicable period. Revenue from the
Company's prescription drug dispensing activities is reported at net
realizable amounts from insurance providers and patients at the time
the individual prescriptions are delivered to the patients.
(e) 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
U.S. Treasury Notes, or in bank certificates of deposit and money
market accounts. At times, such amounts may be in excess of FDIC
insurance limits.
F-7
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(f) ACCOUNTS RECEIVABLE - Substantially all of the Company's accounts
receivable are due from various healthcare payors and providers and the
State of Florida or agencies thereof. Collateral is not required.
Credit losses are provided for in the consolidated financial statements
and have been within management's expectations.
(g) INVENTORY - Inventory consisting of component parts, materials and
supplies (used in the upgrading of peripheral computer equipment and
contract manufacturing) and finished goods (including direct labor and
overhead and consisting principally of computer peripherals, hardware
and software, and prescription drugs) 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; depreciation of revenue earning equipment
is included in cost of sales. Leasehold improvements are amortized on
the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets.
Upon sale or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the accounts and any
resulting gains or losses are reflected in other income for the period;
upon sale or retirement of revenue earning equipment, the gross
proceeds are included in net revenues and the undepreciated cost of the
equipment sold is included in cost of sales. Maintenance and repair of
property and equipment are charged to expense as incurred. Renewals and
betterments are capitalized and depreciated.
(i) INTANGIBLE ASSETS
GOODWILL - Goodwill, representing the excess of cost over the estimated
fair value of net assets acquired, is amortized on the straight-line
basis over 3 to 40 years.
OTHER INTANGIBLES - Other acquired intangible assets consisting
primarily of customer contracts and covenants-not-to-compete, and are
being amortized on a straight-line basis over their estimated useful
lives of 4 to 5 years.
The recoverability of goodwill, other intangible assets and other
long-lived assets is regularly reviewed by the Company for indications
that the carrying value may be impaired or that the useful lives
assigned are excessive. When such indications exist, the carrying value
is assessed based upon an analysis of estimated future cash flows on an
undiscounted basis and before interest charges, or useful lives are
changed prospectively.
F-8
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
PURCHASED TECHNOLOGY AND CAPITALIZED SOFTWARE - The Company has
recorded amounts related to various software and technology that it has
purchased or capitalized both for external sale to its customers or for
its own internal systems use. Certain computer software costs for
external sale are capitalized and are reported at the lower of
unamortized cost or net realizable value. Such costs are capitalized
when they are related to a product which has achieved technological
feasibility or that has an alternative future use, and are amortized
over their estimated useful lives, generally over 3 to 5 years. Costs
for computer software used for the Company's own internal systems are
capitalized during the application development stage and are
periodically evaluated by the Company for indications that the carrying
value may be impaired or that the useful lives assigned may be
excessive. Such software is being amortized over its estimated useful
life of 3 years. Amortization of purchased technology and capitalized
software was $3,261,000 in 1998, $251,000 in 1997 and $21,000 in 1996.
Management believes that future revenues related to these projects will
be sufficient to realize the amounts capitalized at December 31, 1998,
and as such these amounts will be recovered over the lives of the
related projects. It is reasonably possible, however, that those
estimates of future revenues could be adversely impacted if these
projects are not released timely or if the market acceptance of the
related technology is not what is anticipated by management. As a
result, the recoveries of these capitalized costs through future
revenues could be reduced materially.
Accumulated amortization of goodwill at December 31, 1998 and 1997 is
$4,110,731 and $104,066, respectively. Accumulated amortization of
purchased technology, capitalized software and other intangible assets
at December 31, 1998 and 1997 is $3,725,022 and $291,957, respectively.
(j) RESEARCH AND DEVELOPMENT - Software development costs incurred prior to
achieving technological feasibility are charged to research and
development expense when incurred. Research and development expense was
approximately $2,978,000 in 1998, $1,908,000 in 1997, and $177,000 in
1996, respectively.
(k) INCOME TAXES - The Company provides for income taxes pursuant to the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Deferred income taxes are
determined based upon differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected
to reverse. Deferred tax assets are also established for the future tax
benefits of loss and credit carryovers. Valuation allowances are
established for deferred tax assets when, based on the weight of
available evidence, it is deemed more likely than not that such amounts
will not be realized.
F-9
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(l) NET LOSS PER SHARE - Basic loss per share of common stock is computed
by dividing net loss applicable to common shareholders by the weighted
average shares of common stock outstanding during the year. Diluted per
share results reflect the potential dilution from the exercise or
conversion of securities into common stock; however, stock options,
warrants and contingent shares totaling 2,553,488 shares, 2,808,233
shares and 2,498,214 shares for the three years ended December 31,
1998, 1997 and 1996, respectively, were excluded from the calculation
of diluted per share results because their effect was antidilutive.
(m) NEW ACCOUNTING PRONOUNCEMENTS - Effective January 1, 1998, the Company
adopted and is reporting in accordance with SFAS No. 130, "Reporting
Comprehensive Income," and SOP No. 97-2, "Software Revenue
Recognition." There were no differences between the Company's net loss
and comprehensive loss under SFAS No. 130 and the adoption of SOP No.
97-2 did not have a material effect on the timing of its revenue
recognition.
(n) RECLASSIFICATIONS - Certain prior year amounts have been reclassified
to conform with current year presentation.
(2) BUSINESS COMBINATIONS
(a) KEY COMMUNICATIONS SERVICE - On December 31, 1998, the Company merged
with Key Communications Service, Inc. ("Key"), a privately-owned
company based in New Albany, Indiana. Key is a designer, manufacturer,
distributor and servicing company for laboratory results reporting
communication products for national, regional and hospital-based
laboratories. The Company issued 2,078,106 shares of common stock in
exchange for all of Key's capital stock. The transaction has been
accounted for as a pooling of interests. Because of a leveraged buyout
transaction consummated on April 30, 1998 by the former stockholders of
Key, the accounts of Key have been combined with those of the Company
commencing May 1, 1998. For the period May 1, 1998 to December 31,
1998, Key had net revenues of $10,439,327 and net income of $1,117,398.
Merger related expenses of $426,970 have been included in the statement
of operations for 1998. In connection with the merger, certain debt
guaranteed by Key's assets was retired, and as a result, $3,015,505 was
credited to additional paid-in capital. In addition, distributions of
$515,490 have been recorded, representing S Corporation income tax
obligations arising from Key's operations prior to the merger.
(b) INTEGRATED MEDICAL SYSTEMS - In May 1998, the Company acquired all of
the capital stock of WPJ, Inc., d/b/a Integrated Medical Systems
("IMS"), a privately-owned company based in Santa Ana, California. IMS
provides financial EDI transaction processing services including
medical claims, encounters and other financial transactions. The
purchase price consisted of $20,620,000 in cash and 481,836
unregistered shares of the Company's common stock (valued at
$5,345,325). The cash portion of the purchase price was funded through
the private placement sale of common stock (see Note 5). The
acquisition was accounted for as a purchase and the excess of the
consideration paid over the estimated fair value of the net assets
acquired in the amount of $14,649,731 was recorded as goodwill.
F-10
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(c) USHDI - In November 1997, the Company acquired substantially all of the
assets and the business of US HealthData Interchange, Inc. ("USHDI")
from Avatex Corporation. USHDI provides financial EDI transaction
processing services including medical claims, encounters and other
financial transactions. The purchase price consisted of $4,000,000 in
cash paid at closing. The acquisition was accounted for as a purchase
and the excess of the consideration paid over the estimated fair value
of the net assets acquired in the amount of $3,040,669 was recorded as
goodwill.
(d) HAYES COMPUTER SYSTEMS - In April 1997, the Company acquired
substantially all the assets and assumed certain specific, but limited
liabilities of Hayes Computer Systems, Inc. ("HCS"), a privately-owned
company located in Tallahassee, Florida. HCS provides information
technology solutions and services to principally the public sector
including systems integration services, Internet access services, and
client/server software development. The purchase price consisted of
$3,147,126 in cash and 388,215 shares of unregistered common stock paid
at closing (valued at $1,296,000). The acquisition was accounted for as
a purchase. In addition, the Company was obligated to pay up to
$1,000,000 (at least 50% in cash and the remainder in common stock) in
each of the two subsequent 12 month periods upon the achievement of
defined operating criteria. In June 1998, the Company made its first
contingent payment which consisted of $500,000 in cash and 30,303
shares of common stock. The Company allocated this contingent payment
to the long-term assets acquired as follows: $859,830 to in-process
research and development technology, $85,617 to property and equipment,
and $54,553 to capitalized software.
(e) CLINICAL MICROSYSTEMS - In March 1997, the Company acquired
substantially all the assets and certain liabilities of Clinical
MicroSystems, Inc. ("CMS"), a privately-owned company located in
Babylon, New York. CMS was the developer of ClinScan, a physician
desktop lab ordering and results posting software. The purchase price
consisted of the following: $3,000,000 in cash and 125,786 shares of
unregistered common stock (valued at $760,452) paid at closing, plus
$2,000,000 in cash and common stock payable over a three year period as
follows: $750,000, $500,000 and $750,000 in 12, 24 and 36 months
following the closing date, respectively (recorded net of interest
imputed at the rate of 10.31% per annum). Each of the future payments
will be at least 50% in cash, with the remaining balance, if any, paid
in shares of unregistered common stock. The acquisition was accounted
for as a purchase and the excess of the consideration paid over the
estimated fair value of the net assets acquired in the amount of
$841,130 was recorded as goodwill. In April 1998, the Company paid its
first debt payment of $750,000 in cash.
F-11
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Portions of the initial purchase prices for the HCS and CMS acquisitions
were allocated to in-process research and development technology, resulting in
charges to the Company's 1997 operations of $4,167,098 for the HCS acquisition
and $4,300,000 for the CMS acquisition. The following products are includable as
in-process research and development technology:
(a) KIMS - The in-process research and development acquired from HCS
consisted of the Krypton Internet Messaging Server ("KIMS"), a
server-to-server intranet email system designed to provide more
security, higher performance and a lower price than comparable UNIX
based email systems. At the time of the acquisition, this product was
in the alpha phase of programming and had the capability of processing
only simple email communications. The Company intended to complete the
development of a testing lab, the development of the KIMS product, and
the development of the EDI version of the product at an estimated cost
of approximately $253,000 and include it in its EDI product offering to
physicians and other healthcare providers using the Company's ProxyNet
network by the end of calendar 1997.
However, shortly after the acquisition, Microsoft Corporation released
its improved email product. Therefore, the decision to complete the
KIMS product was temporarily suspended until an assessment of the
Microsoft product could be completed. After analyzing the KIMS product
and discussing the opportunities for it, the Company decided to
complete the KIMS product and expects to have it completed in 1999 and
include it in its future web-based product line.
(b) CLINSCAN INTRANET - The in-process research and development acquired
from CMS consisted of the ClinScan Intranet, a system designed to
provide hospitals with the capability to connect hospital-based and
office-based physicians together, in a private wide area network, or
Intranet. The hospitals and physicians would have the ability to
electronically exchange messages, images, files and other valuable
clinical information, including the exchange of clinical orders and
results using proven interface technology. By incorporating the
ClinScan workstation at physician sites, this software application
would provide access to all of the hospital based legacy systems
invisibly. By adding high-speed communications access, hospitals and
physicians would be able to access the Internet. At the time of the
acquisition, completion of the communication protocols for incoming and
outgoing messaging and an interface for communications to the legacy
systems had been developed. The Company intended to complete the global
patient data repository, routing functionality, cross-relational master
indexes, and master catalogue of clinical functionality of the product
at an estimated cost of approximately $600,000 and include it as a
clinical EDI product offering to physicians, laboratories and other
healthcare providers by the start of 1998.
The technology supported by the research performed on the ClinScan
Intranet was used by the Company to develop its Lab Network Intranet
Server ("LNIS"), the central information processor for its latest
ClinScan software product. Revenues from the sales of ClinScan
involving an LNIS commenced in 1998.
F-12
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
To determine the fair value of the acquired in-process research and
development, the Company used independent appraisals which utilized standard
appraisal methodologies. Each appraisal procedure performed involved projected
cash flows for KIMS and ClinScan Intranet over their estimated useful lives,
net of ongoing operating investment needs (including working capital, fixed
assets and other assets) that support the products. An effective income tax
rate of 37.6% was applied to each of the cash flows representing the expected
marginal combined federal and state tax rate to apply over the cash flow
periods. These cash flows were discounted to their present value using a
discount rate of 70%, which is reflective of a "start up" company for which
the KIMS and ClinScan Intranet products are similar in risk. The KIMS product
was valued at $6,400,000 and the ClinScan Intranet product was valued at
$4,300,000 using these model assumptions. The development of these projects
had not yet reached technological feasibility to permit capitalization, and
the technology had no alternative future use. Income tax benefits resulted
from these charges of approximately $1,563,000 and $1,613,000 for the HCS and
CMS acquisitions, respectively; however, based on the weight of available
evidence, valuation allowances for the full amounts have been recorded.
Goodwill previously recorded from the acquisitions of HCS and CMS is
being amortized on the straight-line method over 3 years beginning April 1,
1998. Goodwill from these acquisitions was previously being amortized on the
straight-line method over 15 years. This change in estimate results in an
additional amortization expense of approximately $1,015,000 per year. Goodwill
relating to the acquisitions of IMS and CMS is being amortized over 3 years.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company, Key, IMS, USHDI, HCS and CMS as if the
acquisitions of these businesses had occurred at the beginning of 1997,
including any amortization of goodwill and additional interest expense but
excluding one-time charges for acquired in-process research and development
technology. These pro forma results do not necessarily represent results which
would have occurred if the acquisitions had taken place at that date, or of
results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 44,084,507 $ 34,946,391
Net loss $(14,553,471) $(20,995,562)
Basic and diluted net loss
per share of common stock $ (0.83) $ (1.33)
</TABLE>
F-13
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) ACQUISITION OF PRESCRIBE TECHNOLOGY
In June 1997, the Company acquired all rights, title and interest in
all copyrights and trademarks related to the technology underlying the
PreScribe(TM) pharmacy-physician prescription network (the "PreScribe network")
from Walgreens Co. ("Walgreens"). Concurrently, Walgreens entered into a network
services agreement whereby Walgreens will pay fees to the Company for 12 years
(the first three of which are on an exclusive basis) for transactions (as
defined) received over the PreScribe network or ProxyMed's existing network,
ProxyNet. ProxyMed paid Walgreens $2,000,000 at closing, issued a 10-year
warrant for 200,000 shares of ProxyMed's common stock exercisable at $9.96 per
share (the market price at the date of grant) commencing on the fourth
anniversary of the closing date, and will pay $500,000 per year on the first,
second and third anniversaries of the agreement. The value of the warrant
resulted in a $731,938 credit to additional paid-in capital and was computed
using the Black-Scholes model using the following assumptions: risk-free
interest rate of 6.45%, expected life of 10 years, expected volatility of 75%
and no dividend yield. The Company is amortizing the purchase price over the 12
year term of the services agreement. In June 1998, the Company made its first
anniversary payment under this agreement.
(4) SALE OF DISPENSARY ASSETS
On March 15, 1995, the Company sold to Eckerd Corporation ("Eckerd")
certain, but not all, of the assets related to the Company's HMO prescription
drug dispensing operations for $4,851,481. Of the total purchase price,
$2,200,000 was contingent on the amount of prescription business retained by
Eckerd through September 30, 1996. Accordingly, the Company initially recorded a
loss on the sale, and recognized additional income in 1996 as prescription data
was provided by Eckerd. Ultimately, the Company collected the entire purchase
price, including the entire contingent amount.
F-14
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) EQUITY SECURITIES
(a) SALES OF COMMON STOCK - During 1998, private placement sales of common
stock totaling 3,013,416 shares were consummated, including 2,063,636
shares to Bellingham Industries Inc. ("Bellingham"), resulting in net
proceeds of $29,118,505. Additionally, the Company issued a five-year
warrant to Bellingham for the purchase of 100,000 shares of the
Company's common stock at $7.56 per share and issued a five-year
warrant to an underwriter for the purchase of 94,978 shares of the
Company's common stock at $12.10 per share.
During 1997, private placement sales of common stock totaling 1,625,000
shares were consummated to Bellingham, resulting in net proceeds of
$13,391,387.
In 1996, the Company raised net proceeds of $13,041,309 in an
underwritten offering to the public of 3,367,500 shares of common stock
at a price of $4.42 per share. As of December 31, 1998, underwriter
warrants for the purchase of 181,600 shares of common stock at an
exercise price of $5.63 per share remain outstanding through May 7,
2001.
(b) PREFERRED STOCK - In 1995, the Company sold 23.75 units of 9% Series A
convertible preferred stock, all of which was subsequently converted to
common stock. As of December 31, 1998, underwriter warrants for the
purchase of 201,041 shares of common stock at an exercise price of
$4.17 per share remain outstanding through June 9, 2000. If the
preferred stock had been converted to common stock as of the beginning
of 1996, net loss per share would have been $(.34) for 1996.
The Company has 1,870,000 authorized but unissued shares of preferred
stock, par value $.01 per share, which is entitled to rights and
preferences to be determined at the discretion of the Board of
Directors.
(c) OTHER WARRANTS - In connection with a private placement sale of common
stock in 1994, warrants are outstanding to the placement agent for the
purchase of up to 14,000 shares of common stock at an exercise price of
$3.06 per share through August 19, 1999. Additionally, as part a
software development agreement with Medical Manager Corp. ("MMC"), the
Company granted a five-year warrant to MMC for the purchase of 150,000
shares of common stock for $3.50 per share; MMC subsequently sold this
warrant to Bellingham in 1998. The compensatory value of the MMC
warrant, as well as a warrant for 37,500 shares exercisable at $4.17
per share issued in connection with a license agreement with Blue Cross
and Blue Shield of Massachusetts, Inc. and certain other stock options
for 12,500 shares issued to two consultants, were charged to expense in
1996 in the amount of $300,172. The weighted average fair value of each
compensatory warrant and option was estimated at $1.50 at the date of
grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 6.17%, expected life of 5
years, expected volatility of 60.8%, and no dividend yield.
F-15
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) LOAN AGREEMENT
The Company has a revolving loan agreement with a bank for borrowings
of up to $5,000,000. Outstanding borrowings bear interest at the prime rate less
3/4%, are due on demand and are collateralized by U.S. Treasury Notes and
certificates of deposit. There were no borrowings outstanding as of December 31,
1998 or 1997.
(7) INVENTORY
Inventory consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Materials, supplies and component parts $1,050,692 $ --
Work in process 129,423 --
Finished goods 1,790,095 1,202,431
---------- ----------
$2,970,210 $1,202,431
========== ==========
</TABLE>
(8) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
ESTIMATED
1998 1997 USEFUL LIVES
---------- ---------- -------------
<S> <C> <C>
Furniture, fixtures and equipment $1,427,798 $ 800,240 5 to 7 years
Computer hardware and software 3,249,782 2,014,293 5 years
Service vehicles 145,126 -- 5 years
Leasehold improvements 559,396 189,908 Life of lease
Revenue earning equipment 415,344 -- 5 years
---------- ----------
5,797,446 3,004,441
Less accumulated depreciation 1,461,502 681,267
---------- ----------
Property and equipment, net $4,335,944 $2,323,174
========== ==========
</TABLE>
Depreciation expense was $1,020,000 in 1998, $499,000 in 1997 and
$297,000 in 1996.
F-16
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Accounts payable $3,619,427 $2,671,182
Accrued payroll and related costs 665,048 365,716
Accrued expenses related to acquisitions 1,036,319 556,316
Other accrued expenses 923,837 645,859
---------- ----------
Total accounts payable and accrued expenses $6,244,631 $4,239,073
========== ==========
</TABLE>
(10) INCOME TAXES
The significant components of the deferred tax asset account is as
follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net operating losses - Federal $ 13,074,000 $ 8,224,000
Net operating losses - State 2,005,000 1,261,000
In-process research and development technology 3,119,000 2,964,000
Other - net 234,000 (125,000)
------------ ------------
Total deferred tax assets 18,432,000 12,324,000
Less valuation allowance (18,432,000) (12,324,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
Based on the weight of available evidence, a valuation allowance has
been provided to offset the entire deferred tax asset amount. Net operating loss
carryforwards, which amount to $38,454,000 as of December 31, 1998, begin to
expire in 2008.
The benefit for income taxes differs from the amount computed by
applying the statutory federal income tax rate to the net loss reflected on the
Consolidated Statements of Operations in each of the three years ended December
31, 1998 due to the following:
<TABLE>
<S> <C>
Federal income tax benefit at statutory rate 35.0%
State income tax benefit 3.5
Increase in valuation allowance (38.5)
-----
-- %
=====
</TABLE>
F-17
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ----------- -------
<S> <C> <C> <C>
Cash paid for interest $ 267,468 $ 3,230 $31,123
============ =========== =======
Warrants issued for acquisition of PreScribe technology $ -- $ 731,938 $ --
============ =========== =======
Acquisition of businesses:
Contingent common stock issued for prior year acquisition $ 500,000 $ -- $ --
============ =========== =======
Common stock issued for businesses acquired $ 5,345,332 $ 2,056,452 $ --
Debt issued for businesses acquired -- 1,649,555 --
Other acquisition costs accrued 328,433 1,131,759 --
Details of acquisitions:
Working capital components, other than cash (1,378,851) (688,757) --
In-process research and development technology -- (8,467,098) --
Property and equipment (1,432,331) (485,517) --
Goodwill (15,226,365) (4,641,746) --
Capitalized software and technology (11,000,000) (473,574) --
Notes and loans payable 3,429,860 9,375 --
------------ ----------- -------
Net cash used in acquisitions $(19,933,922) $(9,909,551) $ --
============ =========== =======
</TABLE>
(12) SIGNIFICANT CUSTOMERS
Approximately 32% and 65% of the Company's revenues for 1998 and 1997,
respectively, were from the State of Florida or agencies thereof. Approximately
50% of the Company's revenues for 1996 were from another customer.
F-18
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) STOCK OPTIONS
The Company has three stock option plans for executives, directors and
other key personnel, under which both incentive stock options and non-qualified
options may be issued. Under such plans, options to purchase up to 1,237,250
shares of common stock may be granted. Options may be granted at prices equal to
the fair market value at the date of grant, except that incentive stock options
granted to persons owning more than 10% of the outstanding voting power must be
granted at 110% of the fair market value at the date of grant. The Company also
has a stock option plan for outside directors under which options to purchase up
to 303,000 shares of common stock may be granted at prices and with vesting
periods as may be determined by the Board of Directors or the Compensation
Committee thereof. In addition, as of December 31, 1998, options for the
purchase of 672,700 shares were granted to newly-hired employees. Stock options
issued by the Company generally vest within three years, and expire up to ten
years from the date granted. Stock option activity was as follows for the three
years ended December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
AVAILABLE OPTIONS EXERCISE PRICE
FOR GRANT OUTSTANDING OF OPTIONS
------- --------- --------
<S> <C> <C> <C>
Balance, January 1, 1996 115,875 934,125 $ 3.73
Options authorized 532,500 -- --
Options granted (875,250) 875,250 $ 5.20
Options exercised -- (139,601) $ 4.22
Options expired/forfeited 231,124 (231,124) $ 4.00
------- ---------
Balance, December 31, 1996 4,249 1,438,650 $ 4.59
Options authorized 457,200 -- --
Options granted (291,368) 291,368 $ 8.51
Options exercised -- (87,900) $ 6.22
Options expired/forfeited -- (14,000) $ 7.04
------- ---------
Balance, December 31, 1997 170,081 1,628,118 $ 4.59
Options authorized 184,500 -- --
Options granted (389,000) 389,000 $ 7.80
Options exercised -- (319,166) $ 4.08
Options expired/forfeited 57,083 (123,583) $ 9.50
------- ---------
Balance, December 31, 1998 22,664 1,574,369 $ 5.79
======= =========
</TABLE>
F-19
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table summarizes information regarding outstanding and
exercisable options as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ----------------------------------
RANGE OF EXERCISE NUMBER WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ----------- ------------------------ ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$3.17 - 5.00 741,500 1.78 $3.60 741,500 $ 3.60
$5.01 - 8.00 617,452 8.12 $6.95 327,553 $ 6.91
$8.01 - 13.63 215,417 3.81 $9.96 90,093 $10.00
--------- ---------
1,574,369 1,159,146
========= =========
</TABLE>
The following table summarizes information regarding options
exercisable at of December as of each year:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Number exercisable 1,159,146 1,213,751 822,234
Weighted average exercise price $5.03 $4.40 $4.10
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans for options issued to
employees. Had compensation cost for such options been recorded based upon the
fair value at the grant date consistent with the methodology prescribed in SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net loss and
net loss per share would have been $(12,760,615) and $(0.82) for 1998,
$(19,269,832) and $(1.82) for 1997, and $(3,723,924) and $(.49) for 1996,
respectively. The weighted average grant date fair value of options granted
($3.26 in 1998, $3.13 in 1997, and $2.31 in 1996) was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate 5.19% 6.33% 6.08%
Expected life 8.4 years 5.3 years 7.0 years
Expected volatility 73.9% 74.7% 65.1%
Expected dividend yield 0.0% 0.0% 0.0%
</TABLE>
F-20
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has classified the following
reportable segments which are separately managed: healthcare EDI and
communication devices; network integration services; and prescription drug
dispensing. Intersegment sales are not material and there were no foreign sales
for any years presented.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Healthcare EDI and
communication devices $ 22,229,326 $ 1,817,122 $ 1,886,007
Network integration services 13,855,458 7,779,787 --
Prescription drug dispensing 1,682,893 1,335,060 1,168,144
------------ ------------ ------------
$ 37,767,677 $ 10,931,969 $ 3,054,151
============ ============ ============
Operating income (loss):
Healthcare EDI and
communication devices $ (7,236,218) $ (7,369,360) $ (1,596,925)
Network integration services 203,505 224,947 --
Prescription drug dispensing (35,452) 18,050 36,063
Corporate (3,870,826) (3,190,801) (2,744,431)
In-process research and
development technology (742,623) (8,467,098) --
------------ ------------ ------------
$(11,681,614) $(18,784,262) $ (4,305,293)
============ ============ ============
Depreciation and amortization:
Healthcare EDI and
communication devices $ 8,465,382 $ 873,924 $ 209,681
Network integration services 215,606 69,373 --
Prescription drug dispensing 19,414 15,003 12,907
Corporate 276,725 120,000 100,000
------------ ------------ ------------
$ 8,977,127 $ 1,078,300 $ 322,588
============ ============ ============
Capital expenditures and capitalized software:
Healthcare EDI and
communication devices $ 1,234,321 $ 4,297,152 $ 1,106,448
Network integration services 386,674 155,026 --
Prescription drug dispensing 6,303 16,264 10,000
Corporate 408,894 100,000 120,000
------------ ------------ ------------
$ 2,036,192 $ 4,568,442 $ 1,236,448
============ ============ ============
Total assets:
Healthcare EDI and
communication devices $ 36,758,590 $ 12,228,222 $ 1,952,686
Network integration services 4,886,152 2,402,150 --
Prescription drug dispensing 1,032,414 996,545 910,685
Corporate 6,159,418 3,976,204 12,831,684
------------ ------------ ------------
$ 48,836,574 $ 19,603,121 $ 15,695,055
============ ============ ============
</TABLE>
F-21
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) EMPLOYEE BENEFIT PLANS
The Company has two 401(k) retirement plans, including one plan which
was acquired in its merger with Key, for substantially all employees who meet
certain minimum lengths of employment and minimum age requirements.
Contributions are made by employees based on up to 15% of their annual
compensation. For the plan acquired from Key, the Company makes matching
contributions of up to 5% of participant's salary or $1,000, whichever is less.
These matching contributions are vested after 5 years of employment. Estimated
matching contributions for the period May 1 to December 31, 1998 have been
expensed in the amount of $100,000.
(16) COMMITMENTS AND OTHER
(a) LEASES - The Company leases certain premises, operating and office
equipment, and vehicles under operating leases which expire on various
dates through 2005. The leases for the premises contain renewal
options, and require the Company to pay such costs as property taxes,
maintenance and insurance. At December 31, 1998, future minimum lease
payments under noncancelable operating leases with initial or remaining
lease terms in excess of one (net of payments to be received under
subleases) are as follows: $1,146,000 in 1999, $869,000 in 2000,
$781,000 in 2001, $698,000 in 2002, $372,000 in 2003, and $469,000
thereafter.
The Company's obligations under capital leases are not material. Total
rent expense for all operating leases amounted to $1,064,000 in 1998,
$372,000 in 1997, and $119,000 in 1996.
(b) DUE FROM OFFICERS - Included in other assets at December 31, 1998 and
1997 is a demand loan in the amount of $350,000, plus accrued interest
at 7-3/4% per annum, due from the Company's chief executive officer.
The officer has agreed to collateralize the loan pursuant to pledges of
securities, including shares of the Company's common stock,
satisfactory to the Company's Board of Directors.
Additionally, included stockholder's equity at December 31, 1998, is a
promissory note in the amount of $259,800, plus accrued interest at 5%
per annum, from another officer. This note is collateralized by 60,000
shares of the Company's common pursuant to a stock pledge agreement.
(17) SUBSEQUENT EVENT
In January 1999, the Company acquired the EDI business and assets of
Specialized Medical Management, Inc. ("SMMI") of Dallas, Texas, a provider of
healthcare financial EDI services primarily in the Southwestern United States.
for $1,000,000 in cash. The acquisition is being accounted for as a purchase.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
February 19, 1999
To the Stockholders of ProxyMed, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 19, 1999 appearing on page F-2 of this Form 10-K also included an
audit of the Financial Statement Schedules listed in Item 14(a)(2) of this Form
10-K. In our opinion, these Financial Statement Schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
F-23
<PAGE>
PROXYMED, INC. AND SUBSIDIARIES
SCHEDULE II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
----------------------------------------------------------------------------------------------
ADDITIONS
-----------------------------------------
BALANCE AT
YEAR ENDED BEGINNING CHARGED TO CHARGED TO BALANCE AT
DECEMBER 31, OF PERIOD COSTS AND EXPENSES OTHER ACCOUNTS (1) DEDUCTIONS (2) END OF PERIOD
- ------------ --------- ------------------ ------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
1998 $242,549 368,207 333,579 349,481 $594,854
======== ======== ======= ======== ========
1997 $ 16,712 121,771 138,630 34,564 $242,549
======== ======== ======= ======== ========
1996 $106,625 8,105 -- 98,018 $ 16,712
======== ======== ======= ======== ========
</TABLE>
(1) Includes amounts acquired through acquisitions.
(2) Primarily write-off of bad debts.
F-24
EXHIBIT 10.22
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") dated, January 12, 1999,
between PROXYMED, INC., a Florida corporation ("Buyer"), with its principal
business address at 2555 Davie Road, Suite 110, Fort Lauderdale, Florida 33317,
and SPECIALIZED MEDICAL MANAGEMENT, INC., a Texas corporation ("Seller"), with
its principal business address at 6100 Western Place, Suite 200, Ft. Worth,
Texas 76107-4600, and TEXAS HEALTH MANAGEMENT SERVICES, INC., a Texas
corporation, the sole shareholder of Seller ("Shareholder"), with its principal
business address at 600 East Las Colinas Blvd., #1550, Irving, Texas 75039-5622.
Seller and Shareholder are sometimes collectively referred to in this Agreement
as "Selling Parties".
Buyer desires to purchase from Seller and Seller desires to sell to Buyer,
on the terms and subject to the conditions of this Agreement, substantially all
of the electronic data interchange ("EDI") assets, properties and EDI business
of Seller.
THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained in this Agreement, the parties agree as
follows:
ARTICLE 1. TRANSFER OF EDI ASSETS
Subject to the terms and conditions set forth in this Agreement, Seller
agrees to sell, convey, transfer, assign and deliver to Buyer, and Buyer agrees
to purchase from Seller at the Closing described in Article 3 hereof, all the
EDI assets, properties and EDI business of Seller of every kind, character and
description (except for real property), whether tangible, intangible, personal
or mixed, and wherever located, all of which are sometimes collectively referred
to in this Agreement as the "EDI Assets" or "Assets", including the following:
1.1 CONTRACTS AND AGREEMENTS. All right, title and interest of Seller in
the contracts and licenses that Seller has (including those Seller has with its
customers and clients) relating to Seller's EDI business other than those
specifically referred to elsewhere in this Agreement and as more fully described
on SCHEDULE 1.1 (with commencement dates, expiration dates and renewal options),
to be assumed by Buyer pursuant to Article 4 (such contracts, agreements and
licenses together here and after collectively referred as the "Contracts").
Seller shall provide Buyer with copies of all contracts listed on SCHEDULE 1.1
prior to Closing;
1.2 REAL PROPERTY. Buyer is not purchasing any leased or owned real
property from Seller;
1.3 EQUIPMENT. All furniture, fixtures, equipment, computer hardware and
other tangible personal property of every kind and description that are located
upon or within the real property of Seller, and/or are owned or leased by
Seller, and/or are utilized in connection with Seller's EDI operations (whether
or not upon or within the real property), a current list of which is more fully
described on SCHEDULE 1.3 (hereinafter referred to collectively as the
"Equipment");
<PAGE>
1.4 SOFTWARE PROGRAMS AND CONTRACTS. All of Seller's right, title and
interest to all owned or leased software programs, and all other contracts,
agreements, licenses and other commitments and arrangements, oral or written,
with any person or entity respecting the ownership, license, acquisition,
design, development, distribution, marketing, use or maintenance of software
programs, source and object codes, related technical or user documentation and
databases relating to Seller's EDI business, as more fully described on SCHEDULE
1.4 (with commencement dates, expiration dates and renewal options for leases
and licenses), except for off-the-shelf, generally available software (hereafter
referred to collectively as the "Software Programs and Contracts"), and to be
assumed by Buyer pursuant to Article 4;
1.5 INVENTORIES. Buyer is not purchasing any inventory from Seller;
1.6 ACCOUNTS RECEIVABLE. All of Seller's accounts receivable relating to
its EDI business as of the Closing Date IN AN AMOUNT NO LESS THAN $170,000
("Accounts Receivable");
1.7 OTHER INTANGIBLES. All trade names, trademarks, service marks,
copyrights, patents, patent rights, licenses, brand names, trade secrets,
technical know-how, goodwill, rights, if any, to domain names and phone numbers
and other intangibles relating to EDI business as more fully described on
Schedule 1.7;
1.8 BOOKS AND RECORDS. All papers, computerized databases and records in
Seller's care, custody or control relating to any or all of the EDI business and
the operation thereof, including but not limited to all personnel and labor
relations records, sales records, marketing materials, and accounting and
financial records;
1.9 PREPAID EXPENSES AND DEPOSITS. Buyer is not purchasing any prepaid
expenses and other prepaid items and deposits relating to any of the EDI
business and the operations thereof;
1.10 PERMITS, ETC. Buyer is not purchasing any permits, licenses,
franchises, consents or authorizations issued by, and all registrations and
filings with any governmental agency in connection with Seller's EDI business
and the operations thereof, inasmuch as Seller warrants and represents that
there are none; and
1.11 ALL PROPERTY NOT ELSEWHERE DESCRIBED. Except as described in SCHEDULE
1.11, all other properties of Seller of every kind, character or description
owned, used or held for use (whether or not exclusively) primarily in connection
with Seller's EDI business, wherever located and whether or not similar to the
things set forth elsewhere in this Article 1.
ARTICLE 2. PURCHASE PRICE
2.1 PAYMENT OF PURCHASE PRICE. In consideration for the transfer and
assignment by Seller of the EDI Assets and in consideration of the
representations, warranties and covenants of Selling Parties set forth herein,
Buyer on the conditions set forth herein:
2
<PAGE>
(a) shall pay to Seller or its assignee(s) at the Closing (as
hereinafter defined) One Million Dollars ($1,000,000) in cash as more
fully described in Section 3.2 hereof; and
(b) shall assume and discharge, and shall indemnify Seller against,
liabilities and obligations of Seller under the contracts or other
agreements, if any, specified on SCHEDULE 4 but only to the extent that
such liabilities or obligations accrue on or after the Closing Date.
2.2 ALLOCATION OF PURCHASE PRICE. The parties agree that the Purchase
Price (defined as the amounts specified in Section 2.1(a) above) shall be
allocated as set forth on SCHEDULE 2.2 and that such allocation will be used by
the parties in reporting the transaction contemplated by this Agreement for tax
purposes.
ARTICLE 3. THE CLOSING
The closing of the purchase and sale of the EDI Assets by Seller to Buyer
(the "Closing") shall take place at the offices of Seller at 10:00 a.m. local
time, on January 15, 1999, or at such other place and/or time as the parties may
agree in writing (the "Closing Date"). The Schedules described herein shall be
completed to the satisfaction of Buyer and Seller at least three (3) days prior
to Closing. In the event that the conditions specified in this Agreement have
not been fulfilled by such date, Buyer (if such failure of conditions is on the
part of Selling Parties) or Seller (if such failure of conditions is on the part
of Buyer) may extend the Closing Date for a period or periods not exceeding an
aggregate of thirty (30) days by written notice to the other party and the no
shop period described in the Letter of Understanding dated December 14, 1998,
shall likewise be automatically extended to such Closing Date. If on the
original or any postponed Closing Date, Seller has been unable to obtain all
waivers and consents of third parties required by this Agreement, then Buyer, on
written notice, may postpone the Closing to a time not later than 10:00 a.m.
local time, on March 31, 1999.
3.1 SELLING PARTIES' OBLIGATIONS AT THE CLOSING. At the Closing, Selling
Parties shall deliver or cause to be delivered to Buyer:
(a) Assignment and assumption agreements for all contracts and
agreements, personal property and equipment leases, and all other
contracts and agreements of Seller to be assumed in connection herewith,
in form and substance satisfactory to Buyer's counsel, and accompanied by
all consents required; and
(b) Instruments of assignment and transfer (including a bill of sale
and assignments of trademarks) of all of the other EDI Assets of Seller to
be transferred hereunder, in form and substance satisfactory to Buyer's
counsel.
Simultaneously with the consummation of the transfer, Seller,
through its officers, agents, and employees, shall put Buyer into full
possession and enjoyment of all the EDI Assets to be sold, conveyed,
transferred, assigned and delivered by this Agreement.
3
<PAGE>
Selling Parties, at any time before or after the Closing Date, shall
execute, acknowledge and deliver any further assignments, conveyances and other
assurances, documents and instruments of transfer, reasonably requested by Buyer
and shall take any other action consistent with the terms of this Agreement that
may reasonably be requested by Buyer for the purpose of assigning, transferring,
granting, conveying and confirming to Buyer, or reducing to possession, any or
all property and EDI Assets to be conveyed and transferred by this Agreement. If
requested by Buyer, Selling Parties agree to prosecute or otherwise enforce in
their own names for the benefit of Buyer any claims, rights, or benefits that
are transferred to Buyer by this Agreement and that require prosecution or
enforcement in either of the Selling Parties' name. Any prosecution or
enforcement of claims, rights, or benefits under this Section shall be solely at
Buyer's expense, unless the prosecution or enforcement is made necessary by a
breach of this Agreement by Selling Parties.
3.2 BUYER'S OBLIGATIONS AT THE CLOSING. At the Closing, Buyer shall
deliver to Seller against delivery of the items specified in Section 3.1 a wire
transfer of immediately available funds in the amount of $1,000,000 payable to
Seller.
ARTICLE 4. ASSUMPTION OF LIABILITIES
Buyer is not assuming any debt, liability or obligation of Seller, whether
known or unknown, fixed or contingent, except as specifically provided herein.
Selling Parties agree to indemnify and hold Buyer harmless against all debts,
claims, liabilities and obligations of Seller not expressly assumed by Buyer
hereunder, and to pay any and all reasonable attorneys' fees and legal costs
incurred by Buyer, its successors and assigns in connection therewith, except as
provided in Section 12.4. Buyer shall have the benefit of and shall perform and
assume all contracts, agreements, and licenses, if any, specifically listed on
SCHEDULE 4, in accordance with the terms and conditions thereof, with the
written consent of the other parties where required, except to the extent
modifications are specifically set forth on such SCHEDULE 4 and except to the
extent set forth in the assignments or assignment and assumption agreements.
Buyer agrees to indemnify each of the Selling Parties and hold each of them
harmless against all debts, claims, liabilities and obligations of the Buyer
expressly assumed by the Buyer hereunder, and to pay any and all reasonable
attorney's fees and legal costs incurred by either of the Selling Parties, and
their respective successors and assigns in connection therewith, except as
provided in Section 12.13.
ARTICLE 5. PROPERTY TAXES
Seller shall pay all sales, use and transfer taxes arising out of the
transfer of the EDI Assets and EDI business to Buyer and shall pay its portion,
prorated as of the Closing Date, of any personal property taxes of the EDI
Assets being sold hereunder. Buyer shall not be responsible for any EDI
business, occupations, withholding or similar tax, or for any taxes of any kind
relating to Seller for any period before the Closing Date.
4
<PAGE>
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF SELLING PARTIES
Selling Parties, jointly and severally, hereby represent and warrant to
Buyer that the following facts and circumstances are and, except as contemplated
hereby, at all times up to the Closing Date will be true and correct, and hereby
acknowledge that such facts and circumstances constitute the basis upon which
Buyer is induced to enter into and perform this Agreement. Any exceptions to the
representations and warranties made hereby are disclosed on a SCHEDULE attached
hereto corresponding to the Section numbers of this Article, except as otherwise
specified herein. All such representations and warranties are subject to the
items set forth in the SCHEDULES even though express references to the SCHEDULES
are not set forth below.
6.1 [INTENTIONALLY OMITTED].
6.2 FINANCIAL REPORTS. SCHEDULE 6.2 to this Agreement sets forth the
Financial Reports of Seller's EDI business as of December 31, 1997, and for the
eleven (11) months ended November 30,1998 (the "Stub Period Date"), certified as
complete and accurate by the chief financial officer of Seller and the
Shareholder. The Financial Reports in SCHEDULE 6.2 are referred to as the
"Financial Reports." The Financial Reports accurately and completely present the
financial position of the EDI business of Seller for the respective periods
indicated, except that the Financial Reports for the Stub Period Date are
subject to normal year-end adjustments and lack other representation items.
Seller's EDI business has no liabilities or obligations of any nature (known or
unknown, absolute, accrued, contingent or otherwise) of the type required to be
reflected or disclosed in a balance sheet (or the notes thereto) that were not
fully reflected or reserved against in the Financial Reports or disclosed
elsewhere in this Agreement.
(a) Financial Reports[INTENTIONALLY OMITTED].
6.3 ABSENCE OF SPECIFIED CHANGES. Except as set forth on SCHEDULE 6.3
hereof, since the Stub Period Date, there has not been any:
(a) Transaction by Seller relating to its EDI business except in the
ordinary course of EDI business;
(b) [INTENTIONALLY OMITTED];
(c) Material adverse change in the financial condition, liabilities,
Assets, EDI business or prospects relating to the EDI business of Seller;
(d) Destruction, damage to, or loss of any EDI Assets of Seller
(whether or not covered by insurance) that materially adversely affects
the financial condition, EDI business or prospects relating to the EDI
business of Seller;
(e) Labor trouble or other event or condition of any character
materially adversely affecting the financial condition, EDI business,
Assets or prospects relating to the EDI business of Seller;
5
<PAGE>
(f) [INTENTIONALLY OMITTED];
(g) [INTENTIONALLY OMITTED];
(h) [INTENTIONALLY OMITTED];
(i) Sale or transfer of any EDI Asset of Seller, except in the
ordinary course of EDI business;
(j) Execution, creation, amendment or termination of any contract,
agreement or license relating to Seller's EDI, except in the ordinary
course of EDI business;
(k) [INTENTIONALLY OMITTED];
(l) Waiver or release of any right or claim of Seller relating to
the EDI Assets, except in the ordinary course of EDI business;
(m) Mortgage, pledge or other encumbrance of any EDI Asset of
Seller;
(n) Other event or condition of any character that has or might
reasonably have a material adverse effect on the financial condition, EDI
business, Assets or prospects of Seller relating to its EDI business;
(o) Loss of any EDI customers or third party payers of Seller
resulting in a material adverse change in revenues or number of
transactions.
(p) [INTENTIONALLY OMITTED]; or
(q) Agreement by Seller to do any of the things described in the
preceding clauses (a) through (p).
6.4 [INTENTIONALLY OMITTED]
6.5 [INTENTIONALLY OMITTED]
6.6 [INTENTIONALLY OMITTED]
6.7 [INTENTIONALLY OMITTED]
6.8 CONTRACTS, ETC. The contracts described in SCHEDULES 1.1 and 1.4
consist of all written and oral contracts, licenses and agreements, and any
other commitments, or understandings entered into by Seller in the ordinary
course of EDI business with its customers, clients and other third parties other
than those specifically referred to elsewhere in this
6
<PAGE>
Agreement. True, correct and complete copies of the contracts and agreements
described in SCHEDULES 1.1 and 1.4 have been delivered to Buyer. Except as set
forth on SCHEDULES 1.1 AND 1.4, all such contracts and agreements are valid and
in full force, and to the Seller's Knowledge, there does not exist any default
or threat of default, or event that with notice or lapse of time, or both, would
constitute default under any of these contracts and agreements. There have been
no claims or defaults, and to the Knowledge of the Selling Parties, there are no
facts or conditions which if continued, or unnoticed, will result in a default
under these contracts or agreements.
As used in this Section 6.8 and the remainder of this Agreement, an
individual will be deemed to have "Knowledge" or "Known" of a particular fact or
other matter if such individual is actually or consciously aware of such fact or
other matter upon exercising reasonable inquiry and diligence as appropriate
within the scope of such individual's position. Selling Parties will only be
deemed to have "Knowledge" of a particular fact or other matter if any
individual who is serving as a President, Chief Executive Officer, Chief
Financial Officer, Senior Vice President, Vice President, Secretary or Assistant
Secretary, as of December 14, 1998 and/or as of the Closing Date, has Knowledge
of such fact or other matter.
Except as set forth in SCHEDULE 4, Seller is not a party to, nor are
the EDI Assets bound by, any other agreement not entered into in the ordinary
course of EDI business, any indenture, mortgage, deed of trust, lease or any
other agreement that is unusual in nature, duration or amount (including,
without limitation, any agreement requiring the performance by Seller of any
obligation for a period of time extending beyond one year from Closing Date or
calling for consideration of more than $5,000 or requiring purchases at prices
in excess of, or sales at prices lower than, prevailing market prices). To
Selling Parties' Knowledge, all contracts which will be assigned to or assumed
by Buyer under this Agreement are valid and binding upon the parties thereto. To
Selling Parties' Knowledge, there is no default or threat of default, or event
that with notice or lapse of time, or both, would constitute a default by any
party to any of the agreements listed in SCHEDULE 4, except as set forth on
SCHEDULE 4. Seller has not received notice that any party to any of the
agreements listed in SCHEDULE 4 intends to cancel or terminate any of these
agreements or to exercise or not exercise any options under any of these
agreements. To Selling Parties' Knowledge, Seller is not a party to, nor is
Seller or the EDI Assets bound by, any agreement that is materially adverse to
the EDI business, property or financial condition of Seller's EDI business.
6.9 OTHER TANGIBLE PERSONAL PROPERTY. The tangible personal property
described in Section 1.3 and SCHEDULE 1.3 of this Agreement constitutes
substantially all the items of tangible personal property owned by, in the
possession of, or used by Seller in connection with its EDI business. Except as
stated in SCHEDULE 1.3, no tangible personal property used by Seller in
connection with its EDI business is held under any lease, security agreement,
conditional sales contract, or other title retention or security arrangement, or
is in the possession of anyone other than an employee of Seller.
6.10 TRADE NAMES; TRADEMARKS; COPYRIGHTS; ETC. Except as set forth in
SCHEDULE 6.10, Seller does not use any other trademark, service
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mark, trade name, copyright or brand name, or own any trademarks, trademark
registrations or applications, trade names, service marks, copyrights, copyright
registrations or applications or brand names, telephone or facsimile number, or
domain name in its EDI business. To the Knowledge of Selling Parties, no person
(other than Seller) owns any trademark, trademark registration or application,
service mark, trade name, copyright, copyright registration or application, or
brand name, the use of which is necessary or contemplated in connection with the
performance of any contract to which Seller is a party. To the Knowledge of
Seller, Seller has the right and authority to use its trade names, trademarks,
copyrights, telephone or facsimile number, or domain name in its EDI business as
are necessary to enable it to conduct and to continue to conduct its EDI
business, and to its Knowledge, such use does not and will not conflict with,
infringe or violate any intellectual or proprietary rights of others.
6.11 PATENTS AND PATENT RIGHTS. SCHEDULE 6.11 to this Agreement is a
complete schedule of all patents, inventions, industrial models, processes,
designs, formulas and applications for patents owned by Seller or in which
Seller has any rights, licenses or immunities relating to its EDI business
("Intellectual Properties") The patents and applications for patents listed in
SCHEDULE 6.11 are valid and in full force and effect and are not subject to any
taxes, maintenance fees or actions falling due within 90 days after the Closing
Date. Except as set forth in SCHEDULES 6.11 or 6.20, there have not been any
administrative, judicial, arbitration, or other adversary proceedings concerning
the Intellectual Properties listed in SCHEDULE 6.11. Each patent application is
awaiting action by its respective patent office except as otherwise indicated in
SCHEDULE 6.11. To the Knowledge of Seller, the manufacture, use or sale of the
inventions, models, designs and systems covered by the Intellectual Properties
listed in SCHEDULE 6.11 do not violate or infringe on any patent or any
proprietary or personal right of any person, firm or corporation, and Seller, to
its Knowledge, has not infringed and is not now infringing on any patent or
other right belonging to any person, firm or corporation. Except as set forth in
SCHEDULE 6.11, Seller is not a party to any license, agreement or arrangement,
whether as licensee, licenser or otherwise, with respect to any patent,
application for patent, invention, design, model, process, trade secret or
formula. relating to its EDI business. Seller has the right and authority to use
such inventions, trade secrets, processes, models, designs and formulas as are
necessary to enable it to conduct and to continue to conduct all phases of its
EDI business in the manner presently conducted, and such use does not and will
not conflict with, infringe or violate any patent or other rights of others.
6.12 TRADE SECRETS. SCHEDULE 6.12 to this Agreement is a true and complete
list, without extensive or revealing descriptions, of trade secrets used by
Seller in (or owned by Seller and useful in) the operation of its EDI business,
including all customer lists, processes, know-how and other technical data. The
specific location of each trade secret's documentation, including its complete
description, specifications, charts, procedures and other material relating to
it, is also set forth with it in such SCHEDULE 6.12. Each trade secret's
documentation is current, accurate and sufficient in detail and content to
identify and explain it, and to allow its full and proper use by Buyer without
reliance on the special knowledge or memory of others. Seller is the sole owner
of each of these trade secrets, free and clear of any liens, encumbrances,
restrictions, or legal or equitable claims of others, except as specifically
stated in SCHEDULE 6.12. Seller has taken all reasonable security measures to
protect the secrecy, confidentiality and value of these trade secrets; any of
its employees and any other persons, who, either along or in concert with
others, developed, invented, discovered, derived, programmed or designed these
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secrets, or who have knowledge of or access to information relating to them,
have been put on notice and have entered into appropriate agreements that
Seller's trade secrets are proprietary to Seller and are not to be divulged or
misused. All these trade secrets are presently valid and protractible, and are
not part of the public knowledge or literature, nor to Seller's Knowledge have
they been used, divulged or appropriated for the benefit of any past or present
employees or other persons, or to the detriment of Seller.
6.13 OTHER INTANGIBLE PROPERTY. SCHEDULE 6.13 to this Agreement is a true
and complete list of all software programs, contracts and all other intangible
EDI Assets, other than those specifically referred to elsewhere in this
Agreement, including, without limitation, all of Seller's right, title and
interest owned and leased software programs, databases, and all other agreement,
contracts, licenses and other commitments, oral or written, with any person or
entity respecting the ownership, license, acquisition, design, development,
distribution, marketing, use or maintenance of software programs, source and
object codes, related technical or user documentation manuals relating to
Seller's EDI business.
6.14 TITLE TO EDI ASSETS. Seller has good and marketable title to all the
EDI Assets and its interest in the EDI Assets to be conveyed to Buyer hereunder,
whether real or personal, mixed, tangible, and intangible, which constitute all
the EDI Assets and interest in EDI Assets that are used in the EDI business of
Seller. All the EDI Assets are free and clear of mortgages, liens, pledges,
charges, encumbrances, equities, claims, easements, rights of way, covenants,
conditions or restrictions, except for (i) those disclosed in Seller's Financial
Reports as of the Stub Period Date, or in the Schedules to this Agreement; (ii)
the lien of current taxes not yet due and payable relating to any of its EDI
Assets and EDI business; and (iii) possible minor matters that, in the
aggregate, are not substantial in amount and do not materially detract from or
interfere with the present or intended use of any of these EDI Assets, nor
materially impair EDI business operations. All the EDI Assets are in good
operating condition and repair, ordinary wear and tear excepted. Except as set
forth on the appropriate Schedule listing such EDI Assets, neither any officer,
nor any director or employee of Selling Parties, nor any spouse, child or other
relative of any of these persons, owns, or has any interest, directly or
indirectly, in any of the personal property or EDI Assets, owned by or leased to
Seller, or any copyrights, patents, trademarks, trade names or trade secrets
licensed by Seller.
6.15 CUSTOMERS AND TRANSACTIONS. SCHEDULE 6.15 to this Agreement is a
correct and current list of all customers and clients of Seller together with
summaries of the sales made to each customer or client during the Stub Period.
Except as indicated in Schedule 6.15, Seller has no Knowledge of any facts
indicating that any of these customers and clients intent to cease doing EDI
business with Seller or materially alter the amount of the EDI business that
they are presently doing with Seller.
6.16 EXISTING EMPLOYMENT ARRANGEMENTS. SCHEDULE 6.16 to this Agreement is
a list of all employment contracts and collective bargaining agreements, and all
pension, bonus, profit-sharing, deferred compensation, stock option, or other
agreements or arrangements providing for employee or outside consultant
remuneration or benefits of those directly related to the EDI business and to
whom Buyer may wish to make an offer of employment, to which Seller is a party
or by which Seller is obligated, whether legally binding or in the nature of
informal
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understandings. All these contracts and arrangements are in full force and
effect, and neither Seller nor Shareholder have Knowledge that any party is in
default under them. The Seller has received no oral or written notice of claims
of defaults and, to the Knowledge of Selling Parties, there are no facts or
conditions which if continued, or on notice, will result in a default under
these contracts or arrangements. There is no pending or, to the Knowledge of
Selling Parties, threatened labor dispute, strike or work stoppage affecting
Seller's EDI business.
6.17 INSURANCE POLICIES. SCHEDULE 6.17 to this Agreement is a description
of all insurance policies held by Seller concerning the EDI Assets. All these
policies are in the respective principal amounts set forth in SCHEDULE 6.17.
Seller has maintained and now maintains (i) insurance on all the EDI Assets of a
type customarily insured, covering property damage and loss of income by fire or
other casualty; and (ii) adequate insurance protection against all liabilities,
claims, and risks against which it is customary to insure, including without
limitation, and errors and omissions coverage.
6.18 [INTENTIONALLY OMITTED]
6.19 COMPLIANCE WITH LAWS. To Selling Parties' Knowledge, Seller has
complied with, and is not in violation of, applicable federal, state or local
statutes, laws and regulations affecting the EDI Assets or the operation of its
EDI business, except as set forth in SCHEDULE 6.19 and for such exceptions as
would not individually or collectively have a materially adverse effect in the
EDI business or the Assets.
6.20 LITIGATION. Except as set forth in SCHEDULE 6.20, there is no suit,
action, arbitration or legal, administrative or other proceeding, or
governmental investigation pending or, to the best Knowledge of Selling Parties,
threatened, against or affecting Seller's EDI business, or Assets. The matters
set forth in SCHEDULE 6.20, if decided adversely to Seller, will not result in a
material adverse change in its EDI business or Assets. Selling Parties have
furnished or made available to Buyer copies of all court papers and other
documents relating to the matters set forth in SCHEDULE 6.20. Seller is not in
default with respect to any order, writ, injunction or decree of any federal,
state, local or foreign court, department, agency or instrumentality. Except as
set forth in SCHEDULE 6.20, Seller is not presently engaged in any legal action
to recover moneys due to it or damages sustained by it relating to its EDI
business or Assets.
6.21 EDI ASSETS SUFFICIENT FOR CONDUCT OF EDI BUSINESS. The EDI Assets
constitute substantially all of the EDI Assets, exclusive of sufficient working
capital, as may be needed from time to time, required for Buyer to conduct the
EDI business of Seller as it is presently conducted.
6.22 AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION. Neither the entry into
this Agreement nor the consummation of the transactions contemplated hereby will
result in or constitute any of the following: (i) a breach of any term or
provision of this Agreement; (ii) a default or an event that, with notice or
lapse of time or both, would be a default, breach or violation of the Articles
of Incorporation or Bylaws of Seller or any lease, license, promissory note,
conditional sales contract, commitment, indenture, mortgage, deed of trust or
other agreement, instrument or arrangement to which Seller is a party or by
which Seller or the EDI
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business and Assets are bound; (iii) an event that would permit any party to
terminate any agreement or to accelerate the maturity of any indebtedness or
other obligation to which either Selling Party is a party; (iv) the creation or
imposition of any lien, charge or encumbrance on any of the EDI Assets; or (v)
the violation of any law, regulation, ordinance, judgment, order or decree
applicable to or affecting Seller's EDI business or Assets.
6.23 AUTHORITY AND CONSENTS. Except as set forth in SCHEDULE 6.23 Selling
Parties have the right, power, legal capacity and authority to enter into, and
perform its obligations under this Agreement, and no approvals, consents or
permits of any person or governmental authority other than Selling Parties are
necessary in connection with it. The execution and delivery of this Agreement
and the consummation of this transaction by Selling Parties have been, or prior
to the Closing will have been, duly authorized by all necessary corporate action
of Selling Parties (including any necessary action by Selling Parties security
holders). This Agreement constitutes a legal, valid and binding obligation of
Selling Parties enforceable in accordance with its terms except as limited by
bankruptcy and insolvency laws and by other laws affecting the rights of
creditors generally.
6.24 [INTENTIONALLY OMITTED].
6.25 [INTENTIONALLY OMITTED].
6.26 [INTENTIONALLY OMITTED]
6.27 BULK TRANSFER NOTICE. Selling Parties represent and warrant that
there are no state or local bulk sales laws or regulations to which the EDI
Assets may be subject.
6.28 [INTENTIONALLY OMITTED]
6.29 LABOR MATTERS. To the Knowledge of the Selling Parties, as to those
employees directly involved in Seller's EDI business whom Buyer may wish to
offer employment, Seller is in compliance in all material respects with all
currently applicable federal, state and local laws and regulations respecting
employing, discrimination, discrimination in employment, disability, terms and
conditions of employment, wages and hours, occupational safety and health and
employment practices except for such failures to comply as would not reasonably
be expected to have a material adverse effect, either individually or in the
aggregate, on Seller. As of the date hereof, Seller has received no notice from
any governmental entity and, as of the date hereof, there has not been asserted
before any governmental entity any claim, action or proceeding to which Seller
is a party, and the Seller has received no notice of any investigation or
hearing pending or threatened concerning Seller, arising out of or based upon
any such laws, regulations or practices.
6.30 DOCUMENTS DELIVERED. Each copy or original of any agreement, contract
or other instrument which is identified in any exhibit delivered by Selling
Parties or their counsel to Buyer (or its counsel or representatives), whether
before or after the execution hereof, is in fact what is purported to be by
Selling Parties and has not been amended, canceled or otherwise modified.
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6.31 FULL DISCLOSURE. None of the written representations and warranties
made by Selling Parties or made in any letter, certificate or memorandum
furnished or to be furnished by Selling Parties, or on their behalf, contains or
will contain any untrue statement of a material fact, or omits any material fact
the omission of which would make the statements made herein, in light of the
circumstances under which they were made, not misleading. There is no fact Known
to Selling Parties which materially adversely affects, or in the future may (so
far as Seller can now reasonable foresee) materially adversely affect the
condition, EDI Assets, liabilities, EDI business, operations or prospects of
Seller's EDI business that has not been set forth herein or heretofore
communicated to Buyer in writing pursuant hereto.
6.32 [INTENTIONALLY OMITTED]
6.33 ABSENCE OF UNDISCLOSED LIABILITIES. Seller does not have and will not
have as of the Closing, except as to the extent reflected or reserved against on
the face of its Financial Reports reflected in SCHEDULE 6.2 hereto, any material
debts, liabilities or obligations (whether absolute, accrued, contingent or
otherwise) including, without limitation, any liabilities for environmental
pollution, any foreign or domestic tax liabilities or deferred tax liabilities
incurred in respect of or measured by Seller's income, or any other material
debts, liabilities or obligations relating to or arising out of any act,
omission, transaction, circumstance, sale of goods or services, stated facts or
other condition related to its EDI business or the Assets.
ARTICLE 7. BUYER'S REPRESENTATIONS AND WARRANTIES AND AGREEMENT
Buyer hereby represents and warrants to Selling Parties that the following
representations are true and correct and, except as contemplated hereby, at all
times up to the Closing Date will be true and correct, and hereby acknowledges
that such representations constitute the basis upon which the Selling Parties
are induced to enter into and perform this Agreement.
7.1 AUTHORITY AND CONSENTS. Buyer represents and warrants that Buyer is a
corporation duly organized, existing and in good standing under the laws of
Florida. Buyer has the right, power, legal capacity and authority to enter into,
and perform its obligations under this Agreement, and no approvals or consents
of any persons other than its Board of Directors are necessary in connection
with it. The execution and delivery of this Agreement and the consummation of
this transaction by Buyer have been, or prior to the Closing will have been,
duly authorized by all necessary corporate action of Buyer. This Agreement
constitutes a legal, valid and binding obligation of Seller enforceable in
accordance with its terms, except as limited by bankruptcy and insolvency laws
and by other laws affecting the rights of creditors generally.
7.2 [INTENTIONALLY OMITTED]
7.3 [INTENTIONALLY OMITTED]
7.4 AGREEMENT WILL NOT CAUSE BREACH OR VIOLATION. Neither the entry into
this Agreement nor the consummation of the transactions contemplated hereby will
result in or
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constitute any of the following: (i) a breach of any term or provisions of this
Agreement; (ii) a default or an event that, with notice or lapse of time or
both, would be a default, breach or violation of the Articles of Incorporation
or Bylaws of Buyer or, to the Knowledge of Buyer, any lease, license, promissory
note, conditional sales contract, commitment, indenture, mortgage, deed of trust
or other agreement, instrument or arrangement to which Buyer is a party or by
which Buyer is bound; (iii) to the knowledge of Buyer, an event that would
permit any party to terminate any agreement or to accelerate the maturity of any
indebtedness or other obligation; or (iv) to the knowledge of Buyer, the
violation of any law, regulation, ordinance, judgment, order or decree
applicable to or affecting Buyer.
ARTICLE 8. PARTIES' OBLIGATIONS BEFORE CLOSING.
Selling Parties covenant that, except as otherwise agreed in writing by
Buyer, from the date of this Agreement until the Closing:
8.1 BUYER'S ACCESS TO PREMISES AND INFORMATION. Buyer and its counsel,
accountants and other representatives shall be entitled to have full access
during normal EDI business hours to all Seller's properties, books, accounts,
records, contracts and documents of or relating to the EDI business and Assets,
but shall not restrict or inhibit Seller's normal EDI business operations.
Selling Parties shall furnish or cause to be furnished to Buyer and its
representatives all data and information concerning the EDI business, Assets,
finances and properties of Seller that may reasonably be requested.
8.2 CONDUCT OF EDI BUSINESS IN NORMAL COURSE. Seller shall carry on its
EDI business and activities diligently and in substantially the same manner as
they previously have been carried on, and shall not make or institute any
unusual or novel methods of management, accounting or operation that will vary
materially from the methods used by Seller as of the date of this Agreement.
Seller shall use its reasonable best efforts, without making any commitments on
behalf of Buyer, to preserve its EDI business organization intact, to keep
available to Seller its present officers and employees, and to preserve its
present relationships with suppliers, customers and others having EDI business
relationships relating to its EDI business with it. Buyer has been informed that
the President of Seller, Armand Morin, has left its employment as of December
31, 1998.
8.3 NO SOLICITATION. Parties hereby ratify and confirm that they have
entered into a legally binding agreement dated December 14, l998, whereby
Selling Parties on behalf of themselves and their affiliates have agreed not to
offer or solicit for sale or sell Seller except to Buyer for a period of time,
all as more fully set out on Addendum A attached hereto and incorporated herein
by reference. Selling Parties and Buyer hereby agree to extend the "no shop"
period to January 15, 1999.
8.4 MAINTENANCE OF INSURANCE. Seller shall continue to carry its existing
insurance, subject to variations in amounts required by the ordinary operations
of its EDI business. At the request of Buyer and at Buyer's sole expense, the
amount of insurance against fire and other casualties which, at the date of this
Agreement, Seller carries on any of the Assets or in respect of
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its EDI business and operations shall be increased by such amount or amounts as
Buyer shall specify.
8.5 EMPLOYEES AND COMPENSATION. As to the EDI Employees as defined in
SCHEDULE 12.16-A and identified in SCHEDULE 12.16-B, Seller shall not do, or
agree to do, any of the following acts relating to its EDI business: (i) grant
any increase in salaries payable or to become payable to any officer, employee,
sales agent or representative, or consultant; or (ii) increase benefits payable
to any officer, employee, sales agent, representative or consultant under any
bonus or pension plan or other contract or commitment. Seller will remain liable
to pay each employee the base salary, bonus and severance, if any, plus any
other compensation due, including any unused vacation or sick time, through the
date of Closing, and comply with all tax withholding provisions of applicable
federal, state, local and foreign laws and have or will pay over to the proper
governmental authorities all amounts required to be so withheld and paid over.
Seller's employees directly involved with its EDI business will be free to
become employees of Buyer after the Transition Period (as defined in Section
12.16) should the Buyer elect to offer employment to any such employees and such
employees accept any such offer of employment.
8.6 NEW TRANSACTIONS. In regards to its EDI business, Seller shall not do,
or agree to do, any of the following acts:
(a) Enter into any contract, commitment or transaction not in the
usual and ordinary course of its EDI business;
(b) Make any capital expenditures or commitments or enter into any
leases of capital equipment or property;
(c) Sell or dispose of any capital EDI Assets; or
(d) Declare any dividends or make any distributions.
8.7 PAYMENT OF LIABILITIES AND WAIVER OF CLAIMS. In regards to its EDI
business, Seller shall not do, or agree to do, any of the following acts: (i)
pay any obligation or liability, fixed or contingent, other than to pay current
liabilities as they become due and payable (ii) waive or compromise any right or
claim; or (iii) cancel, without full payment, any note, loan or other obligation
owing to Seller.
8.8 EXISTING AGREEMENTS. In regards to its EDI business, Seller shall not
modify, amend, cancel or terminate any of its existing contracts or agreements,
or agree to do any of those acts.
8.9 CONSENT OF OTHERS. As soon as reasonably practical after the execution
and delivery of this Agreement, and in any event on or before the Closing Date,
Seller shall use reasonable best efforts to obtain any written consents required
by the terms and conditions of the items described in Sections 1.1, 1.2, 1.3,
1.4, 1.8, 1.10, 1.12, 3.1, 4, 6.23 6.24, 10.7 and 10.9 , and as set out in any
of their respective Schedules to this Agreement in form and substance
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satisfactory to Buyer and will furnish to Buyer executed copies of those
consents obtained by Seller.
8.10 REPRESENTATIONS AND WARRANTIES TRUE AT CLOSING. Selling Parties shall
use all reasonable efforts to assure that all representations and warranties of
Selling Parties set forth in this Agreement and in any written statements
delivered to Buyer by Selling Parties under this Agreement will also be true and
correct as of the Closing Date as if made on that date and that all conditions
precedent to the Closing shall have been met. Seller shall promptly disclose to
Buyer any information contained in the Schedules to this Agreement which,
because of an event occurring after the date hereof, is incomplete or is no
longer correct as of all times after the date hereof until the Closing Date;
provided, however, that none of such disclosures shall be deemed to modify,
amend or supplement the representations and warranties of Seller or the
Schedules hereto for the purposes of Article 9 hereof, unless Buyer shall have
consented thereto in writing.
8.11 SALES AND USE TAXES. Selling Parties hereby agree to indemnify and
hold Buyer harmless against any claims arising out of sales, use and other tax
liabilities relating to its EDI business accrued prior to the Closing Date.
Shareholder agrees to furnish to Buyer certificate(s) in good standing from the
appropriate governmental agencies where it is incorporated and where it does
business and is subject to any such taxes, and any and/or any related
certificates that Buyer may reasonably request, as evidence that all sales, use
and other tax liabilities that are due and payable of the Seller relating to its
EDI business, including without limitation, any sales or use taxes, owed by
Seller as of the Closing Date have been paid.
8.12 STATUTORY FILINGS. Seller shall cooperate fully with Buyer in
preparing and filing all information and documents deemed necessary or desirable
by Buyer under any statutes or governmental rules or regulations pertaining to
the transactions contemplated by this Agreement.
ARTICLE 9. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE
The obligations of Buyer to purchase the EDI Assets under this Agreement
are subject to the satisfaction, at or before the Closing, of all the conditions
set out below in this Article 9. Buyer may waive any or all of these conditions
in accordance with Section 14.2 hereof; provided, however, that no such waiver
of a condition shall constitute a waiver by Buyer of any of its other rights or
remedies, at law or in equity, if Selling Parties shall be in default of any of
their representations, warranties or covenants under this Agreement.
9.1 [INTENTIONALLY OMITTED]
9.2 ACCURACY OF SELLING PARTIES' REPRESENTATIONS AND WARRANTIES. All
representations and warranties by Selling Parties in this Agreement or in any
written statement that shall be delivered to Buyer by Selling Parties under this
Agreement shall be true and correct in all material respects on and as of the
Closing Date as though made at that time.
9.3 ABSENCE OF LIENS. At or within ten (10) days prior to the scheduled
Closing, Buyer shall have received a UCC search report dated as of a date not
more than five days before the Closing Date issued by the appropriate state
governmental agency in Texas and the county
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within which Seller's principal place of business is located reasonably
satisfactory to counsel for Buyer indicating that there are no filings under the
Uniform Commercial Code on file which name any of Seller as debtor or otherwise
indicating any lien not satisfied on the Assets, except for the liens otherwise
disclosed in Schedules hereto.
9.4 SELLING PARTIES' PERFORMANCE. Selling Parties shall have performed,
satisfied, and compiled in all material respects with all covenants, agreements,
and conditions required by this Agreement to be performed or compiled with by
Selling Parties on or before the Closing Date.
9.5 CERTIFICATION BY SELLER. Buyer shall have received a certificate,
dated the Closing Date, signed by Seller's president and its chief financial
officer certifying, in such detail as Buyer and its counsel may reasonably
request, that the conditions specified in Section 9.2 and 9.4 have been
fulfilled.
9.6 OPINION OF SELLING PARTIES' COUNSEL. Buyer shall have received from Ed
Farrar, Esquire counsel for Selling Parties, an opinion dated as of the Closing
Date, in form and substance satisfactory to Buyer and its counsel, that:
(a) ; This Agreement has been duly and validly authorized and, when
executed an delivered by Selling Parties, will be valid and binding on
Selling Parties and enforceable in accordance with its terms, except as
limited by bankruptcy and insolvency laws and by other laws affecting the
rights of creditors generally;
(b) To the best of counsel's knowledge and belief and without
independent inquiry and except as set forth in SCHEDULE 6.20 to this
Agreement, such counsel does not know of any suit, action, arbitration or
legal, administrative or other proceeding or governmental investigation
pending or threatened against or affecting Seller or its EDI business or
any of its properties, or financial or other condition;
(c) To the best of counsel's knowledge and belief and without
independent inquiry, neither the execution nor delivery of this Agreement
nor the consummation of the transaction contemplated in this Agreement
will constitute (i) a default, or an event that would with notice or lapse
of time or both constitute a default under, or violation or breach of (A)
Selling Parties Articles of Incorporation or Bylaws, or (B) to such
counsel's knowledge without independent inquiry, any indenture, license,
lease, franchise, mortgage, instrument or other agreement or statute,
rule, regulation, judgment, order or decree to which Selling Parties are a
party, or by which Selling Parties are a party, or by which Selling
Parties or the Assets may be bound; or (ii) an event that would permit any
party to any agreement or instrument to terminate it or to accelerate the
maturity of any indebtedness or other obligation of Seller; or (iii) to
such counsel's knowledge without independent inquiry, an event that would
result in the creation or imposition of any lien, charge or encumbrance on
any of the Assets; and
(d) To such counsel's knowledge and belief without independent
inquiry, every consent, approval, authorization or order of any court or
governmental agency or body that is required for the consummation by Buyer
of the transaction
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contemplated by this Agreement has been obtained or has been waived by
Buyer, and such counsel has not been informed that any such consent,
approval, authorization or order has been rescinded or is no longer in
effect as of the Closing Date.
9.7 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or any governmental body or authority, pertaining to the transaction
contemplated by this Agreement or to its consummation, shall have been
instituted or threatened on or before the Closing Date.
9.8 CORPORATE APPROVAL. The execution and delivery of this Agreement by
Selling Parties, and the performance of its covenants and obligations under it,
shall have been duly authorized by all necessary corporate action, and Buyer
shall have received copies of all resolutions pertaining to that authorization,
certified by the secretary of Seller and of Shareholder.
9.9 [INTENTIONALLY OMITTED]
9.10 [INTENTIONALLY OMITTED]
9.11 CONSENTS. All necessary agreements and consents of any parties to the
consummation of the transaction contemplated by this Agreement, or otherwise
pertaining to the matters covered by it, shall have been obtained by Seller and
delivered to Buyer.
9.12 APPROVAL OF DOCUMENTATION. The form and substance of all
certificates, instruments, opinions and other documents delivered to Buyer under
this Agreement shall be satisfactory in all reasonable respects, to Buyer and
its counsel.
9.13 [INTENTIONALLY OMITTED]
9.14 [INTENTIONALLY OMITTED]
9.15 TRADEMARK AND PATENT MATTERS. If requested by Buyer, Buyer shall have
received a report, satisfactory to Buyer, from Seller's counsel concerning the
matters set forth in Sections 6.10 and 6.11, and all such assignments of
trademarks and patents duly assigned in recordable form to Buyer shall have been
delivered to Buyer in the form satisfactory to Buyer and its counsel.
9.16 CONTINUITY OF MANAGEMENT. Buyer shall have made arrangements
reasonably suitable to it for the employment by Buyer of sufficient Seller
employees to continue the operation of the EDI business being transferred
without disruption thereto.
9.17 CONDITION OF EDI ASSETS. The Assets shall not have been materially or
adversely affected in any way as a result of any fire, accident, storm or other
casualty or labor or civil disturbance or act of God or the public enemy.
17
<PAGE>
9.18 HARRIS. Buyer shall have received a copy of a new payer agreement
between Seller and Harris Methodist Health Plan and Harris Insurance Company
("Harris"), in a form satisfactory to Buyer.
ARTICLE 10. CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE
The obligations of Seller to sell and transfer the Assets under this
Agreement are subject to the satisfaction, at or before the Closing, of all the
following conditions set out below in this Article 10. Except for Sections 10.4
and 10.7, Seller may waive any or all of these conditions in accordance with
Section 14.2 hereof; provided, however, that no such waiver of a condition shall
constitute a waiver by Seller of any of its other rights or remedies, at law or
in equity, if Buyer shall be in default of any of its representations,
warranties or covenants under this Agreement.
10.1 ACCURACY OF BUYER'S REPRESENTATIONS AND WARRANTIES. All
representations and warranties by Buyer contained in this Agreement or in any
written statement delivered by Buyer under this Agreement, including but not
limited to the Reports delivered to Selling Parties pursuant to Section 7.2
hereof, shall be true on and as of the Closing as though such representations
and warranties were made on and as of that date.
10.2 BUYER'S PERFORMANCE. Buyer shall have performed and complied with all
covenants and agreements, and satisfied all conditions that it is required by
this Agreement to perform, comply with, or satisfy, before or at the Closing.
10.3 OPINION OF BUYER'S COUNSEL. Buyer shall have furnished Seller with an
opinion, dated the Closing Date, of Frank M. Puthoff, Esquire, Chief Legal
Officer for Buyer, in form and substance satisfactory to the Shareholder and his
counsel, to the effect that:
(a) Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida and has all requisite
corporate power to perform its obligations under this Agreement;
(b) All corporate proceedings required by law or by the provisions
of this Agreement to be taken by Buyer on or before the Closing Date, in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement, have been
duly and validly taken;
(c) Buyer has the corporate power and authority to acquire the EDI
Assets for the consideration set forth herein;
(d) To such counsel's knowledge without independent inquiry, every
consent, approval, authorization or order of any court or governmental
agency or body that is required for the consummation by Buyer of the
transactions contemplated by this Agreement has been obtained or has been
waived by Seller and will be in effect on the Closing Date;
18
<PAGE>
(e) The consummation of the transaction contemplated by this
Agreement does not violate or contravene any of the provisions of the
Articles of Incorporation, Bylaws of Buyer or to the best of such
counsel's knowledge without independent inquiry any indenture, agreement,
statute, judgment or order to which Buyer is a party or by which Buyer is
bound;
(f) This Agreement has been duly and validly authorized and, when
executed and delivered by Buyer, will be valid and binding on Buyer and
enforceable in accordance with its terms, except as limited by bankruptcy
and insolvency laws and by other laws affecting the rights of creditors
generally.
10.4 BUYER'S CORPORATE APPROVAL. Buyer shall have received corporate
authorization and approval from its Board of Directors for the execution and
delivery of this Agreement and all corporate action necessary or proper to
fulfill the obligations of Buyer to be performed under this Agreement on or
before the Closing Date.
10.5 CERTIFICATION BY BUYER. Shareholder shall have received a
certificate, dated the Closing Date, signed by an executive officer of Buyer
certifying, in such detail as Shareholder and his counsel may reasonably
request, that the conditions specified in Section 10.1 and 10.2 have been
fulfilled.
10.6 ABSENCE OF LITIGATION. No action, suit or proceeding before any court
or any governmental body or authority, pertaining to the transaction
contemplated by this Agreement or to its consummation, shall have been
instituted or threatened on or before the Closing Date.
10.7 CONSENTS. All necessary agreements and consents of any parties to the
consummation of the transaction contemplated by this Agreement, or otherwise
pertaining to the matters covered by it, shall have been obtained on or before
the Closing Date.
10.8 APPROVAL OF DOCUMENTATION. The form and substance of all
certificates, instruments, opinions and other documents delivered to Selling
Parties under this Agreement shall be satisfactory in all reasonable respects,
to Shareholder and his counsel.
10.9 PAYMENT OF PURCHASE PRICE. The Buyer shall have paid the purchase
price for the Assets to be paid at Closing as specified in Section 2.1(a).
ARTICLE 11. EMPLOYEES
11.1 EMPLOYEE PLANS. Buyer is not assuming any obligations of Seller
relating to any Employee Plan. "Employee Plan" includes all pension, retirement,
disability, medical, dental or other health insurance plans, life insurance or
other death benefit plans, profit sharing, deferred compensation, stock option,
bonus or other incentive plans, vacation benefit plans, severance plans or other
employee benefit plans or arrangements including, without limitation, any
pension plan as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974 ("ERISA") and any welfare plan as defined in Section 3(1)
of ERISA, whether or not funded,
19
<PAGE>
covering any employee of Seller or to which Seller is a party or bound or makes
or has made any contribution or by which Seller may have any liability to any
Subject Employee (including any such plan formerly maintained by or in
connection with which Seller may have any liability to any Subject Employee, and
any such plan which is a multiemployer plan as defined in Section 3(37)(A) of
ERISA).
ARTICLE 12. PARTIES' OBLIGATIONS AFTER THE CLOSING
A. SELLING PARTIES' OBLIGATIONS.
12.1 PRESERVATION OF GOODWILL. Following the Closing, Selling Parties will
restrict their activities so that Buyer's reasonable expectations with respect
to the goodwill, EDI business reputation, employee relations and prospects
connected with the Assets will not be materially impaired.
12.2 GUARANTEE OF LIABILITIES. Selling Parties, jointly and severally,
guarantee to Buyer that all liabilities, whether current or long term, of Seller
relating to its EDI business as of the Closing Date will be fully paid and
satisfied within sixty (60) days after the Closing.
12.3 [INTENTIONALLY OMITTED]
12.4 SELLING PARTIES' INDEMNITIES. Selling Parties shall indemnify, defend
and hold harmless Buyer, including its directors, managers, officers, employees
and agents, against and in respect of any and all claims, demands, losses,
costs, expenses, obligations, liabilities, damages, recoveries and deficiencies,
including interest, penalties and reasonable attorneys' fees ("Losses"), that
Buyer and such other persons shall incur or suffer, which arise, result from or
relate to any breach of, or failure by Selling Party to perform, any of its
representations, warranties, covenants or agreements in this Agreement or in any
schedule, certificate, exhibit or other instrument furnished or to be furnished
by Seller under this Agreement, or from the EDI business and operation of the
Seller prior to the Closing Date.
Notwithstanding any other provision of this Agreement, Selling
Parties shall not be liable to Buyer on any warranty, representation or covenant
made by Selling Parties in this Agreement, or under any of their indemnities in
this Agreement, regarding any single claim, loss, expense, obligation or other
liability (except for those arising under Sections 1.6, 8.7, 8.9, 12.2 and 12.16
which shall be first dollar coverage) that does not exceed $25,000; provided,
however, that when the aggregate amount of all such claims, losses, expenses,
obligations and liabilities not exceeding $25,000 each reaches $25,000, Selling
Parties shall thereafter be liable in full for all such breaches and indemnities
and regarding all those claims, losses, expenses, obligations and liabilities
exceeding $25,000.
12.5 ACCESS TO RECORDS. From and after the Closing, Selling Parties shall
allow Buyer, and its counsel, accountants and other representatives, such access
to records which after the Closing may be in the custody or control of Selling
Parties as Buyer reasonably requires in order to comply with its obligations
under the law or under contracts assumed by Buyer pursuant to this Agreement.
20
<PAGE>
12.6 [INTENTIONALLY OMITTED]
12.7 DEPOSIT OF CHECKS. Selling Parties shall cooperate with Buyer in
making all necessary or desirable arrangements so that checks and other payments
on Accounts Receivable purchased by Buyer pursuant to this Agreement may be
deposited into Buyer's bank accounts without endorsement by the Seller.
12.8 GUARANTEE. Shareholder hereby unconditionally guarantees to Buyer the
full and timely performance of all of the obligations and agreements of Seller.
The foregoing guarantee shall include the guarantee of the payment of all
damages, costs and expenses which might become recoverable as a result of the
nonperformance of any of the obligations or agreements so guaranteed as a result
of the nonperformance of this guarantee. Buyer may, at its option, proceed
against Seller and/or Shareholder for the performance of any such obligation or
agreement, or for damages for default in the performance thereof, without first
proceeding against any other party or against any of its properties. Selling
Parties further agree that its guarantee shall be an irrevocable extension and
shall continue in effect notwithstanding any extension or modification for any
guaranteed obligation, any assumption of any such guaranteed obligation by any
other party, or any other act or thing which might otherwise operate as a legal
or equitable discharge of a guarantor, and Shareholder hereby waives all special
suretyship defenses and notice requirements.
12.9 [INTENTIONALLY OMITTED]
12.10 [INTENTIONALLY OMITTED]
12.11 [INTENTIONALLY OMITTED]
12.12 ACCESS TO RECORDS. From and after the Closing, Buyer shall allow
Selling Parties, and their counsel, accountants and other representatives, such
access to records which after the Closing are in the custody or control of Buyer
as Selling Parties reasonably require in order to comply with their respective
obligations under the law or under contracts assumed by Buyer pursuant to this
Agreement.
12.13 BUYER'S INDEMNITIES. Buyer shall indemnify, defend and hold harmless
Seller and Shareholder, and their respective directors, managers, officers,
employees and agents, against and in respect of any and all Losses (as such term
is defined in Section 12.4 hereof) that Seller and/or Shareholder and/or such
other persons shall incur or suffer, which arise out of or result from any
breach of, or failure by Buyer to perform any obligations pursuant to this
Agreement and the EDI business and Assets acquired on or after the Closing Date.
Notwithstanding any other provision of this Agreement, except for
Buyer's obligation to pay the consideration for the Assets referred to in
Section 2.1 hereof in connection with liabilities of Seller to be specifically
assumed hereunder, Buyer shall not be liable to Seller and/or Shareholder on any
warranty, representation or covenant made by Buyer in this Agreement, or under
any of its indemnities in this Agreement, regarding any single claim loss,
expense,
21
<PAGE>
obligation or other liability that does not exceed $25,000, provided, however,
that when the aggregate amount of all such claims, losses, expenses, obligations
and liabilities exceeding $25,000 each reaches $25,000, Buyer shall thereafter
be liable in full for all such breaches and indemnities and regarding all those
claims, losses, expenses, obligations and liabilities exceeding such $25,000
amount.
12.14 INDEMNIFICATION PROCEDURES.
(a) In connection with the indemnification provisions contained
herein, the party claiming indemnification shall promptly notify the
indemnifying party of such a claim.
(b) The indemnifying party shall be entitled to assume the defense
or settlement thereof with counsel of its own choosing, which counsel
shall be reasonably satisfactory to the indemnified party; provided,
however, that: (a) the indemnified party shall be entitled to participate
in any such action or proceeding or in any negotiations or proceedings to
settle or otherwise eliminate any claim for which indemnification is being
sought; and (b) the indemnifying party shall not be entitled to settle,
compromise, decline to appeal or otherwise dispose of such claim, action
or proceeding without the consent of the indemnified party if such claim,
action or proceeding in the reasonable judgment of the indemnified party
either (i) involves a request for relief other than money damages; or (ii)
in the event of an adverse ruling, could have a material adverse effect on
the indemnified party.
(c) In the event that the indemnifying party does not assume the
defense or settlement of any claim, action or proceeding, the indemnified
party may conduct the investigation, defense, trial and, if necessary,
appeal of, and/or may settle any such claim, action or proceeding.
(d) Any claims, legal fees or other reasonable and actual costs and
expenses paid or incurred by the indemnified party shall be paid to the
indemnified party by the indemnifying party within ninety (90) days after
receipt by the indemnifying party of the indemnified party's itemized
invoice.
12.15 [INTENTIONALLY OMITTED]
12.16 Transition Period. After the Closing Date and for a period through
April 30, 1999 (the "Transition Period"), Seller agrees, as more fully set forth
in the EDI Employee Services Agreement attached hereto as Schedule 12.16-A, to
lease to Buyer all of Seller's employees who were directly involved in the EDI
business up to the Closing Date(the "EDI Employees") and to provide the same or
similar office space and services as provided to the EDI Employees on the date
of this Agreement. Buyer shall reimburse Seller for operating expenses
associated with the EDI Employees as set forth in Schedule 12.16-B, except for
separation stay pay bonuses which will be paid directly by ProxyMed. Seller
represents and warrants that the operating expenses budget as set forth in
Schedule 12.16-B is complete and accurate in all material respects and that
22
<PAGE>
there are no other significant operating expenses related to the EDI business
which are not reflected therein.
ARTICLE 13. COSTS
13.1 FINDER'S OR BROKER'S FEES. Each of the parties represents and warrants that
it has dealt with no broker or finder in connection with any of the transactions
contemplated by this Agreement, and, insofar as it knows, no broker or other
person is entitled to any commission or finder's fee in connection with any of
these transactions.
13.2 EXPENSES. Each of the parties shall pay all costs and expenses,
including, but not limited to attorneys' and accounting fees, incurred or to be
incurred by it in negotiating and preparing this Agreement and in closing and
carrying out the transactions contemplated by this Agreement.
ARTICLE 14. FORM OF AGREEMENT
14.1 HEADINGS. The subject headings of the Articles and Sections of this
Agreement are included for purposes of convenience only, and shall not affect
the construction or interpretation of any of its provisions.
14.2 ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations, and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall be
binding unless executed in writing by the party making the waiver.
14.3 COUNTERPARTS. This Agreement may be executed simultaneously in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. In addition, execution of
this Agreement may be transmitted by one party to the other via facsimile.
ARTICLE 15. PARTIES
15.1 PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over against any party to this Agreement.
15.2 ASSIGNMENT. Buyer may not assign or delegate any of its rights or
obligations under this Agreement or any part hereof without the prior written
consent of Seller except for any
23
<PAGE>
assignment in connection with the sale of substantially all of Buyer's assets or
capital stock to an unaffiliated third party. Except as otherwise set forth
herein the Selling Parties may not assign or delegate any of their respective
rights or duties hereunder, without the prior written consent of the Buyer. This
Agreement shall be binding on and shall inure to the benefit of the parties to
it and their respective heirs, legal representatives, successors and assigns.
ARTICLE 16. REMEDIES
16.1 RECOVERY OF LITIGATION COSTS. If any legal action or any arbitration
or other preceding is brought for the enforcement of this Agreement, or because
of an alleged dispute, breach, default or misrepresentation in connection with
any of the provisions of this Agreement, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief to which
it or they may be entitled.
16.2 CONDITIONS PERMITTING TERMINATION. Subject to the provisions of
Article 3 and Article 20.2, either party may on the Closing Date terminate this
Agreement by written notice to the other, without liability to the other, if any
bona fide action or proceeding shall be pending against either party on the
Closing Date that could result in an unfavorable judgment, decree or order that
would prevent or make unlawful the carrying out of this Agreement.
16.3 DEFAULTS PERMITTING TERMINATION. If either Buyer or Selling Parties
materially default in the due and timely performance of any of its
representations, warranties, covenants, or agreements under this Agreement, the
non-defaulting party or parties may on the Closing Date give notice of
termination of this Agreement, in the manner provided in Article 18 or in
Section 20.2 as applicable. The notice shall specify with particularity the
default or defaults on which the notice is based. The termination shall be
effective ten (10) business days from the date notice is actually received (the
"Termination Date"). If the Termination Date is less than ten (10) days prior to
the scheduled Closing Date, such Closing Date shall be extended for the same
time to enable defaulting party to cure the specified default(s) on or before
the Termination Date. Such termination shall not waive, release or discharge the
non-defaulting parties' rights to seek legal and equitable relief.
16.4 BREACH OF WARRANTIES. Notwithstanding any provision of the Agreement
to the contrary, if, upon execution of the Agreement and upon the Closing, the
warranties and representations made by either party pursuant to Sections 6, 7 or
11 of the Agreement are not true and correct, and either party notifies the
other party of such fact in writing, then the rights and obligations of the
parties shall be as follows:
(a) If the applicable warranty or representation was untrue as of
the date made, then except in cases of fraud or neglect, the sole and exclusive
remedy of the non-warranting party shall be either of the following, as the
non-warranting party may elect in writing:
24
<PAGE>
(i) To waive the breach in writing and continue with the
Closing, in which case the non-warranting party shall have no further recourse
with respect to such breach or falsity pursuant to Section 12.4 or 12.13 or
otherwise; or
(ii) To terminate the Agreement by written notice, in which
case neither party shall have any further obligations or liabilities to the
other party hereunder, except as set forth in Sections 16.4 and 20.2.
(b) If the applicable warranty or representation was true when
made, but became untrue thereafter for reasons other than a breach by the
warranting party of its other covenants and obligations under the Agreement,
then:
(i) If the breach or falsity would adversely and materially
affect the non-breaching party's rights and obligations under the Agreement, the
remedies of the non-warranting party shall be as elected under Section 16(a)
above; and
(ii) If the breach or falsity would not adversely and
materially affect the non-breaching party's rights and obligations under the
Agreement, the sole and exclusive remedy of the non-warranting party shall be
limited to those set forth elsewhere in this Agreement, and the non-warranting
party shall have no right to terminate the Agreement on account of such breach
or falsity.
16.5 EXCLUSIVE REMEDY. The indemnification provisions contained in this
Agreement and remedies provided for in Section 20.5 are the exclusive remedies
that any party hereto may have for breach of any representation, warranty or
covenant in this Agreement. The parties hereto acknowledge and agree that the
purpose of the representations and warranties contained in this Agreement is to
give an aggrieved party the right to be indemnified pursuant to such
indemnification provisions. Accordingly, the parties agree that immaterial
breaches of such representations and warranties shall not be deemed to
constitute fraud or misrepresentation under state or federal law.
ARTICLE 17. NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES
All representations, warranties, covenants and agreements in this
Agreement or in any Schedule, instrument, certificate, opinion or other writing
provided for in it, shall survive the Closing for a period of two (2) years
thereafter.
ARTICLE 18. NOTICES
All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given on the
date of service if served personally on the party to whom notice is to be given,
or on the third day after mailing if mailed to the party to whom notice is to be
given, by first class mail registered or certified, postage prepaid, and
properly addressed as follows:
25
<PAGE>
SELLER: Specialized Medical Management, Inc.
6100 Western Place, Suite 200
Ft. Worth, Texas 76107-4600
Attn.: _____________________________
with copy to: Texas Health Resources, Inc.
6000 Western Place, Suite 340
Ft. Worth, Texas 76107
Attn.: General Counsel
SHAREHOLDER: Texas Health Management Services, Inc.
600 E. Las Colinas Blvd., #1550
Irving, Texas 75039-5622
Attn: ______________________________
BUYER: ProxyMed, Inc.
2555 Davie Road, Suite 110
Fort Lauderdale, Florida 33317
Attn.: Chief Executive Officer
with copy to: ProxyMed, Inc.
2555 Davie Road, Suite 110
Fort Lauderdale, Florida 33317
Attn.: Chief Legal Officer
Any party may change its address for purposes of this Article by giving the
other parties written notice of the new address in the manner set forth above.
ARTICLE 19. GOVERNING LAW
This Agreement shall be construed in accordance with, and governed by, the
laws of the State of Texas, without regard to its conflict of laws provisions.
ARTICLE 20. MISCELLANEOUS
20.1 ANNOUNCEMENTS. Except as and to the extent required by any applicable
law, regulation or order, including Securities and Exchange Commission
regulations, no party to this Agreement shall, and each shall direct its
representatives not to, directly or indirectly, make any public comment,
statement or communication with respect to, or otherwise disclose or permit the
disclosure of the existence of negotiations regarding a proposed transaction
between the parties or any of the terms, conditions or other aspects of a
proposed transaction without prior written consent of the other party, In the
event any party is required by applicable law, regulation or order to make any
such disclosure, such party shall provide prior notice of such required
disclosure to the other party. Selling Parties and Buyer agree to make a public
announcement of this transaction and Buyer will deliver to Seller a copy of the
proposed public announcement relating to this transaction prior to the
publication thereof in order to give Seller an opportunity
26
<PAGE>
to make recommendations with respect thereto, which recommendation shall in no
way be binding on Buyer.
20.2 CONFIDENTIALITY. Buyer and Selling Parties hereby ratify and confirm
that they have entered into a legally binding agreement dated December 14, l998,
whereby Buyer and Selling Parties on behalf of themselves and their affiliates
have agreed as to matter of confidentiality, all as more fully set out on
Addendum "A" attached hereto and incorporated herein by reference.
20.3 FURTHER ACTIONS. Each party shall execute and deliver such other
certificates, agreements and other documents and take such other actions as may
reasonably be requested by the other parties in order to consummate or implement
the transactions contemplated by this Agreement.
20.4 SEVERABLE COVENANTS. In the event that any provision contained herein
is declared invalid or illegal, the other provisions hereof shall not be
affected or impaired thereby and shall remain valid and enforceable.
20.5 SPECIFIC PERFORMANCE. In the event of a breach or threatened breach
by any party hereto of the provisions of this Agreement, any other party hereto
shall be entitled to specific performance. Nothing herein shall be construed as
prohibiting any party hereto from pursuing any other remedies available for such
breach or threatened breach, including the recovery of damages.
20.6 COUNTERPARTS. This Agreement may be signed in two or more
counterparts, any one of which need not contain the signatures of more that one
party, but all such counterparts taken together will constitute one and the same
instrument. In addition, execution of this Agreement may be transmitted by one
party to the other via facsimile.
[SIGNATURE PAGE FOLLOWS]
27
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have duly executed it as
of the day and year first above written.
BUYER:
PROXYMED, INC.
Attest:
By: /s/ FRANK M. PUTHOFF By: /s/ HARROLD BLUE
-------------------- ----------------------------------
Frank M. Puthoff Harold Blue, Chairman of the Board
Secretary and Chief Executive Officer
SELLER:
SPECIALIZED MEDICAL MANAGEMENT,
INC.
Attest:
By: /s/ ED FARRAR By: /s/ RONALD D. BOURLAND
-------------------- ----------------------------------------
Secretary Executive Vice President
SHAREHOLDER:
TEXAS HEALTH MANAGEMENT
SERVICES, INC.
Attest:
By: /s/ KENNETH KRAMER By: /s/ RONALD D. BOURLAND
- ------------------------ ----------------------------------------
Secretary Ronald D. Bourland
Title: EXECUTIVE V.P./CFO
-------------------------------------
28
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
<S> <C> <C>
REGISTRANT: Name: ProxyMed, Inc.
State of Incorporation: Florida
SUBSIDIARIES: Name: Hayes Telecommunication Services, Inc.
State of Incorporation: Florida
Name: Key Communications Service, Inc.
State of Incorporation: Indiana
Name: ProxyCare, Inc.
State of Incorporation: Florida
Name: WPJ, Inc. d/b/a Integrated Medical Systems
State of Incorporation: California
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in registration statements of
ProxyMed, Inc. and subsidiaries on Forms S-3 (File Nos. 333-58311, 333-11179,
333-34645 and 33-95454) and Forms S-8 (File Nos. 333-04717 and 333-50391) of our
report dated February 19, 1999, on our audits of the consolidated financial
statements and financial statement schedule of ProxyMed, Inc. and subsidiaries
as of December 31, 1998 and 1997, and for each of the three years ended December
31, 1998 which report is included in this annual report on Form 10-K.
PricewaterhouseCoopers LLP
Miami, Florida
March 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,681,671
<SECURITIES> 0
<RECEIVABLES> 6,978,850
<ALLOWANCES> (594,854)
<INVENTORY> 2,970,210
<CURRENT-ASSETS> 14,754,750
<PP&E> 5,797,446
<DEPRECIATION> (1,461,502)
<TOTAL-ASSETS> 48,836,574
<CURRENT-LIABILITIES> 7,190,262
<BONDS> 0
0
0
<COMMON> 17,808
<OTHER-SE> 82,427,262
<TOTAL-LIABILITY-AND-EQUITY> 40,279,119
<SALES> 19,205,611
<TOTAL-REVENUES> 37,767,677
<CGS> 13,208,278
<TOTAL-COSTS> 31,755,352
<OTHER-EXPENSES> 1,169,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106,571
<INCOME-PRETAX> (11,788,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,788,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,788,185)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
