form-10ka_051502
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(As Amended)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ TO ____________
Commission File Number 0-24768
MEDIX RESOURCES, INC.
(Name of small business issuer in its charter)
Colorado 84-1123311
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization Identification No.)
420 Lexington Avenue, Suite 1830
New York, New York 10170
(Address of Principal Executive Offices)
Issuer's Telephone Number: (212) 697-2509
Securities Registered Under Section 12(b) of the Exchange Act:
Common Stock - $.001 Par Value.
Securities Registered Under Section 12(g) of the Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act during the past 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.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-X contained in this form, and no disclosure will be contained, to
the best of 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. [X]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of March 15, 2002 was approximately $31,707,233
for purposes of the foregoing calculation only, each of the
registrant's officers and directors is deemed to be an affiliate).
There were 58,386,516 shares of registrant's Common Stock outstanding as of March
15, 2002.
Documents incorporated by reference:
None
TABLE OF CONTENTS
PART I..........................................................................3
ITEM 1. BUSINESS.............................................................3
ITEM 2 PROPERTIES..........................................................15
ITEM 3. LEGAL PROCEEDINGS...................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................17
PART II....................................................................... 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................17
ITEM 6. SELECTED FINANCIAL DATA.............................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION......................19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.............................................25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................25
PART III.......................................................................25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................25
ITEM 11. EXECUTIVE COMPENSATION..............................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................................35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................37
PART IV ....................................................................38
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.................................................38
PART I
ITEM 1. BUSINESS
Our Company
Medix Resources, Inc., a Colorado corporation ("Medix" or the "Company"), is an
information technology company with its principal executive office in New York, New York.
The Company also maintains offices in Agoura Hills, California, Greenwood Village, Colorado
and Marietta, Georgia. We specialize in the development, marketing and management of
connectivity solutions for clinical and business transactions within the healthcare
industry. Through our wholly owned subsidiary, Cymedix Lynx Corporation, a Colorado
corporation ("Cymedix"), we have developed the Cymedix(R)suite of service products as a
toolkit to help modernize physician and healthcare communication technology and facilitate
transaction productivity. We continue to enhance and refine our products to enable the many
disparate information systems within the healthcare industry to communicate with one
another and to expand the scope of healthcare transaction automation.
The Cymedix(R)suite of products enables the transmission of critical clinical,
financial and administrative information between healthcare information systems, and
provides healthcare institutions (such as health plans, insurers, hospitals and practicing
physicians) with non-invasive connectivity products that can be integrated with their
existing software applications to provide Internet-enabled transaction capability between
all parties. This approach is significant because it offers substantial utility to
physicians who are cautious about making major adjustments to their practice disciplines or
reluctant to invest heavily in new, administrative technologies.
The implementation of Cymedix(R)service products targets improved efficacy of daily
interactions between health caregivers and their staffs, ancillary providers such as
laboratories and pharmacy benefit managers (PBMs), insurance companies, hospitals,
Integrated Delivery Networks (IDNs) and Health Maintenance Organizations (HMOs). Recent
State and Federal legislative actions, as well as industry mandates to promote quality and
the privacy of patient information while controlling costs, have created fertile ground for
effective technology solutions that unite systems and enable digital communication. The
market for robust and practical healthcare solutions will grow rapidly, and that growth
will continue to accelerate as the joined emphases of consumer choice, quality,
administrative service and cost-containment ratchet up the demand for more efficient and
user-friendly methods of delivering quality healthcare.
Moreover, Medix understands the essentially local nature of healthcare and will
deploy Cymedix(R)service products only in regions where we can guarantee that each installed
physician can use our technologies to serve most of his or her patients. This disciplined
market approach, combined with the Cymedix(R)suite of physician-centric products, provides a
foundation for rapid adoption, ongoing utilization and stable, recurring revenue streams.
Our regional strategy and focus on authentic physician adoption is what differentiates us
from most eHealth companies, including those who have survived the rough justice of today's
market, as well as the many who have perished.
Medix was incorporated in the State of Colorado in 1988. For the next decade, the
Company operated as a temporary healthcare staffing company, with offices at various times
in Colorado, New York, Texas and California. Medix disposed of the its remaining healthcare
staffing operations in February 2000. In January 1998, the Company acquired Cymedix
Corporation, a California corporation, which was merged into our wholly owned healthcare
technology subsidiary, Cymedix Lynx Corporation.
As of March 15, 2002, we are in various stages of project development, testing and
market implementation with six clients using components of the Cymedix(R)software suite to
link healthcare participants by using the Internet. While none of these projects have
generated any significant revenues to date, if funding can be obtained to continue and
expand our operations, these projects should position us as one of the technology leaders
in the emerging eHealth industry. All of these projects involve working with an existing
healthcare insurer, reference laboratory or pharmacy benefit management company to
integrate selected Cymedix(R)products into their networks to enable physicians to use those
products for pharmacy management transactions, laboratory orders and results reporting or
claims processing. See "Forward-Looking Statements and Associated Risks" under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION below.
Our principal executive office is located at 420 Lexington Avenue, Suite 1830, New
York, NY 10170, and its telephone number is (212) 697-2509. Our principal administrative
office is at 7100 East Belleview Ave., Greenwood Village, CO 80111, and its telephone
number is (303) 741-2045.
Recent Developments
We executed an Amended and Restated Common Stock Purchase Warrant with WellPoint
Pharmacy Management a wholly owned subsidiary of WellPoint Health Networks Inc., dated
February 18, 2002, to restructure our obligations to issue warrants to WellPoint. Under
that Warrant, we are obligated to issue up to 7,000,000 shares of our common stock at
exercise prices of $0.30 per share for 3,000,000, $0.50 per share for 3,000,000 shares and
$1.75 per share for 1,000,000 shares, if various performance related vesting requirements
are satisfied by WellPoint. Currently, WellPoint has satisfied certain of these
requirements giving WellPoint the right to purchase 1,850,000 shares of our common stock
at $0.30 per share. The Warrant grants to WellPoint certain registration rights to require
us to register with the SEC the shares issued to WellPoint for resale to the public. In
the Warrant, WellPoint has agreed to restrict sales to the public of these shares during
the first year after they have been issued to 200,000 shares per month and 100,000 shares
in any five trading days. The Warrant contains anti-dilution provisions providing that
the number of shares that may be purchased by WellPoint under the Warrant may be adjusted
in certain circumstances. WellPoint's rights to purchase our shares under the Warrant
expire on September 8, 2004.
We entered into a secured convertible loan agreement with WellPoint, dated February
19, 2002, pursuant to which we borrowed $1,000,000 from WellPoint Health Networks Inc. The
loan becomes payable on February 19, 2003, if not converted into our common stock. The
loan earns annual interest at a floating rate of 300 basis points over prime, as it is
adjusted from time to time, which is also payable at maturity and may be converted into
common stock. Conversion into common stock is at the option of either WellPoint or Medix
at a contingent conversion price. The conversion price will be either (i) at the price at
which additional shares are sold to other private placement investors if Medix obtains
written commitments for at least an additional $4,000,000 of equity by the close of
business on September 30, 2002, from persons not affiliates of WellPoint, and if such sales
are closed by the maturity date of the loan, or (ii) at a price equal to 80% of the
then-current Fair Market Value (as defined below) if Medix is unable to obtain a written
commitment for the additional equity investment by the close of business on September 30,
2002 or close the sales by the maturity date. For this purpose, "Fair Market Value" shall
be the average closing price of Medix common stock for the twenty trading days ending on
the day prior to the day of the conversion. The loan is secured by the grant of a security
interest in all Medix's intellectual property, including its patent, copyrights and
trademarks. While Medix can cure a default in the repayment of the loan at the fixed
maturity date by the forced conversion of the loan into its common stock, a cross default,
breach of representation or warranty, and bankruptcy or similar event of default will
trigger the foreclosure provision of the security agreement. The Company expects to
require conversion at the earliest possible time, which may be before September 30, 2002 if
the required funds are received at which point the pledge of collateral will be received.
In October 2001, Medix announced the introduction of Cymedix(R)III, the next
generation of its proprietary, point-of-care products. Cymedix(R)III is based upon a robust
and device-neutral architecture that leverages established workstation, handheld and
wireless technologies and supports Medix' long-term commitment to support emerging exam
room and point-of-care technologies. Cymedix(R)III products, including working applications
for Cymedix(R)Pharmacy, Laboratory and PlanConnect services, will be made available to
physicians in 2002. Until recently, the combination of expensive, front-end equipment costs
coupled with time-consuming and often problematic data synchronization requirements
effectively dampened the physician's appetite for any of the point-of-care technologies
being offered. Our new Cymedix(R)III architecture is both fully scalable and device-neutral,
allowing our Pharmacy, Lab and PlanConnect products to be delivered via workstation and
wireless handheld devices with the technologies available today as well as those of the
future. The addition of wireless capability within our Cymedix(R)III product release
naturally complements the Medix suite of transaction products, and enables physicians and
their office staff to execute the full range of clinical and support transactions from
their office workstation, their home desktop or from the exam room itself, via a handheld
device with real-time synchronization of secure patient data. We believe that the expanded
capabilities of Cymedix(R)III offer a compelling value return for physicians and will
accelerate their adoption of our technology.
Finally, during 2001, we ceased operations of our Automated Design Concepts division
(ADC), a Web design business. We had acquired ADC in early 2000 from a former officer and
director of the Company for cash and stock valued at $474,000. In connection with our
general cost reduction program, we determined that the business of the subsidiary was not
part of our core business operations and therefore did not justify our continued financial
support. In connection with the termination of our subsidiary's operations we took a
write-off of goodwill in the amount of $443,000. We also determined that our license of
proprietary software from ZirMed.com had no value to us and had no more than a nominal
market value. In 2001, we wrote-off the unamortized value of the related intangible asset,
which was $668,000.
Our Industry
The U.S. Centers for Medicare and Medicaid Services (formerly the Health Care Finance
Administration) estimates that $1.4 trillion dollars, or 14% of the U.S. Gross domestic
product, is spent annually on healthcare. Healthcare expenditures are expected to grow to
approximately $2.8 trillion by 2011, due to increasingly expensive and sophisticated
clinical technology, an aging population base and the growing demands of newly-empowered
and health conscious consumers.
Every year, the healthcare industry conducts its business by executing more than 30
billion transactions, more than 90% of which are untouched by integrated automation. Core
transactions -- such as enrollment and eligibility verification, referrals and
authorizations, lab orders and lab results reporting, billing and claims and
prescription-writing with drug interaction checks -- are processed through a disjointed
matrix of isolated systems, including paper, fax and phone. Of necessity, every provider,
insurer or supplier has invested in its own proprietary and often antiquated information
system. As a result, duplication is rampant, error probabilities are enormous and the
waste of precious resources is glaringly obvious.
Health economists estimate that 20% or more of the nation's total healthcare
expenditures is spent on backroom administration. Another 10% funds the fallout of adverse
health events that are caused by inaccurate or unavailable patient information. The
cumulative effect is that, more than 4% of our nation's annual economic output is being
consumed by a service and transactions industry that pleases no one and angers many.
Today's inefficient and "silo" healthcare information systems are created by the
extreme fragmentation and complexity of the industry. Briefly:
o Healthcare remains a quintessentially cottage industry. There are currently
approximately 645,000 practicing physicians, 6,200 hospitals, 16,500 nursing homes,
8,000 home health care agencies, 4,500 independent laboratories and thousands of
managed care organizations and other ancillary (usually local) health care providers.
o The various constituents of healthcare have sharply different levels of access to
capital. Typically, insurers have had the finances to fund large-scale systems able to
structure and share uniform information. Physicians do not. This imbalance has
produced an industry rich in proprietary administrative systems but poor in
patient-focused point-of-care information systems.
o Government regulation of the industry is splintered across 50 states, coupled with
substantial federal intervention.
o Healthcare is an extremely complex business. Literally, errors can be life-threatening.
Until recently, affordable technologies capable of replacing wasteful, but
comparatively safe administrative practices were not available.
The Internet provides a platform for catalytic change within the healthcare
industry. Grabbing hold of that opportunity requires the deployment of effective
connectivity tools that enable disparate systems to effectively and affordably communicate
with one another. The Internet's emerging,, ubiquitous accessibility and growing acceptance
make it an increasingly critical tool for business-to-business and business-to-consumer
interaction. Moreover, Internet use is undergoing a transformation from simple, static
information publishing, messaging, and data gathering to real-time, interactive
applications that are capable of supporting core business transactions and fundamental
business processes.
In many industries, work is in progress to harness the power of the Internet and to
fuse previously disconnected business processes that allow companies to reengineer
workflows, reduce administrative and distribution costs and leverage core-competency,
expert resources. Because of its size, complexity and dependence on accurate and timely
information exchange, the healthcare industry is well suited to benefit from the
connectivity and data integration solutions that we are developing. In addition, as more
and more powerful technology tools become available at decreasing cost levels, (including
workstations, handheld devices and wireless networks), we believe that physicians will
acquire more advanced technology platforms to optimize patient care, automate processes and
better leverage their clinical experience.
Administrative processes in healthcare consume approximately $300 billion per year.
Insurers typically spend 10-12% of gross premiums in administration, not including sales
acquisition costs. A typical physician practice spends between 25%-50% of gross billings on
administration. Medix's mission is to offer a set of tools to physicians and to insurers
that takes direct aim at the present tab of administrative cost and reduces the potential
of clinical error. For the eHealth industry, we believe it to be a $20 billion opportunity.
Our Products and Technology
Cymedix(R)is a suite of Web-enabled products and integration tools that seamlessly
moves clinical and administrative information among health insurers, physicians, pharmacy
benefit management companies and reference labs. Collectively, they create an
indispensable, non-invasive technology platform that establishes secure connectivity among
the many isolated systems of the healthcare industry. The Cymedix(R)platform enables
physicians or their staff to use a Web portal that transparently performs the timesaving
activity of gathering and transmitting vital patient information to healthcare entities.
Since physicians can offload substantial administrative burdens to the Cymedix(R)services
products, we believe they will see the opportunity to employ the Cymedix(R)product suite
(PBM, payor, pharmacy, lab and hospital connections) to improve the quality of patient care
and to grow their business.
We deliver our solutions via the Internet using secure socket layers and other
encryption technologies that protect confidential patient information while reducing the
physician's need to purchase and manage on-site hardware and software systems. The Cymedix(R)
suite of products may be utilized on any device that supports an Internet browser, allowing
our software to run on a wide range of equipment, from aging personal computers to leading
edge exam room technologies (handheld devices, tablets, etc.). In addition, the advent of
low cost, secure wireless networking solutions makes the last inch of the "last mile" of
physician practice implementation vastly easier today than even a year ago.
Our Cymedix(R)Universal Interface (CUI) is central to the implementation of the
Cymedix(R)suite of products. Physicians generally reject new technology solutions that
require new investments in time or money over and above their primary investment in
practice management systems. Therefore, we believe it is imperative to deliver solutions
that effectively leverage their practice management investment at no additional cost. The
CUI toolkit automatically extracts pre-selected data elements from existing systems and
remaps the targeted information for use by the Cymedix(R)products suite. This technology
permits the Cymedix(R)suite to efficiently and effectively integrate with virtually any
practice management system, thereby eliminating the need to hard code unique, expensive and
time-consuming interfaces. Typically, the practice management system is the only
administrative information system in a physician's practice and is therefore the most
trusted source for patient and billing data. The CUI enables the physician's staff to
embrace the Cymedix(R)suite as a value-added adjunct of their legacy practice management
system, all without having to bear duplicative processes such as the re-keying of critical
patient data.
The Cymedix(R)product suite of services includes:
PRODUCT FUNCTIONALITY
---------------------------- --------------------------------------
Cymedix(R)Pharmacy >>>> o Pharmacy benefit manager
identification (eligibility
verification and an automatic
link to formulary/benefits
information.)
o Electronic prescribing (retail
and mail order).
o Medication history.
o Treatment and formulary
compliance.
o Drug to drug interaction, drug to
allergy, duplicate therapy and
other clinical checks.
o Messaging and prompts.
o Compliance analysis
Cymedix(R)Lab >>>> o Complete lab order entry.
o Medical necessity verification.
o 24/7 results reporting (partial
and full).
o Specimen tracking.
o Messaging and prompts.
o Cumulative and custom reporting.
Cymedix(R)PlanConnect >>>> o Eligibility verification.
o Referrals and authorizations.
o Custom messaging and prompts.
o Electronic claim validation,
submission and tracking.
The introduction of our proprietary, point-of-care products is proceeding with our
six active customers. Our suite of technology services is based upon a robust and
device-neutral architecture that leverages proven workstation, handheld and wireless
technologies. Our Cymedix(R)technology architecture includes a flexible integration
framework that facilitates rapid and reliable connectivity efforts. All product
components, including Cymedix(R)Pharmacy, Cymedix(R)Laboratory and Cymedix(R)PlanConnect
services are in final testing as we prepare for production-level physician installations in
second quarter 2002.
On the sponsor host side, we are in late-stage development and testing for customized
integrations with each of our active contracts. When we sign a connectivity agreement with
a transaction sponsor (PBM, payor, lab, hospital, etc.), we move into a disciplined
integration phase in which we establish the interface connection to the sponsor, enable
transactions, tailor the front-end to the sponsor's requirements, and incorporate any
sponsor-specific rules within our applications. Generally, this integration phase should
take between 90-120 days, depending upon the pace, regimen and internal resource allocation
set by our customers. However, as we have learned with earlier pilots, these time frames
are variable and may be extended indefinitely for reasons beyond our control. After the
integration phase is completed, we move to the deployment and production phase when
transaction fee revenues will be generated.
We have targeted our initial, production-level physician installations to begin in
second quarter 2002 and we currently expect transaction fee revenues to commence before the
end of the second quarter 2002. While we had expected to begin receiving such revenues in
the first quarter of 2002, the scope and timing of several sponsor host integrations
required that we push the physician launch date to the next quarter. As a result, we have
yet to receive any transaction fee revenue.
The marketing and development of our Cymedix(R)suite of services products is our sole
business at this time, and a substantial portion of our net operating loss is due to such
efforts. We are funding such expenses as well as our administrative expenses through the
sale of our securities.
Our Sponsor Customer Relationships
As an eHealth connectivity company, Medix must build relationships with two sets of
customers: physician end-users and sponsor host institutions, including health plans,
pharmacy benefit managers, reference laboratories and other, ancillary types of managed
care networks. These sponsor organizations, typically large enterprises, pay our per-click
transaction fees as described in the section titled "Our Strategy and Business Model"
below. Our relationships with WellPoint Pharmacy Management, Merck-Medco and Express
Scripts, Inc. all recorded key sponsor customer events in 2001
WellPoint Pharmacy Management
In 2001, Medix announced that we had completed our pilot program with WellPoint
Pharmacy Management (WPM) and a joint deployment of Web-based transactions services to WPM
health plan customers and their participating physicians will begin during 2002. WPM has
long committed to providing value to customers, patients and physician partners through the
elimination of administrative waste, clinical error, fraud and abuse. They enjoy a
well-earned reputation for extraordinary growth and clinical programs of excellence.
Together, Medix and WPM have forged deep, long-term ties bound by a common objective to
provide physicians with the tools and means to elevate the clinical experience through
shared information and decision support. Our robust pilot program with WPM, combined with
the gathering momentum in the emerging eHealth industry, has allowed Medix to strengthen
our sales pipeline over a compressed timeframe. In addition, our multi dimensional
relationship involves the following:
Product Distribution - Through the execution of an amendment to the Warrant
Agreement, WellPoint Pharmacy Management has formally agreed to recommend Medix Resources,
Inc. to their customers and key vendors. WPM enjoys a diversified customer base that
includes health plans, employers and regional PBMs. Initially, Medix and WPM are focusing
joint sales activities on WPM's large Blue Cross Blue Shield plan customers. Executing
customer agreements with WPM's large customers will provide Medix with significant patient
density in several key markets. Under a formal agreement with specific targets and
incentives, WPM will earn warrants in Medix shares when WPM-sponsored customers agree to
implement the Cymedix(R)technology set.
Product Development - Medix and WPM are executing a shared, formal agenda to
continually research, test and implement new product enhancements. These collaborative
product development efforts offer a substantive benefit to Medix, as WPM possesses a
powerful repository of pharmacy industry knowledge and distinguished clinical expertise.
Our longstanding and close working relationship with WPM is a significant asset,
especially as they are a first-rate reference with which we can expand our reach to
healthcare's other large constituencies.
Merck-Medco and Express Scripts, Inc.
In October 2001, we announced agreements with two of the nation's leading pharmacy
benefit managers, Merck-Medco and Express Scripts, Inc. These business relationships allow
us to provide physicians with point-of-care access to clinical information and electronic
prescribing. Client integration work is well underway and we will shortly begin joint
deployment of these services to Merck-Medco and Express Scripts health plan customers and
physicians. Different than the start-up of our WPM relationship, neither Merck-Medco nor
Express Scripts requires a phased product pilot program.
Our agreements with Merck-Medco and Express Scripts are important milestones for
Medix. Merck-Medco is the nation's second largest pharmacy benefits manager, with a client
roster that includes major insurers and corporations throughout the nation and more
importantly within our target markets. Likewise, Express Scripts, Inc. is an ideal match
because of their demonstrated market leadership. Both Merck-Medco and Express Scripts are
leading sponsors of technology initiatives that place decision-making tools in the hands of
physicians at the point of care. Together, our joint efforts will provide physicians and
their staffs with easy-to-use connectivity solutions that support all aspects of the
prescription process.
Our Strategy and Business Model
General. Our market strategy is organized around several well-defined components.
First, we believe that there is significant value attached to offering products that
complement today's commonly available technologies. This is a critical aspect of the added
value that we bring to our sponsor customers and physicians. For Medix, it means delivering
connectivity and service solutions that take into consideration our users' current
technology and workflows. For example, many physician practices have not yet invested in a
high-speed (DSL/cable) Internet connection. Therefore we have designed our products to
excel at every level of connectivity, from the less sophisticated dial-up capability to
high speed, persistent connections.
Second, our business model is a per-click transaction fee model paid for by large
institutional sponsors with an interest in enabling their connectivity and information
sharing with physician offices. Physicians' offices operate on a private network created by
Medix and financed by per click transaction fees from sponsoring institutions. We expect
that this approach will offer favorable returns to sponsoring institutions through
aggregate administrative and underwriting cost savings while enabling physicians' offices
to reduce paperwork and costs within their practice environment with no front-end
investment. In the longer term, as the value proposition becomes more obvious to
physicians, they may elect to pay for an expanded suite of services.
Third, we believe that the functionality provided by the Cymedix(R)product suite,
together with the CUI, gives us a distinct competitive advantage. By enabling physician
practices to continue to use their existing information systems while accessing our
non-invasive technology, we recognize and honor the physician's investment in their choice
of practice management technology. Our approach recognizes that, as in medicine, our first
duty is to do no harm. Thus, while the Cymedix(R)product suite offers attractive timesaving
clinical and administrative capabilities, our products do not put at risk any of the
assumed "safe" features of today's processes.
Fourth, we act as support partners to our customers and users. Our intent is to leave
the business of medicine to physicians and the business of managed care to managed care
companies. We bring value by constructing safe and secure, high-speed data highways that
enable connectivity and provide hassle-free productivity tools for all users.
Finally, we believe that our approach and the products that we make take direct aim
at the wasteful administration costs that plague all of healthcare's stakeholders. Our
internal standards mandate that we make a substantive difference in this area, and we ask
our users and customers to judge us accordingly.
Taken together, these strategy components position Medix to earn substantial,
recurring revenue streams at attractive margins. Moreover, once critical density is
reached, continued growth in our core product line can be supported without substantial
reinvestment in added support or fulfillment infrastructure, further leveraging our market
investment returns for the future.
Our plan to secure long-term recurring revenue streams via the creation of
contractual relationships with large sponsors is well underway. As physicians grow to
appreciate the benefit of our institutionally sponsored product offerings and to recognize
the value of clinical and administrative data captured during ongoing use of our product
suite, we believe we can establish a market for physician-centric enhancements and add-ons
to our products. Medix plans to offer physicians additional timesaving features that
further improve patient care and practice profitability. Among these features will be
connectivity gateways to non-sponsored transactions, charge capture, patient relationship
management services and document management. We expect that physicians will pay for these
additional services under a subscription model. Broadly cast, our business model follows
the following regimen:
|| Medix establishes a connection between sponsor organizations and physicians.
|| Using the CUI and our product suite, physicians and practice administrators drive
transactions via their practice management systems, handheld or wireless devices,
or through a direct Internet connection to Medix servers.
|| Sponsor organizations pay for transactions.
|| Physicians will pay for subscription services to gain access to future product
enhancements that leverage their administrative efficiencies and clinical
effectiveness.
Our Regional Strategy. Healthcare services are insured, delivered and remunerated
differently from one region to another. Medix understands the essential, local nature of
healthcare and will deploy Cymedix(R)service products only in regions where we can assure
that each installed physician can use our technologies to serve most of his or her
patients. This disciplined market approach, combined with the Cymedix(R)suite of
physician-oriented service products, provides a foundation for rapid adoption, and
sustained physician utilization. Moreover, we believe that contracting with large
communities of physicians and sponsor organizations within highly defined geographies
creates a highly desirable financial and operating scenario for Medix as well as lasting
brand presence that sharply differentiates us from our competition.
Given adequate long term financing, we intend to initially focus our resources on
deploying the Cymedix(R)software suite in five markets. They are Atlanta, Northern
California, Southern California, the New York Metropolitan Area, and Chicago. As of March
2002, our Atlanta market development efforts are underway with a planned Q2, 2002 product
launch.
See "Forward-Looking Statements and Associated Risks" under "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" below.
Our Marketing and Sales Approach
The Company intends to pursue a focused but multi-dimensional marketing and sales
strategy over the next several years. Specifically:
o We will concentrate our energies on selected, geographical target markets that provide
ample transaction potential and offer us the opportunity to penetrate a significant
share of physician desktops.
o We will seek to partner first with a leading, anchor client or consortium of anchor
clients in each of the selected markets.
o Following platform development with the anchor client(s), we will concentrate our sales
focus on enlisting the second tier of potential customers, including corollary
agreements with regional-specific suppliers such as pharmacy benefit managers, labs and
large, organized provider groups. Our goal is to achieve major market density.
o Concurrent with the market breadth effort described above, the Company will aggressively
seek added market depth by up-selling and cross-selling the full portfolio of product
services to existing customers and their affiliates.
o As our brand and presence gains local strength, we will seek to market relevant
enhancements and add-ons to our products directly to physicians, using a monthly
subscription model.
Sales Process
Most of our customers are large health plans, PBM's and lab companies that are
national in scope, but are operated on a local or regional basis. Therefore, it is
imperative to organize sales efforts at both the national and local levels to close sales,
gain market share and retain existing customers. Consistent with our regional approach to
market sales and implementations, the Medix sales process draws resources and experience
from both corporate and regional teams.
NATIONAL SALES PROCESS TEAM REGIONAL SALES PROCESS TEAMS
---------------------------------- ---------------------------------
|X| CEO |X| Regional Market CEO
|X| EVP & CTO |X| Local Implementation Team
|X| EVP Operations |X| Local Consultants (as
|X| Selected Technology Team needed)
Members |X| Selected Technology Team
Members
---------------------------------- ---------------------------------
Medix views the sales process to gain customer relationships as a two-step process.
This process can happen sequentially or be pursued along parallel tracks. The national
sales process team is responsible for negotiating and executing contracts as well as
charged with the responsibility to expand customer relationships in terms of product base
or market expansion. The regional sales process team is responsible for local account sales
and account management and the local administration of the sale's execution for our
national customers.
At present, our executive staff devotes a substantive portion of their time to sales,
marketing and account management activities. Longer term, with appropriate financing in
place, we expect to recruit and hire a new head of Corporate Business Development, as well
as to staff our regional organizations with resident sales professionals to complement
current resources.
Outside consultants have been engaged to assist with sales leads development and
target-customer introductions. Outside contractors also have been retained to develop
marketing and sales literature for Cymedix(R)services. Materials to promote the various
Cymedix products are being developed for direct mailing to physicians affiliated with our
customers.
Competition
eHealth Services. The market for eHealth services is evolving, highly fragmented and
subject to fast-moving technological change. Although our competitive position is difficult
to characterize, due principally to the youth of our market niche and the diversity of
current and future competitors, we believe the primary competitive elements in the eHealth
connectivity business are: (i) the scope, quality and performance of the technologies
offered; (ii) rates of physician adoption and sustained utilization; and (iii) the
integrity and market-worthiness of pricing and data models.
We believe our principal competitive advantages are: (i) our robust technology
architecture; (ii) our CUI toolkit; (iii) our clinical product base; (iiii) our regional
and physician-centric focus; and (iiiii) our customer relationships. There are other
connectivity companies, in the United States, both publicly held and private, that compete
directly or indirectly with Medix Resources, Inc. Moreover, competition can be expected to
emerge from established healthcare information vendors and established or new Internet
related vendors. The most likely competitors are companies with a focus on clinical
information systems and enterprises with an Internet commerce or electronic network focus.
Currently, we view our main competitors as WebMD, ProxyMed, NaviMedix and AllScripts. These
competitors may have greater financial marketing or technology resources than us. We will
seek to raise capital to develop and implement Cymedix products in a timely manner,
however, so long as our operations remain under funded, as they are now, we will be at a
competitive disadvantage.
Software Development Personnel. The success of the development of our underlying
Cymedix(R)software is dependent to a significant degree on our key management and technical
personnel. We believe that our success will also depend upon our ability to attract,
motivate and retain highly skilled, managerial, sales and marketing, and technical
personnel, including software programmers and systems architects skilled in the computer
languages in which our Cymedix products operate. Competition for such personnel in the
software and information services industries is intense. The loss of key personnel, or the
inability to hire or retain qualified personnel, could have a material adverse effect on
our results of operations, financial condition or business.
Patents, Trademarks and Copyrights
US Patent No 5,995,939 was issued on November 30, 1999 to our wholly-owned
subsidiary, Cymedix Lynx Corporation from the U.S. Patent and Trademark Office ("USPTO").
The patent covers our automated service request and fulfillment system and will expire
October 14, 2017. A divisional U.S. patent application, including five claims directed to
the method by which the system operates through the Cymedix Universal Interface, has been
abandoned
The USPTO issued to Cymedix U.S. Trademark Registration No. 2,269,377 for the mark
CYMEDIX in connection with "computer software for data base and electronic record
management in the healthcare field" on August 10, 1999, U.S. Trademark Registration No.
2,316,240 for the mark LYNX in connection with "computer software to provide secure
communication on a global communication information network" on February 8, 2000, and U.S.
Trademark Registration No. 2,409,248 for the mark CYMEDIX.COM in connection with "computer
software for database and electronic record management in the healthcare field" on November
28, 2000.
Cymedix has obtained seven copyright registrations for two versions of each of three
modular software components of the Cymedix suite of products, as well as a technical
evaluation document that describes the software products.
No assurance can be given that any of our software products will receive additional
patent or other intellectual property protection. Cymedix has assigned the above patent
and copyrights registrations to Medix.
We seek to protect our software, documentation and other written materials primarily
through a combination of trade secret, trademark and copyright laws, confidentiality
procedures and contractual provisions. In addition, we seek to avoid disclosure of our
trade secrets, by, among other things, requiring those persons with access to our
proprietary information to execute confidentiality agreements with us and restricting
access to our source code.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is difficult. While we are unable
to determine the extent to which piracy of our products exists, software piracy can be
expected to be a persistent problem, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the United States.
From time to time, we are involved in intellectual property disputes. We may notify
others that we believe their products infringe upon our intellectual property rights, and
we may be notified by others that they believe that our products infringe on their
intellectual property rights. We expect that providers of eHealth solutions will
increasingly be subject to infringement claims as the number of products and competitors in
our industry grows and traditional suppliers of health care data and transaction solutions
begin to offer Internet-based products. If our proprietary technology is subjected to
infringement claims, we may have to expend substantial amounts to defend ourselves, and, if
we lose, pay damages or seek a license from third parties, which could delay sales of our
products. If our proprietary technology is infringed upon, we may have to expend
substantial amounts to prosecute the infringing parties, and we may experience losses if we
cannot support our claim of infringement.
We have been notified by a party that it believes our pharmacy product may infringe
on patents that it holds. We have retained patent counsel who has made a preliminary
investigation and determined that our product does not infringe on the identified patents.
At this time no legal action has been instituted.
Government Regulation
Federal and state laws and regulations regulate many aspects of our business. Since
sanctions may be imposed for violations of these laws, compliance is a significant
operational requirement. We believe we are in substantial compliance with all existing
legal requirements material to the operation of our businesses. There are, however,
significant uncertainties involving the application of many of these legal requirements to
our business. We are unable to predict what additional federal or state legislation or
regulatory initiatives may be enacted in the future relating to our business or the health
care industry in general, or what effect any such legislation or regulations might have on
us. We cannot provide any assurance that federal or state governments will not impose
additional restrictions or adopt interpretations of existing laws that could have a
material adverse affect on our results or operations, financial position and/or cash flow
from operations.
HIPAA and Standardized Transactions. Our sponsor customers and physician users must
comply with the Administration Simplification provision of the Health Insurance Portability
and Accountability Act of 1996 (HIPAA), which includes regulations for privacy,
transactions, code sets, security and standard identifiers. Final regulations and
implementation deadlines exist for transactions, code sets and privacy while only proposed
regulations exist for security and standard identifiers. Accordingly, our products must
contain features and functionality that allow our customers and users to comply with
existing law.
As the effective date of the HIPAA regulations approach, they will have a major
impact on us as well as every other participant in the healthcare industry. Significant
resources will be required to implement these regulations. Major retooling of medical
information technology will be required to install the required standardized codes and
procedures. Transaction standards, code sets, and identifiers will need to be installed on
medical participants' networks and office computers. Security and privacy regulations will
be the most difficult to implement and maintain because they are broad in scope, less
definitive, and require ongoing vigilance to assure compliance. Estimate costs of
implementation vary widely but will be in the billion of dollars. Failure to comply could
put us or any other healthcare participant out of business.
We believe that our Cymedix(R)software product offerings are designed to allow for
full compliance with known HIPAA regulations. However, until all such regulations are
issued and final, they could be modified, which may require us to expend additional
resources to comply with the revised standards. In addition, given their novelty, breadth
in scope, and uncertainty as to interpretation, implementation will be uncertain and the
possibility of inadvertently failing to meet these standards is high. Such failure could
result in fines and penalties being assessed against us or cause our business to suffer in
other ways.
Government Regulation of the Internet. Laws and regulations may be adopted with
respect to the Internet or other on-line services covering issues such as user privacy,
pricing, content, copyrights, distribution and characteristics and quality of products and
services. The adoption of any additional laws or regulations may impede the growth of the
Internet or other on-line services, which could, in turn, decrease the demand for our
software applications and services, increase our cost of doing business, or otherwise have
an adverse effect on our business, financial condition and results of operations. Moreover,
the applicability to the Internet of existing laws in various jurisdictions governing
issues such as property ownership, sales and other taxes, libel and personal privacy is
uncertain and may take years to resolve. Any such new legislation or regulation, the
application of laws and regulations from jurisdictions whose laws do not currently apply to
our business, or the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on our business, financial condition
and results of operations.
Confidentiality and Security. While HIPAA regulations, as discussed above, are
expected to generally govern in this area, regulation by various state agencies may also
still apply to confidentiality of patient records and the circumstances under which such
records may be released for inclusion in our databases. Such regulations govern both the
disclosure and the use of confidential patient medical records. Such regulation could
require holders of such information, including us, to implement costly security measures,
or may materially restrict the ability of health care providers to submit information from
patient records using our applications. We utilize an architecture that incorporates
encrypted messaging, firewalls and other security methods to assure customers of a
compliant and secure computing environment. However, no security procedure is failsafe,
and we will always be subject to a potential breach of security by wither determined human
effort or inadvertent human error. If we were found liable for any such breach, such
finding could have a material adverse affect on our business, financial condition and
results of operations.
False Claims Act. Under the federal False Claims Act, liability may be imposed on
any individual or entity who knowingly submits or participates in submitting claims for
payment to the federal government which are false or fraudulent, or which contain false or
misleading information. Liability may also be imposed on any individual or entity who
knowingly make or use a false record or statement to avoid an obligation to pay the federal
government. Certain state laws impose similar liability. The federal government or private
whistleblowers may bring claims under the federal False Claims Act. If we are found liable
for a violation of the federal False Claims Act, or any similar state law, due to our
processing of claims for Medicaid and Medicare, it may result in substantial civil and
criminal penalties. In addition, we could be prohibited from processing Medicaid or
Medicare claims for payment.
Government Investigations. There is significant scrutiny by law enforcement
authorities, the U.S. Department of Health and Human Services Office of Inspector General,
the courts and Congress of agreements between healthcare providers and suppliers or other
contractors that have a potential to increase utilization of government health care
resources. In particular, scrutiny has been placed on the coding of claims for payment,
incentive programs that increase use of a product and contracted billing arrangements.
Investigators have demonstrated a willingness to look beyond the formalities of business
arrangements to determine the underlying purposes of payments between health care
participants. Although, to our knowledge, neither we nor any of our customers is the
subject of any investigation, we cannot tell whether we or our customers will be the
target of governmental investigations in the future.
Federal and State Anti-Kickback Laws. Provisions of the Social Security Act, which
are commonly known as the Federal Anti-Kickback Law, prohibit knowingly or willfully,
directly or indirectly, paying or offering to pay, or soliciting or receiving, any
remuneration in exchange for the referral of patients to a person participating in, or for
the order, purchase or recommendation of items or services that are subject to
reimbursement by, Medicare, Medicaid and similar other federal or state healthcare
programs. Violations may result in civil and criminal sanctions and penalties. If any of
our health care communications or electronic commerce activities were deemed to be
inconsistent with the Federal Anti-Kickback Law or with state anti-kickback or illegal
remuneration laws, we could face civil and criminal penalties or be barred from such
activities. Further, we could be required to restructure our existing or planned
sponsorship compensation arrangements and electronic commerce activities in a manner that
could harm our business.
If compliance with government regulation of healthcare becomes costly and difficult
for us and our customers, we may not be able to grow our business as we plan, or we may
have to abandon a product or service we are providing or plan to provide altogether.
Employees
As of March 15, 2002, we had 28 full-time and no part-time employees. Fifteen of
these employees are involved in software programming and support of the Cymedix network, 7
are involved in the marketing and deployment of product, and 6 are involved in our
administrative and financial operations. None of our employees is represented by a labor
union, and we have never experienced a work stoppage. We believe our relationship with our
employees to be good. However, our ability to achieve our financial and operational
objectives depends in large part upon our continuing ability to attract, integrate, retain
and motivate highly qualified sales, technical and managerial personnel, and upon the
continued service of our senior management and key sales and technical personnel. See
"Executive Officers Compensation - Employment Agreements." Competition for such qualified
personnel in our industry and the geographical locations of our offices is intense,
particularly in software development and technical personnel.
ITEM 2. PROPERTIES
Our principal executive office is located at 420 Lexington Avenue, Suite 1830, New
York, NY 10170. In addition, we have three other offices located in Colorado, California and
Georgia.
Square Expiration 2002
Footage Date Rent (est.)
----------- ------------ -----------
New York, New York 10,495 1-31-05 $212,526
Greenwood Village 5,236 7-31-03 $98,000
Colorado(1)
Agoura Hills, California 3.474 3-31-07 $69,305
Marietta, Georgia 2,060 2-28-04 $31,930
=========== ===========
Totals: 21,265 $411,761
-----
(1) In connection with the sale of our remaining staffing business in 2000, we subleased
2,735 square feet of this space to the purchaser, who will pay $50,000 in rent annually for
such space until July 31, 2002. We remain jointly liable for rental payments on such
subleased space until the end of the sublease and liable for all the space until the end of
the lease indicated above.
In addition to the properties listed in the above table, the Company also is liable for
rental payments on an old lease in East Brunswick, New Jersey, encompassing 7888 square feet
of vacant office space. The monthly rent is approximately $12,500, with a lease termination
date of April 30, 2003. Management is currently engaged in negotiations with the landlord to
terminate this agreement.
We believe these facilities will be suitable for our needs for the foreseeable future.
We have insured all of our properties at the levels required to meet our lease obligations.
We believe that these levels are reasonable measures of adequate levels of insurance.
ITEM 3. LEGAL PROCEEDINGS
On August 7, 2001, a former officer of the Company filed an action in the District Court
of Arapahoe County, Colorado, against the Company and its former President and CEO, John
Yeros, entitled Barry J. McDonald v. Medix Resources, Inc f/k/a/ International Nursing
Services, Inc. and John Yeros, (Case No. 01CV2119). The plaintiff alleges (1) breach of an
employment agreement, a stock option agreement and the related stock option plan, (2)
breach of the duty of good faith and fair dealing, and (3) violation of the Colorado Wage
Claim Act. Plaintiff seeks unspecified damages to be determined at jury trial, including
interest, punitive damages, plaintiff's attorneys fees, and a 50% penalty under the
Colorado Wage Claim Act. The Company's and its co-defendant have answered the plaintiff's
complaint, denying any liability. The Court has set discovery to be completed by July 31,
2002, and the trial to begin on September 9, 2002. Management of the Company intends to
vigorously defend this action and does not expect any resolution of this matter to have a
material adverse effect on the Company's results of operations or financial condition.
On December 17, 2001, Plaintiff, Vision Management Consulting, L.L.C., filed suit
against us in the Superior Court of New Jersey, Law Division - Essex County, entitled
Vision Management Consulting, L.L.C v. Medix Resources, Inc., Docket No. ESX-L-11438-01.
The complaint alleges breach of contract, unjust enrichment, breach of the duty of good
faith and fair dealing and misrepresentations by us in connection with a negotiated
settlement agreement, which had resulted from claims between the parties arising out of the
termination of operations by our Automated Design Concepts division earlier in 2001.
Plaintiff seeks unspecified damages to be proven at jury trial, together with attorneys
fees, costs of suit and interest on the judgment, as well as such further relief as the
Court deems just and equitable. We have answered the plaintiff's complaint, denying any
liability and setting forth a counterclaim seeking the award to us of our costs of
defending this action and such further relief as the Court deems just and proper.
Management intends to vigorously defend this action and does not expect any resolution of
this matter to have a material adverse effect on the Company's results of operations or
financial condition. The Court has appointed a mediator for the case to try to facilitate
a settlement between the parties.
From time to time, the Company is involved in claims and litigation that arise out of
the normal course of business. Currently, other than as discussed above, there are no
pending matters that in Management's judgment might be considered potentially material to
us. Management does not believe that any of the litigation described above will have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The following matters were submitted to our shareholders at the 2001 Annual Meeting of
Shareholders held on October 16, 2001:
Proposal #1 Election of Directors
For Withheld
Joan E. Herman 45,231,857 181,986
Patrick W. Jeffries 45,231,857 181,986
John R. Prufeta 45,231,857 181,986
Guy L. Scalzi 45,232,126 181,717
Proposal #2 Ratification and approval of the Board of Director's increase in the number of
shares authorized and reserved for issuance under the Company's 1999 Stock Option
Plan from 10 million shares of the Company's common stock to 13 million shares.
For Against Abstained Not Voted
11,371,866 1,944,632 251,501 31,845,844
Proposal #3 Ratification of the selection by the Board of Directors of Ehrhardt Keefe
Steiner & Hottman PC as the Company's independent public accountants, to audit
the financial statements of the Company for the 2001 fiscal year.
For Against Abstained
45,117,923 171,218 124,702
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On April 6, 2000, our common stock was listed and began trading on The American Stock
Exchange under the symbol "MXR." Prior to that our common stock was traded on the OTC
Bulletin Board under the symbol "MDIX." The following table shows high ask and low bid
price information for each quarter in the last two calendar years as reported by Prophet
Information Services, Inc., a provider of online historical stock price data for all major
U. S. securities markets. Such quotations reflect inter-dealer prices, without retail
mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.
On March 15, 2001, the last sales price was reported to be $0.55.
Common Stock Price
High Low
2000
First Quarter $9.50 $1.88
Second Quarter 4.87 1.68
Third Quarter 3.62 1.06
Fourth Quarter 2.37 .75
2001
First Quarter $1.62 .52
Second Quarter 1.49 .41
Third Quarter 1.36 .50
Fourth Quarter 1.09 .49
There were approximately 400 holders of record (and approximately 9,000 beneficial
owners) of our common stock as of March 15, 2002. The number of record holders includes
shareholders who may hold stock for the benefit of others.
We do not expect to pay any dividends on its common stock in the foreseeable future.
Management currently intends to retain all available funds for the development of its
business and for use as working capital. The payment of dividends on the common stock is
subject to our prior payment of all accrued and unpaid dividends on any preferred stock
outstanding.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data, at the end of the last five
fiscal years, should be read in conjunction with our Consolidated Financial Statements and
related Notes thereto appearing elsewhere in this Report. The consolidated selected
financial data are derived from our consolidated financial statements which have been
audited by Ehrhardt Keefe Steiner & Hottman PC, our independent auditors, as indicated in
their report included herein. The selected financial data provided below is not necessarily
indicative of our future results of operations or financial performance.
--------------------------------------------------------------------------------
2001 2000(1) 1999 1998(2) 1997
--------------------------------------------------------------------------------
Operating revenues 29,000 326,000 24,000 17,412,000 24,875,000
--------------------------------------------------------------------------------
Software research 1,075,000 685,000 596,000 780,000 0
and development
costs (3)
--------------------------------------------------------------------------------
(Loss) or profit (10,636,000) (6,344,000) (5,422,000) (515,000) 610,000
from continuing
operations
--------------------------------------------------------------------------------
(Loss) or profit (.21) (.15) (.29) (.15) .06
from continuing
operations per share
--------------------------------------------------------------------------------
Total assets 3,101,000 5,089,000 4,629,000 5,175,000 10,140,000
--------------------------------------------------------------------------------
Working Capital (1,404,000) 394,000 644,000 (2,612,000) (329,000)
--------------------------------------------------------------------------------
Long-term 0 0 400,000 0 0
obligations
--------------------------------------------------------------------------------
Stockholders' 1,345,000 4,202,000 2,376,000 (218,000) 4,504,000
Equity(Deficit)
--------------------------------------------------------------------------------
The following is supplementary information related to software development expenses
---------------------------------------------------------------------------------
Software 2001 2000(1) 1999 1998(2) 1997
Development Costs:
---------------------------------------------------------------------------------
Software research 1,075,000 685,000 596,000 780,000 0
and development
costs (3)
---------------------------------------------------------------------------------
Capitalized 434,000 495,000 0 0 0
software
development costs
---------------------------------------------------------------------------------
Total Software 1,512,000 1,180,000 596,000 780,000 0
development costs
incurred
---------------------------------------------------------------------------------
(1) In February of 2000, we disposed of our remaining medical staffing business and
became solely a developer of software for our own use in providing Internet based
communications for the medical services industry.
(2) In January of 1998, we acquired the Cymedix software business and began the process
of disposing of our medical staffing business.
(3) Excludes amortization of previously capitalized development software costs which are
included in cost of services in the Company's Statement of Operations
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Overview
We are an information technology company headquartered in New York City, with offices
in Agoura Hills, California, Greenwood Village, Colorado and Marietta, Georgia. We
specialize in the development, marketing and management of connectivity solutions for
clinical and business transactions within the healthcare industry Through our wholly owned
subsidiary, Cymedix Lynx Corporation, a Colorado corporation, we have developed Cymedix(R), a
unique healthcare communication technology product. Created by a team of healthcare
professionals, Cymedix software provides healthcare institutions, such as health plans,
insurers and hospitals, as well as practicing physicians, with a set of non-invasive
technology tools to enable Internet-based health care transactions among all parties.
Implementation of the Cymedix(R)products suite promises to speed and improve the
efficacy of daily interactions between health caregivers and their staffs, other ancillary
providers (such as labs or pharmacy benefit managers), insurance companies, hospitals,
Integrated Delivery Networks (IDNs) and Health Management Organizations (HMOs). We believe
that the market for robust and practical healthcare solutions will grow rapidly, and that
segment growth will continue to accelerate as the joined emphases of consumer choice,
quality, administrative service and cost containment ratchets up demand for ever more
efficient and user-friendly methods of delivering quality healthcare.
Forward-Looking Statements and Associated Risks
This Report contains forward-looking statements, which mean that such statements
relate to events or transactions that have not yet occurred, our expectations or estimates
for our future operations and economic performance, our growth strategies or business plans
or other events that have not yet occurred. Such statements can be identified by the use
of forward-looking terminology such as "might," "may," "will," "could," "expect,"
"anticipate," "estimate," "likely," "believe," or "continue" or the negative thereof or
other variations thereon or comparable terminology. The following paragraphs contain
discussions of important factors that should be considered by prospective investors for
their potential impact on forward-looking statements included in this Report. These
important factors, among others, may cause actual results to differ materially and
adversely from the results expressed or implied by the forward-looking statements.
We have reported net losses of ($10,636,000), ($5,415,000), and ($4,847,000) for the
years ended December 31, 2001, December 31, 2000 and December 31, 1999, respectively. At
December 31, 2001, we had an accumulated deficit of ($33,412,000), and negative working
capital of ($1,404,000). These factors and other concerns have caused our accountants to
include a "going concern" exception in their report in connection with their audit of our
financial statements for the year ended December 31, 2001.
We expect to continue to experience losses, in the near term, until such time as our
Cymedix(R)products can be successfully deployed with customers and produce revenue. The
current operation of our business and our ability to continue to develop and market our
Cymedix(R)services products will depend upon our ability to obtain additional financing. At
present, we are not receiving any significant revenues from the sale of our Cymedix(R)
technology products. We are attempting to meet our current cash flow needs by raising
capital in the private debt and equity markets and through the exercise of currently
outstanding warrants. The development and marketing of the Cymedix(R)products suite
requires substantial capital investments. There can be no assurance that additional
investments or financings will be available to us as needed to support the development of
Cymedix products. Failure to obtain such capital on a timely basis could result in lost
business opportunities, the sale of the Cymedix business at a distressed price or the
financial failure of our company.
We have recently entered into a secured financing arrangement. See "BUSINESS -
Recent Developments." The use of secured borrowings increases the risk of loss of the
assets used to secure the borrowing. If an event of default occurs under the security
agreement, the lender will be able to foreclose on the assets used to secure the borrowing
and sell those assets to the highest bidder. In addition, it is generally believed that
foreclosure sales, which are "distress sales", will not maximize the proceeds that are paid
for the assets being sold. The loan we entered into is secured by the grant of a security
interest in all Medix's intellectual property, including its patent, copyrights and
trademarks. While Medix can cure a payment default by the forced conversion of the loan
into its common stock, a bankruptcy or similar event of default will trigger the
foreclosure provision of the security agreement.
We are still in the process of gaining experience in marketing technology-based
service products, providing support services, evaluating demand for products, financing a
technology business and dealing with government regulation of various products. While we
are putting together a team of experienced executives, they have come from different
backgrounds and may require some time to develop an efficient operating structure and
corporate culture for our company. We believe our structure of multiple offices serves our
customers well, but it does present an additional challenge in building our corporate
culture and operating structure.
Our products are in the integration and deployment stages, and have proven their
effectiveness with some sponsors. We have not yet proven our technology with a significant
number of physicians. As a developer of service products, we will be required to
anticipate and adapt to evolving industry standards and new technological developments.
The market for our connectivity products and services is characterized by continued and
rapid technological advances in both hardware and software development, requiring ongoing
expenditures for research and development, and timely introduction of new products and
enhancements to existing products. The establishment of standards is largely a function of
user acceptance. Therefore, such standards are subject to change. Our future success, if
any, will depend in part upon our ability to enhance existing products, to respond
effectively to technology changes, and to introduce new products and technologies to meet
the evolving needs of its clients in the healthcare information systems market.
The success of our products and services in generating revenue may be subject to the
quality and completeness of the data that is generated and stored by the physician or other
healthcare professional and entered into our interconnectivity systems, including the
failure to input appropriate or accurate information. Failure or unwillingness by the
healthcare professional to accommodate the required information quality may result in the
payor refusing to pay Medix for its services.
The introduction of connectivity products in that market has been slow due to the
large number of small practitioners who are resistant to change, as well as the financial
investment or workflow interruptions associated with change, particularly in a period of
rising pressure to reduce costs in the market. We are currently devoting significant
resources toward the development of products. There can be no assurance that we will
successfully complete the development of these products in a timely fashion or that our
current or future products will satisfy the needs of the healthcare information systems
market. Further, there can be no assurance that products or technologies developed by
others will not adversely affect our competitive position or render our products or
technologies noncompetitive or obsolete.
Certain of our products provide applications that relate to patient medication
histories and treatment plans. Any failure by our products to provide accurate, secure and
timely information could result in product liability claims against us by our clients or
their affiliates or patients. We maintain insurance that we believe currently is adequate
to protect against claims associated with the use of our products, but there can be no
assurance that our insurance coverage would adequately cover any claim asserted against
us. The limits of that coverage is $2,000,000 in the aggregate and $1,000,000 per
occurrence. A successful claim brought against us in excess of our insurance coverage
could have a material adverse effect on our results of operations, financial condition or
business. Even unsuccessful claims could result in the expenditure of funds in litigation,
as well as diversion of management time and resources.
We have been granted certain patent rights, trademarks and copyrights relating to its
software business. However, patent and intellectual property legal issues for software
programs, such as the Cymedix products, are complex and currently evolving. Since patent
applications are secret until patents are issued, in the United States, or published, in
other countries, we cannot be sure that we are first to file any patent application. In
addition, there can be no assurance that competitors, many of which have far greater
resources than we do, will not apply for and obtain patents that will interfere with our
ability to develop or market product ideas that we have originated. Further, the laws of
certain foreign countries do not provide the protection to intellectual property that is
provided in the United States, and may limit our ability to market our products overseas.
We cannot give any assurance that the scope of the rights we have are broad enough to fully
protect our Cymedix software from infringement.
Litigation or regulatory proceedings may be necessary to protect our intellectual
property rights, such as the scope of our patent. In fact, the computer software industry
in general is characterized by substantial litigation. Such litigation and regulatory
proceedings are very expensive and could be a significant drain on our resources and divert
resources from product development. There is no assurance that we will have the financial
resources to defend our patent rights or other intellectual property from infringement or
claims of invalidity. We have been notified by a party that it believes our pharmacy
product may infringe on patents that it holds. We have retained patent counsel who has
made a preliminary investigation and determined that our product does not infringe on the
identified patents. At this time no legal action has been instituted.
We also rely upon unpatented proprietary technology and no assurance can be given
that others will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to or disclose our proprietary technology or that
we can meaningfully protect our rights in such unpatented proprietary technology. We will
use our best efforts to protect such information and techniques, however, no assurance can
be given that such efforts will be successful. The failure to protect our intellectual
property could cause us to lose substantial revenues and to fail to reach our financial
potential over the long term.
The healthcare and medical services industry in the United States is in a period of
rapid change and uncertainty. Governmental programs have been proposed, and some adopted,
from time to time, to reform various aspects of the U.S. healthcare delivery system. Some
of these programs contain proposals to increase government involvement in healthcare, lower
reimbursement rates and otherwise change the operating environment for our customers.
Particularly, HIPAA and the regulations that are being promulgated thereunder are causing
the healthcare industry to change its procedures and incur substantial cost in doing so.
Although we expect these regulations to have the beneficial effect of spurring adoption of
our software products, we cannot predict with any certainty what impact, if any, these and
future healthcare reforms might have on our software business. See "BUSINESS -
Governmental Regulation."
In connection with our equity line of credit financing, we have registered 9,500,000
additional shares with the SEC for sale by the providers of the financing, of which
5,031,371 shares remain available for issuance as of March 15, 2002. The resale of the
common stock that may be issued by us under the equity line of credit will substantially
increase the number of our publicly traded shares ("float"). If existing shareholders
perceive that this increased float is not accompanied by a commensurate increase in value
to the Company, then shareholder value--real or perceived--will be diluted. Such dilution
could cause holders of our shares of common stock to sell, thus depressing the price of our
common stock. Therefore, the very existence of the equity line financing could depress the
market price of our common stock.
The resale of the common stock that will be issued by us under our equity line of
credit financing could depress the market price of our common stock. The terms of the
equity line provide that we will sell shares of our common stock to the providers of the
financing at 91% of the average of the three lowest of the daily volume-weighted average
prices of our common stock during the 22-trading day period immediately before our request
for the advance. Therefore, since all of the shares that are issued by us in connection
with advances under the equity line financing will have a "built-in" discount of at least
9% upon issuance, this could produce an impetus for the providers of the equity line to
resell their shares sooner or in greater quantity than they would otherwise. Such resale
could have the effect of depressing our share price. At March 15, 2002 the Company had
issued 2,748,552 shares to the equity line providers, all of which has been sold into the
public market. Trading activity related to the liquidation of these shares shown little
correlation to downward movements in share price.
As of March 15, 2002, we had 58,386,516 shares of common stock outstanding. As of
that date, approximately 24,117,525 shares were issuable upon the exercise of outstanding
options, warrants or other rights, and the conversion of preferred stock. Most of these
shares will be immediately saleable upon exercise or conversion under registration
statements we have filed with the SEC. The exercise prices of options, warrants or other
rights to acquire common stock presently outstanding range from $0.19 per share to $4.97
per share. During the respective terms of the outstanding options, warrants, preferred
stock and other outstanding derivative securities, the holders are given the opportunity to
profit from a rise in the market price of the common stock, and the exercise of any
options, warrants or other rights may dilute the book value per share of the common stock
and put downward pressure on the price of the common stock. The existence of the options,
conversion rights, or any outstanding warrants may adversely affect the terms on which we
may obtain additional equity financing. Moreover, the holders of such securities are
likely to exercise their rights to acquire common stock at a time when we would otherwise
be able to obtain capital on terms more favorable than could be obtained through the
exercise or conversion of such securities. See also the impact of our equity line of
credit financing discussed in the following paragraphs.
As with any business, growth in absolute amounts of selling, general and
administrative expenses or the occurrence of extraordinary events could cause actual
results to vary materially and adversely from the results contemplated by the
forward-looking statements. Budgeting and other management decisions are subjective in
many respects and thus susceptible to incorrect decisions and periodic revisions based on
actual experience and external business developments, the impact of which may cause us to
alter our marketing, capital expenditures or other budgets, which may, in turn, affect our
results of operation. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict accurately and many
of which are beyond our control. Although we believe the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove inaccurate,
and therefore, there can be no assurance that the results contemplated in the
forward-looking statements will be realized.
In light of the significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives or plans for the Company will
be achieved.
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact
and any associated risks related to these policies on our business
operations is discussed throughout Management's Discussion and Analysis of
Financial Condition and Results of Operations where such policies affect
our reported and expected financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and
financial condition in the preparation of our financial statements in
conformity with accounting principles generally accepted in the United
States of America. Actual results could differ significantly from those
estimates under different assumptions and conditions. We believe that the
following discussion addresses our most critical accounting policies, which
are those that are most important to the portrayal of our financial
condition and results of operations and require our most difficult,
subjective, and complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
We recognize revenue when the communication transaction has been completed
by the customer, persuasive evidence of the terms of the arrangement exist,
our fee is fixed and determinable, and collectibility is reasonably
assured. Delivery takes place electronically when the customer has
completed the exchange (transmission or receipt) of data. Revenue is
charged to the customer on a per transaction basis as each transaction is
completed and is billed monthly.
Valuation of Goodwill
We assess the impairment of goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.
Factors we consider important that could trigger an impairment review
include the following:
o significant underperformance relative to expected historical or projected future
operating results;
o significant changes in the manner of our use of the acquired assets or the strategy for
our overall business;
o significant negative industry or economic trends; significant decline in our stock price
for a sustained period; and
o our market capitalization relative to net book value.
Until our adoption of SFAS No. 142 discussed below, when we determine that
the carrying value of goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we
determine whether impairment has occurred by comparing the gross projected
cash flows to the carrying value of the goodwill, and we measure any
impairment based on the discounted projected cash flows consistent with the
provisions of SFAS No. 121. Net goodwill amounted to $1.7 million as of
December 31, 2001.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective. As of December 31,
2001, the net carrying amount of goodwill of $1.7 million will no longer be
amortized and will be subject to impairment testing under SFAS No. 142. In
lieu of amortization, we are required to perform an initial impairment
review of our goodwill in 2002 and an annual impairment review thereafter.
Although we do not expect to record an impairment charge upon completion of
the initial impairment review, we cannot assure you that at the time the
review is completed a material impairment charge will not be recorded.
Capitalized Software Development Costs
We capitalize costs, which primarily include salaries in connection with
developing software for internal use. We use judgment in determining
whether development costs meet the criteria for immediate expense or
capitalization. Direct costs incurred in the development of software are
capitalized once the preliminary project stage is completed, management has
committed to funding the project, and completion and use of the software
for its intended purpose are probable. We cease capitalization of
development costs once the software has been substantially completed and is
ready for its intended use. We capitalized $0, $495,000, and $434,000 of
costs during the years ended December 31, 1999, 2000, and 2001,
respectively. The software development costs capitalized are amortized over
the estimated useful life of the software, which we estimate to be five
years. Amortization expense was $0, $134,000, and $156,000 for the years
ended December 31, 1999, 2000, and 2001, respectively.
Results of Operation
Comparison of years ended December 31, 2001 and December 31, 2000
Total revenues decreased approximately $297,000 from $326,000 in 2000 to $29,000 in
2001. The decrease is due to a decrease in Cymedix pilot program fees billed during 2001 of
$189,000, and a decrease in ADC revenue of $108,000 as a result of discontinuing that
business segment.
Direct costs of services increased approximately $33,000 from $180,000 in 2000 to
$213,000 in 2000. The increase is due to amortization of capitalized software development
costs related to Cymedix.
Software development costs increased approximately 57% from $685,000 in 2000 to
$1,075,000 in 2000, as a result of costs incurred in the ongoing development of the Cymedix
product line.
Selling, general and administrative expenses decreased approximately 3% from
$5,925,000 in 2000 to $5,746,000 in 2001. The decrease is attributable to a company wide
salary reduction program that was undertaken early in 2001.
During 2001, the Company recorded impairment expense of $1,111,000 resulting from the
discontinuance of its Automated Design Concepts division, which totaled $443,000, to focus
staff resources on the Company's primary technology, and the cancellation of its ZirMed
license agreement totaling $668,000, which was a result of management's assessment that the
Company's needs would be better served by superior technology.
Other income decreased approximately $151,000 from 2000 to 2001. This increase
reflects a decline in interest income that had been earned on excess cash received and
invested during 2000 from the exercise of options and warrants.
Interest expense increased $61,000 from 2000 to 2001 due to interest that was paid
on a convertible promissory note issued during 2001.
Financing costs of $2,428,000 were incurred in 2001 due to warrants issued and an in-the
money conversion feature in connection with the convertible debt credit facility of
$581,000, a warrant issued in the private equity placement valued at $113,000, and shares
issued in the conversion of debt and related equity share issuances at below market prices
which resulted in costs of $1,734,000.
Net gain (loss) from discontinued operations decreased approximately $929,000 from
$929,000 in 2000 to $0 in 2001, due to the sale during February 2000 of the remaining
assets of the company's staffing operations.
Net loss increased approximately $5,221,000 from $5,415,000 in 2000 to $10,636,000
in 2001 due to the reasons discussed above.
Comparison of years ended December 31, 2000 and December 31, 1999
Total revenues increased approximately $302,000 from $24,000 in 1999 to $326,000 in
2000. The increase is due to Cymedix pilot program fees billed during 2000, and ADC revenue
from the date of acquisition (March 8, 2000) through December 31, 2000.
Direct costs of services increased approximately $178,000 from $2,000 in 1999 to
$180,000 in 2000. The increase is due to amortization of capitalized software development
costs related to Cymedix of $124,000, as well as costs associated with ADC revenue of
$16,000, from the period March 8, 2000 through December 31, 2000.
Software development costs increased approximately 15% from $596,000 in 1999 to
$685,000 in 2000, as a result of costs incurred in the ongoing development of the Cymedix
product line. During the third quarter of 2000 the company began capitalizing and
amortizing software development costs.
Selling, general and administrative expenses increased approximately 57% from
$3,777,000 in 1999 to $5,925,000 in 2000. The increase is due primarily to an increase in
executive management and operational salaries and benefits as of $1,088,000, as well as
consulting fees related to employee recruitment and placement of $272,000, and legal,
accounting and advisory services of $248,000.
Net loss from operations increased approximately $2,113,000 from $4,351,000 in 1999
to $6,464,000 in 2000. This increase is primarily due to the increases in selling, general
and administrative expenses described above.
Other income increased approximately $156,000 from 1999 to 2000. This increase
reflects interest income on excess cash received and invested during the year from the
exercise of options and warrants.
Interest expense decreased 79%, or approximately $161,000 from 1999 to 2000 due to
interest that was paid and imputed on a convertible promissory note during 1999.
Net loss from continuing operations increased approximately $1,796,000 from
$4,548,000 in 1999 to $6,344,000 in 2000 due to all of the reasons discussed above.
Net gain (loss) from discontinued operations increased approximately 411% or
$1,228,000 from $(299,000) in 1999 to $929,000 in 2000, due to the sale during February
2000 of the remaining assets of the company's staffing operations.
Net loss increased approximately $568,000 from $4,847,000 in 1999 to $5,415,000 in
2000 due to the reasons discussed above.
Liquidity and Capital Resources
We had $8,000 in cash as of December 31, 2001 compared to $1,007,000 in cash as of
December 31, 2000 and $1,229,000 as of December 31, 1999. Net working capital was
($1,404,000) as of December 31, 2001 compared to $394,000 as of December 31, 2000 and
$644,000 as of December 31, 1999. During 2001, net cash used in operating activities was
$5,397,000 compared to $5,173,000 in 2000. As a result of our cash balances at December
31, 2001, we have not been able to pay certain accounts payable and have experienced a
significant increase at December 31, 2001. We have since been able to pay down a portion
of these balances subsequent to December 31, 2001. During 2001, we raised $1,500,000 from a
convertible note financing, $1,200,000 from private placements of our common stock,
$1,510,000 from our equity line of credit and $369,000 from exercise of options and
warrants. During 2000, we raised $6,091,000 from the exercise of options and warrants.
During 1999, we raised $4,112,000 from private placements of preferred stock, $500,000
from issuance of a convertible promissory note, and $150,000 from exercise of options and
warrants.
Subsequent to year-end and through March 15, 2002, we received approximately $3,800 from
the exercise of options and warrants, $1,000,000 from a secured convertible note financing,
and $883,000 from our equity line financing. As of March 15, 2002, we had outstanding
warrants exercisable for 5,136,000 shares of common stock, exercisable at $0.50 per share,
with a aggregate exercise price of $2,568,000 which are callable for $.01 per warrant upon
thirty days written notice. However, no assurance can be given that if called such
warrants would be exercised. From time to time, members of senior management have made
short-term loans to us to meet payroll obligations. However, there is no commitment to
continue that practice.
We will continue to have financing costs charged to our statement of operations in the
future for convertible debt we issue with in-the-money conversion features.
We continue to make significant investments in capitalized software development costs,
andcurrently, we are funding our development and deployment activities through an equity
line of credit financing. We incurred $1,509,000 in software development costs in 2001, of
which we capitalized $434,000 of these costs and expensed $1,075,000. Draws under this
financing are triggered by a "Put Notice" (advance request) initiated by ourselves each
time we wish to draw funds. The financing investors are committed to accept the advance
request provided certain conditions are met, some of which may be waived by agreement
among the parties. Such advance request obligates us to issue to the investors shares of
our common stock at a discount to market which is fixed in the contract. The shares are
immediately re-saleable in the public markets by the investors. As of March 15, 2002, we
had received $2,584,910 in advances, from which offering expenses of $191,278 was paid
under the financing, and we had issued to the investors 4,468,629 shares of our common
stock relating to the advances and an additional 542,847 shares to their affiliates as
fees for arranging the equity line facility. The shares issued pursuant to the equity line
advances to date have been priced from $0.46 to $0.77 per share.
We expect to continue to experience loses and negative cash flows from operations, in
the near term, until such time as we are deployed on physicians' desktops in sufficient
numbers to cover our overhead The current operation of our business and our ability to
continue to further develop and deploy our Cymedix software products will depend upon our
ability to obtain additional financing. At present, we are not receiving any significant
revenues from the sale of our Cymedix software products. We are attempting to meet our
current cash flow needs by raising capital in the private debt and equity markets and
through the exercise of currently outstanding warrants. The development and marketing of
the Cymedix connectivity products require substantial capital investments. There can be
no assurance that additional funding, if needed, will be available on terms acceptable to
us, or at all. Failure to obtain such capital on a timely basis could result in lost
business opportunities, the sale of the Cymedix business at a distressed price or the
financial failure of our company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold or engage in transactions with market risk sensitive
instruments
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this Form 10-K are our Consolidated Financial
Statements, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
Our directors and executive officers, as of the March 15, 2002, and their biographical
information
are set forth below:
----------------------------------------------------------------------------------
Name Date of Birth Position Director Since
----------------------------------------------------------------------------------
John R. Prufeta (1)(4)(5) 7/1/60 President, Chief Executive 1999
Officer and a Director
----------------------------------------------------------------------------------
Louis E. Hyman 1/15/68 Executive Vice President and N.A.
Chief Technology Officer
----------------------------------------------------------------------------------
Patricia A. Minicucci 4/1/49 Executive Vice President for N.A.
Operations
----------------------------------------------------------------------------------
Gary L. Smith 6/2/54 Executive Vice President and N.A.
Chief Financial Officer
----------------------------------------------------------------------------------
Brian R. Ellacott 3/8/57 Senior Vice President and N.A.
Division CEO, Southeast
Region
----------------------------------------------------------------------------------
John T. Lane (1)(2)(3)(4) 4/13/42 Director and Chairman of 1999
The Board
----------------------------------------------------------------------------------
Samuel H. Havens (4)(5) 6/19/43 Director and Chair of the 1999
Nominating Committee
----------------------------------------------------------------------------------
Joan E. Herman (2)(3) 6/2/53 Director and Chair of the 2000
Audit Committee
----------------------------------------------------------------------------------
Patrick W. Jeffries(4) 1/25/53 Director and Chair of the 2001
Finance Committee
----------------------------------------------------------------------------------
Guy L. Scalzi(5) 7/18/46 Director 2001
----------------------------------------------------------------------------------
Dr. David B. Skinner (1)(24/28/35 Director and Chair of the 1999
(3) Compensation Committee
--------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Member of the Finance Committee
(5) Member of Nominating Committee
All of the our executive officers devote full-time to our company's business and
affairs. Biographical information on each current executive officer and director is set
forth below.
Biographical Information
John R. Prufeta. Mr. Prufeta joined the Company as a full time employee and as its
President and Chief Executive Officer on March 1, 2000. Mr. Prufeta also is the Chairman
of the Board of the Company's Cymedix Lynx subsidiary. He had been appointed to the
position of Chief Executive Officer while a consultant to the Company in October 1999.
Prior to that he was the Managing General Partner of The Creative Group, Creative Health
Concepts, and TCG Development, and the President and Chief Executive Officer of Creative
Management Strategies, Inc. for over 11 years. Those affiliated companies cover a wide
spectrum of services within the healthcare industry. He was elected to the Company's Board
of Directors in April 1999. A 1983 graduate of St. John's University with a B.S. in
management, Mr. Prufeta graduated from the Executive Program, OPM at Harvard University,
Graduate School of Business.
Louis E. Hyman. On May 14, 2001, Mr. Hyman became an officer of the Company with the
titles of Executive Vice President and Chief Technology Officer. Prior to that, since
March 9, 2001, he was a consultant to the Company, serving as interim Chief Technology
Officer. From September 1999 until joining Medix, Mr. Hyman was President and CEO of Ideal
Technologies, Inc., a healthcare integration consulting firm. Mr. Hyman held senior
technology management and executive positions with CareInsite, Inc. (from August 1999 to
September 2000 as Vice President of Information Technology) and LaPook Lear Systems Inc.
(from August 1992 to August 1999 as Vice President and Director of Technology), both of
which were merged into WebMD, Inc. in September 2000. As a result of these transactions,
Mr. Hyman maintained his position as Vice President of Information Technology with WebMD
through November 2000, where he played a key role in WebMD's integration efforts as well as
initiatives to improve the Company's profitability. He graduated Summa Cum Laude from St.
John's University where he earned a B.S. degree in Computer Science.
Patricia A. Minicucci. In March 2000, Ms. Minicucci joined the Company as Executive Vice
President of Operations. Prior to joining Medix's staff, Ms. Minicucci served as Executive
Vice President and a principal of Creative Health Concepts. In 1995, she founded and was
Chief Executive Officer of Practice Paradigms, an organization serving primary care
physicians. Prior to founding Practice Paradigms, Minicucci was Senior Vice
President-Managed Care with Empire Blue Cross Blue Shield and, before that, President of
the Employee Benefits Division of Washington National Corporation. Ms. Minicucci began her
career in healthcare at CIGNA Corporation where she held numerous positions, including
President of the South Central Division, CIGNA Healthplan Inc.; Vice President of the Human
Resources Division, Employee Benefits Group; Vice President of the Human Resources
Department, Group Insurance Division; and Regional Vice President of Field Claim
Operations, Group Insurance Division. She holds a B.A. in History from Russell Sage
College.
Gary L. Smith. Mr. Smith joined the Company as Executive Vice President and Chief
Financial Officer in December of 2000. From 1995 to 2000, Mr. Smith was with Provident
Group, a financial advisory firm serving companies operating in emerging market countries,
where he was a principal. Previously, Mr. Smith was an executive of American Express
Bank, the international banking arm of the financial services conglomerate American
Express Corporation (NYSE: AXP), where he held various senior financial positions, most
recently as Senior Director and Commercial Banking Head, London Branch. He holds a BS
degree in Economics from the Wharton School and an MS in Accounting and Finance from the
London School of Economics.
Brian R. Ellacott. In March 2000, Mr. Ellacott joined the Company as Senior Vice
President of Business Development. In mid-2001, Mr. Ellacott was appointed as the Division
CEO for Southeast Region Markets. Mr. Ellacott served as president of Cosmetic Surgery
Consultants from November 1998 until March 2000, when he joined Medix Resources, Inc. From
1996 to 1998 he was executive vice president of Alignis Inc., an alternative healthcare
PPO. Before that, he was President-Bibb Hospitality (Atlanta) for The Bibb Company. Mr.
Ellacott began his career in healthcare at Baxter International/American Hospital Supply
where he held numerous positions, including Director of National Accounts (Chicago);
Director of Marketing (Australia); Director of Marketing (Canada); Systems Manager
(Canada); Regional Manager (British Columbia); and Product Manager (hospital products). He
holds a B.A. in Business Administration, with Honors, from Wilfrid Laurier University
(Waterloo, Canada).
John T. Lane. Prior to his retirement from J.P. Morgan & Company in 1994, Mr. Lane was
head of that firm's U.S. Private Clients Group. He also served as Chairman of J.P. Morgan,
Florida; a Director of Morgan Shareholder Services, J.P. Morgan of California, and Morgan
Futures; and a member of the firm's Credit Policy committee. Earlier, he held a number of
positions in the J. P. Morgan organization, which he joined in 1968. Since retiring from
J.P. Morgan, Lane has served as a consultant to various organizations. Mr. Lane currently
serves or the Boards of Acme Metals Incorporated and Biospecifics Technologies Corp., whose
common shares are publicly traded. Mr. Lane holds an MBA degree from the University of
Michigan, and a BA degree from Dartmouth College.
Samuel H. Havens. Prior to his retirement in 1996, Mr. Havens served as President of
Prudential Healthcare for five years. He had begun his career with The Prudential
Insurance Company as a group sales representative in 1965, and served in various posts in
Prudential healthcare operations over three decades. Since retiring, Mr. Havens has served
on the Board and as a consultant to various healthcare organizations. He is a member of
the Board of Advisors of Temple Law School and the Editorial Board of Managed Care
Quarterly. Havens completed the Executive Program in Business Administration at Columbia
University. He holds a JD degree from Temple Law School, a CLU from the American College of
Life Underwriters, and a BA degree from Hamilton College.
Joan E. Herman. Ms Herman is the Group President of WellPoint's Senior, Specialty, and
State Sponsored Programs division and is responsible for the Company's Dental, Life & AD& D,
Pharmacy, Behavioral Health, Workers' Compensation Managed Care Services, Senior Services,
and Disability businesses. She is also responsible for WellPoint's State Sponsored
Programs, which include MediCal and Healthy Families. In 1999, a WellPoint affiliate
entered into an agreement with the Company to implement a pilot program for the
introduction of Cymedix(R)software to healthcare providers identified by such affiliate.
Ms. Herman serves on the Company's Board of Directors pursuant to the terms of that
agreement. Prior to joining WellPoint in 1998, Ms. Herman was the Senior Vice President,
Strategic Development and Senior Vice President, Group Insurance for Phoenix Home Life
Mutual Insurance Company. Ms. Herman has served as chairman of the board of Leadership
Greater Hartford and been a member of the board of directors of the American Academy of
Actuaries, the American Leadership Forum, the Hartford Ballet, the Greater Hartford Arts
Council, and the Children's Fund of Connecticut. She is a member of the American Academy of
Actuaries and a Fellow of the Society of Actuaries. Ms. Herman holds an MA in Mathematics
from Yale University, an MBA from Western New England College, and an A.B. in mathematics
from Barnard College.
Patrick W. Jeffries. In March 2002, Mr. Jeffries became the Executive Vice President for
IT and Central Services of WellPoint Health Networks Inc. Mr. Jeffries is the founding
partner of Health Technology Partners, LLC and a predecessor company, which was founded in
1997 and provides consulting services for healthcare and technology companies. From August
1997 to March 1999, Mr. Jeffries was the CEO and Chairman of the Board of OpTx Corporation,
during which time he lead this disease management company in its transition from a late
development stage company to commercial profitability. From December 1995 to July 1997, he
was Executive Vice President of Salick Health Care, Inc., a national system of cancer
treatment facilities. From 1985 to 1995, Mr. Jeffries was first an associate and then a
partner of McKinsey & Company, Inc., an international management consulting firm. He holds
an MBA from Cornell University and a BSEE from Washington University.
Guy L. Scalzi. Mr. Scalzi is Vice President of First Consulting Group Management
Services, LLC, a healthcare information technology consultant. Prior to joining that
company in January 2000, he was Senior Vice President and Chief Information Officer for New
York Presbyterian Healthcare System from April 1996 to December 1999. From January 1995 to
March 1996, Mr. Scalzi was Director of Planning for Information Services at New York
Hospital-Cornell Medical Center. From June 1993 to December 1994, he was Chief Information
Officer, The Hospital for Joint Diseases, New York University Medical Center. From 1984 to
1993, he was a founder and senior executive with DataEase International, Inc., an
international PC software development and marketing company. Mr. Scalzi has an MBA from
Manhattan College and a B.S. degree from The State University of New York at Oswego.
Dr. David B. Skinner. Dr. Skinner is President Emeritus of the New York-Presbyterian
Hospital and the New York-Presbyterian Healthcare System. He was Vice Chairman/President
and CEO of the Society of the New York Hospital and its Healthcare System and subsequently
of the merged institution for 13 years. He is also a professor of cardiothoracic surgery
and surgery at the Weill Medical College of Cornell University, professor of surgery at
Columbia University College of Physicians and Surgeons, and an attending surgeon at New
York Presbyterian Hospital. He was professor of surgery at Johns Hopkins University School
of Medicine from 1968 to 1972, and professor and chairman of surgery at the University of
Chicago, Pritzker School of Medicine from 1973 to 1987. Dr. Skinner has been awarded
numerous honorary degrees, faculty appointments, corporate directorships, and domestic and
international honors, awards, and prizes. Dr. Skinner holds a BA degree, with high
distinction, from the University of Rochester and an MD degree, cum laude, from Yale
University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires directors
and executive officers, and persons who own more than 10% of a registered class of a
company's equity securities, to file with the U. S. Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of the Company's common
stock and other equity securities. Officers, directors and greater than 10% shareholders
are required by Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a) reports they file. Based solely upon such reports, we believe
that none of such persons failed to comply with the requirements of Section 16(a) during
2001.
ITEM 11. EXECUTIVE COMPENSATION
Executive Officer Compensation
Summary Compensation Table. The following table sets forth the annual and long-term
compensation for services in all capacities to the Company for the three years ended
December 31, 2001, awarded or paid to, or earned by our Chief Executive Officer ("CEO") and
our four other most highly compensated officers (the "Named Officers").
Annual Compensation Long-Term
Compensation
Name and Principal Fiscal Salary Bonus Other(1) Securities
Position Year ------- ------ -------- Underlying
-------- ------ Options
(Shares)
---------
John R. Prufeta 2001 $114,000 0 425,000
President and CEO 2000 $120,000 0 600,000
1999 $171,000(2) 0 925,000
Louis E. Hyman, 2001 156,625(3) 0 250,000
Executive Vice
President and
Chief Technology
Officer
Patricia A. $197,000 0 175,000
Minicucci 2001 $163,846 0 400,000
Executive Vice
President for 2000
Operations
Gary L. Smith, 2001 $197,000 0 175,000
Executive Vice 2000 $2,430 0 250,000
President and
Chief Financial
Officer
Brian R. Ellacott 2001 $165,000 0 175,000
Senior Vice 2000 $125,769 150,000
President
(1) Other annual compensation, except as noted, is made up of automobile allowances, and
disability and health insurance premiums, in amounts less than 10% of the officer's
annual salary plus bonus.
(2) During 1999, Mr. Prufeta served as a consultant to the Company pursuant to a
consulting agreement between the Company and his employer, Creative Management
Strategies, Inc., which company was paid or accrued the amount shown above and received
options to purchase 25,000 shares of Common Stock, included in the amount shown. He
became an employee of the Company in early 2000.
(3) During 2001, Mr. Hyman, through an affiliated entity, served as a consultant to Medix
before he became a full time employee and executive officer. This amount includes the
consulting compensation to his firm. He also received a grant of options to purchase
20,000 shares for his consulting services.
Stock Option Awards. In August 1999, our Board of Directors approved and authorized
our 1999 Stock Option Plan (the "1999 Plan"), which is intended to grant either
non-qualified stock options or incentive stock options, as described below. In 2000, our
shareholders approved the 1999 Plan. The purpose of the 1999 Plan is to enable our company
to provide opportunities for certain officers and key employees to acquire a proprietary
interest in our company, to increase incentives for such persons to contribute to our
performance and further success, and to attract and retain individuals with exceptional
business, managerial and administrative talents, who will contribute to our progress,
growth and profitability.
Options granted under our 1999 Plan include both incentive stock options ("ISOs"),
within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and non-qualified stock options ("NQOs"). Under the terms of the Plan, all
officers and employees of our company are eligible for ISOs. Our company determines in its
discretion, which persons will receive ISOs, the applicable exercise price, vesting
provisions and the exercise term thereof. The terms and conditions of option grants differ
from optionee to optionee and are set forth in the optionees' individual stock option
agreement. Such options generally vest over a period of one or more years and expire after
up to ten years. In order to qualify for certain preferential treatment under the Code,
ISOs must satisfy the statutory requirements thereof. Options that fail to satisfy those
requirements will be deemed NQOs and will not receive preferential treatment under the
Code. Upon exercise, shares will be issued upon payment of the exercise price in cash, by
delivery of shares of Common Stock, by delivery of options or a combination of any of these
methods. At our 2001 Annual Meeting, our shareholders approved an increase of 3,000,000
shares to 13,000,000 as the amount of total shares of our Common Stock reserved for
issuance under the 1999 Plan.
As of March 15, 2002, we had issued 5,736,560 shares of our Common Stock upon
exercise of options to current or former employees and directors, and have 6,568,667 shares
currently covered by outstanding options held by current or former employees and directors,
with exercise prices ranging form $.19 to $4.97. Such options have been granted under the
1999 Plan and earlier stock option plans.
Option information for fiscal 2001 relating to the Named Officers is set forth below:
Options Granted in 2001
Name Number of Percentage Exercise Expiration Valuation
---- Shares of of Total Price Date under
Common Stock Options -------- ------- Black-Scholes
Underlying Granted to Pricing
Options Employees in Method(1)
Granted in 2001
2001 ----
----
John R. Prufeta 400,00 21.2% $.62 4/17/06 $217,755
25,000 1.3% $.60 3/23/06 $13,171
Louis E. Hyman 230,000 12.2% $.61 5/14/06 $123,190
20,000 1.1% $.70 3/03/03 $15,580
Patricia A. 150,000 7.9% $.61 5/14/06 $80,341
Minicucci 25,000 1.3% $.60 3/23/06 $13,171
Gary L. Smith 150,000 7.9% $.61 5/14/06 $80,341
25,000 1.3% $.60 3/23/06 $13,171
Brian R. Ellacott 150,000 7.9% $.61 5/14/06 $80,341
25,000 1.3% $.60 3/23/06 $13,171
(1) The Black-Scholes option-pricing model estimates the options fair value by
considering the following assumptions: the options exercise price and expected life, the
underlying current market price of the stock and expected volatility, expected dividends
and the risk free interest rate corresponding to the term of the option. The fair values
calculated above use expected volatility of 132%, a risk-free rate of 5.5%, no dividend
yield and anticipated exercise at the end of the term.
Option Exercises and Year-End Values in Fiscal 2001
Name Shares Value Number of Shares Value of Unexercised
---- Exercised Realized Underlying In-the-Money Options
---------- -------- Unexercised Options at Year-End(1)
at Year-End -------------
-----------
Exercisable Unexer Exerci Unexer
---------- cisale sable cisable
------- -------- -------
John R. Prufeta 0 0 1,450,000(2)500,000 $258,250 $80,000
Louis E. Hyman 0 0 112,500 137,500 $8,325 $12,375
Patricia A. 0 0 575,000 0 $16,000 $0
Minicucci
Gary L. Smith 0 0 325,000 100,000 $16,000 $0
Brian R. 0 0 312,500 12,500 $16,000 $0
Ellacott
--------------
(1) The dollar values are calculated by determining the difference between $0.70 per share,
the fair market value of the Common Stock at December 31, 2001, and the exercise price of
the respective options.
(2) Includes options covering 25,000 of these shares were granted to a company that is an
affiliate of Mr. Prufeta for executive search services.
Medix has no retirement, pension or profit-sharing program for the benefit of its
directors, executive officers or other employees, but the Board of Directors may recommend
one or more such programs for adoption in the future. Medix does not make any
contributions to its 401(k) Plan for its employees.
Employment Agreements.
Mr. Prufeta's Employment Agreement, which has an initial term of one year and renews
in automatic one year increments thereafter, provides that he will be compensated at the
base salary of $275,000 annually, plus a bonus of $400,000, subject to certain performance
criteria. He holds the positions of President and Chief Executive Officer and reports to
the Board of Directors. Pursuant to his Employment Agreement, Mr. Prufeta has been granted
options to purchase 200,000 shares of Common Stock at $.70 per share, which vest upon the
occurrence of certain performance goals. His Employment Agreement provides for termination
at any time by the employee with or without cause or by the Company with cause. The
Employment Agreement is also subject to termination by the Company without cause, after the
initial one-year of the term subject to the right of the employee to continue to receive
salary and pro-rata bonus compensation for 6 months. The Employment Agreement also
contains a non-compete provision that extends for a period of one year after termination or
resignation of the employee, as well as certain confidentiality provisions. The Employment
Agreement contains provisions providing that, upon the occurrence of a "Triggering Event"
(defined to include a change in ownership of 50% of the outstanding shares of the Company's
Common Stock through a merger or otherwise) during the term of his employment, he will
receive a lump sum payment equal to his then current year's base and bonus pay.
Mr. Hyman's Employment Agreement, which has an initial term of two years, ending on
May 14, 2003, provides that he will be compensated at the salary of $200,000 annually. He
holds the position of Executive Vice President and Chief Technology Officer, and reports to
the President and CEO. Pursuant to his Employment Agreement, he has been granted options
to purchase 230,000 shares of Common Stock at $.61 per share, which vest over the 2-year
term of his Employment Agreement. His Employment Agreement provides for termination at any
time by the employee with or without cause or by the Company with cause. The Employment
Agreement is also subject to termination by the Company without cause after the initial
one-year of the term, subject to the right of the employee to continue to receive
compensation for 6 months. The Employment Agreement also contains a non-compete provision
that extends for a period of one year after termination or resignation of the employee, as
well as certain confidentiality provisions. The Employment Agreement contains provisions
providing that, upon the occurrence of a "Triggering Event" (defined to include a change in
ownership of 50% of the outstanding shares of the Company's Common Stock through a merger
or otherwise) during the term of his employment, he will receive a lump sum payment equal
to his then current year's base and bonus pay.
Ms. Minicucci's Employment Agreement, which had an initial term of two years, ending
on March 1, 2002, provided that she be compensated at the salary of $200,000 annually.
Such term has been extended to May 1, 2002. She holds the position of Executive Vice
President, Operations, and reports to the President and CEO. Pursuant to her Employment
Agreement, she has been granted options to purchase 400,000 shares of Common Stock at $4.97
per share, which vest over the 2-year term of his Employment Agreement. Her Employment
Agreement provides for termination at any time by the employee with or without cause or by
the Company with cause. The Employment Agreement is also subject to termination by the
Company without cause after the initial one-year term, subject to the right of the employee
to continue to receive compensation for 6 months. The Employment Agreement also contains a
non-compete provision that extends for a period of one year after termination or
resignation of the employee, as well as certain confidentiality provisions. The Employment
Agreement contains provisions providing that, upon the occurrence of a "Triggering Event"
(defined to include a change in ownership of 50% of the outstanding shares of the Company's
Common Stock through a merger or otherwise) during the term of her employment, she will
receive a lump sum payment equal to his then current year's base and bonus pay.
Mr. Smith's Employment Agreement, which has an initial term of two years, ending on
December 11, 2002, provides that he will be compensated at the salary of $200,000
annually. He holds the position of Executive Vice President and Chief Financial Officer,
and reports to the President and CEO. Pursuant to his Employment Agreement, he has been
granted options to purchase 250,000 shares of Common Stock at $1.125 per share, which vest
over the 2-year term of his Employment Agreement. His Employment Agreement provides for
termination at any time by the employee with or without cause or by the Company with
cause. The Employment Agreement is also subject to termination by the Company without
cause after the initial one-year of the term, subject to the right of the employee to
continue to receive compensation for 6 months. The Employment Agreement also contains a
non-compete provision that extends for a period of one year after termination or
resignation of the employee, as well as certain confidentiality provisions. The
Employment Agreement contains provisions providing that, upon the occurrence of a
"Triggering Event" (defined to include a change in ownership of 50% of the outstanding
shares of the Company's Common Stock through a merger or otherwise) during the term of his
employment, he will receive a lump sum payment equal to his then current year's base and
bonus pay.
Mr. Ellacott's Employment Agreement, which had an initial term of two years, ending
on March 1, 2002, provided that he be compensated at the salary of $150,000 annually. Such
term has been extended to May 1, 2002. In March 2001, Mr. Ellacott's annual salary was
increased to $175,000. He initially held the position of Senior Vice President, Business
Development, and recently was appointed as Senior Vice President and Southeast Division
Market CEO, reporting to the Executive Vice President, Operations. Pursuant to his
Employment Agreement, he has been granted options to purchase 150,000 shares of Common
Stock at $3.97 per share, which vest over the 2-year term of his Employment Agreement. His
Employment Agreement provides for termination at any time by the employee with or without
cause or by the Company with cause. The Employment Agreement is also subject to
termination by the Company without cause, subject to the right of the employee to continue
to receive compensation
for 6 months. The Employment Agreement also contains a non-compete provision that extends
for a period of one year after termination or resignation of the employee, as well as
certain confidentiality provisions.
Director Compensation
In 1999, we adopted the policy of compensating non-employee Directors, $1,000 for
attending each regular quarterly Board meeting in person, and $250 for attendance by
telephone. The Board of Directors has also authorized payment of reasonable travel or
other out-of-pocket expenses incurred by non-employee directors for attending Board or
committee meetings. Notwithstanding this policy, during 2001, the Directors waived such
fees but not reimbursements for out-of-pocket expenses. Independently, Ms Joan Herman has
waived her director fees altogether, based on WellPoint company policy.
From time to time, the Board of Directors will grant non-employee Directors options
to acquire shares of Common Stock as compensation for their services to the Company as
Directors. During 2001, we granted options covering 200,000 shares of Common Stock each to
Mr. Jeffries and Mr. Scalzi, at the time they became Directors, which are exercisable at
$.78 per share.
In January 2002, the Directors discontinued the policy of cash fees to Directors for
attending Board or committee meetings. Instead, non-employee Directors will be compensated
for their services through the grant of options to purchase our Common Stock. As of
January 22, 2002, each Director, except Ms. Herman based on the policy referred to above,
has been granted options to purchase 40,000 shares of Common Stock at an exercise price of
$0.70 per share. Those options vest in quarterly 10,000 share increments, from the date of
grant, provided that the Director remains on the Board of the Company.
In 1999, we entered into a consulting agreement with Mr. Samuel Havens, which
provides that we pay Mr. Havens $5,000 per month for his consulting services in connection
with our marketing efforts. Mr. Havens has deferred his monthly payment since April, 2001,
with the accrued amount payable to Mr. Havens at March 15, 2002 being $55,000. During
2001, we paid Mr. Havens $20,000 for his services.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors (the "Committee") administers
the Medix stock option plans and oversees our executive compensation, subject to approval
of its recommendations by the Board of Directors. Executive compensation includes base
salaries, annual incentives and long term stock option plans, as well as any executive
benefits and/or prerequisites.
Our general compensation philosophy for our executive officers, including our Chief
Executive Officer ("CEO"), is to offer competitive compensation packages that are designed
to attract and retain key executives critical to the success of the Company. At present,
packages include annual cash compensation (salaries) and long-term compensation consisting
of options to purchase the Company's stock, to align the interests of management with those
of the Company's shareholders. Beginning with calendar year 2002, executive packages will
include variable amounts of annual bonus potential, tied to specific performance goals for
the Company and the individual executives. The Committee intends to review the performance
and compensation of executives annually, in conjunction with the performance of the
Company. Incentive Stock Option awards are based upon the Committee's judgment as to the
relative rank and contribution of each executive (or other employee) to the success and
survival of the Company.
In addition, the Company has entered into employment agreements with its executive
officers, as outlined earlier in this report.
Compensation Committee,
Dr. David B. Skinner, Chairman
Ms. Joan E. Herman
Mr. John T. Lane
Compensation Committee Interlocks and Insider Participation
In 1999, we entered into agreements with WellPoint Pharmacy Management ("WPM") to
implement a pilot program for the introduction of Cymedix(R)software to healthcare providers
identified by WPM. After the required testing of the software, the agreements provide for
a production program to install the software broadly among WPM managed providers. One of
the agreements provides that Medix will nominate a representative of WPM to be elected to
the Company's Board of Directors. Ms. Herman is that representative. Such agreement also
provided that WPM would be granted warrants evidencing the right to purchase up to
6,000,000 shares of Common Stock, which vest upon the occurrence of certain performance
criteria. The agreement provides for the grant of warrants covering 3,000,000 shares with
an exercise price of $0.30 per share, and warrants covering 3,000,000 shares with an
exercise price of $0.50 per share, all expiring five years from the date of grant,
September 8, 2004. In February 2002, the warrant agreement was amended to revise the
performance criteria and to add an additional right to purchase up to 1,000,000 additional
shares at $1.75 per share. At March 15, 2002, warrants covering 1,850,000 shares,
exercisable at $.30 per share, had vested. In February 2002, WellPoint Health Networks
Inc., the parent of WPM made a secured convertible loan to Medix of $1,000,000. See
"DESCRIPTION OF BUSINESS - Recent Developments" for a description of the terms of both
these agreements. In addition, Mr. Jeffries, who became a director of ours in 2001, is an
officer and consultant to WellPoint Health Network.
Comparison of Cumulative Total Returns
The following graph and data point tables compare the performance of the Company's
common stock with the performance of the AMEX-U.S. Index, as adjusted, and as provided by
the American Stock Exchange and a Custom Composite Index (4 stocks) over the five year
period extending through the end of 2001. The graph
and tabular information assume that $100 was invested on December 31, 1996 in the
Company's common stock, the AMEX-U.S. Index and the Custom Composite Index, with any
dividends being reinvested. The Company has provided this graph and the tabular information
using publicly available information that it has no reason to believe is not accurate.
However, the Company takes no responsibility for such information.
The Custom Composite Index includes Cybear, AllScripts, WebMD and ProxyMed, companies
that the Company believes are its peers and that are involved in the same or similar lines
of business. The Company believes that this peer group is a better comparison than broader
indices which are publicly available. Data for
Cybear, AllScripts and WebMD were not available for periods prior to 1999.
Based on the reinvestment of $100 beginning December 31, 1996
12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001
Medix $ 100 $ 23 $ 9 $ 288 $ 100 $ 65
Resources,
Inc. (1)
AMEX U.S. $ 100 $ 125 $ 134 $ 177 $ 166 $ 151
Index
Custom $ 100 $ 98 $ 165 $ 138 $ 16 $ 20
Composite
Index
(1) Medix acquired its Cymedix Internet software and services business in January of
1998. Before then it operated only a medical temporary staffing business. It did not
dispose of all of its medical staffing business until February 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial ownership of
Common Stock as of March 15, 2002 by (i) each person known by us to own beneficially more
than 5 % of the outstanding shares of Common Stock. (ii) each director, named executive
officer and (iii) all executive officers and directors as a group. On such date, we had
58,386,516 shares of Common Stock outstanding. Shares not outstanding but deemed
beneficial1y owned by virtue of the right of any individual to acquire shares within 60
days are treated as outstanding only when determining the amount and percentage of Common
Stock owned by such individual. Each person has sole voting and investment power with
respect to the shares shown, except as noted.
Name and Address Number of Shares Percentage of Class
---------------- ---------------- -------------------
John R. Prufeta 2,453,000(1) 4.1%
420 Lexington Ave., Suite
1830
New York, New York
John T. Lane 560,000(2) *
94 Sixth Street
Garden City, New Jersey
Samuel H. Havens 210,000(3) *
58 Winged Foot Drive
Livingston, New Jersey
Joan E. Herman None(4) 0%
One Wellpoint Way
Thousand Oaks, California
Patrick W. Jeffries 110,000(3) *
One Wellpoint Way
Thousand Oaks, California
Guy L Scalzi 110,000(3) *
The Chrysler Building,
37th Floor
42nd and Lexington Ave.
New York, New York
Dr. David B. Skinner 210,000(3) *
525 East 68th Street
New York, New York
Louis E. Hyman 167,500(3) *
420 Lexington Ave., Suite
1830
New York, New York
Patricia A. Minicucci 575,000(3) *
420 Lexington Ave., Suite
1830
New York, New York
Gary L. Smith 350,000(3) *
420 Lexington Ave., Suite
1830
New York, New York
Brian Ellacott 325,000(3) *
101 Village Parkway
Building One
Marietta, Georgia
All directors and executive officers5,070,500 8.0%
as a group (11 persons)
*Less than 1% of the outstanding shares
-------------------
(1) Mr. Prufeta owns 737,000 shares of Common Stock, with the remainder available upon
the exercise of warrants and options held by him.
(2) All of Mr. Lane's reported holdings are available upon the conversion or exercise of
convertible preferred stock, warrants and options held by him, including 50 shares of
the Company's 1999 Series B Convertible Preferred Stock (100% of the outstanding shares
of that class), and 25 shares of the Company's 1999 Series C Convertible Preferred Stock
(6.7% of the outstanding shares of that class).
(3) Represents shares of Common Stock available upon the exercise of outstanding options.
(4) Ms. Herman has declined the grant of any options based on Wellpoint company policy.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since 1996, we have had a policy that any transactions with directors or officers or
any entities in which they are also officers or directors or in which they have a financial
interest, will only be on terms that would be reached in an arms-length transaction,
consistent with industry standards and approved by a majority of our disinterested
directors. This policy provides that no such transaction by shall be either void or
voidable solely because of such relationship or interest of such directors or officers or
solely because such directors are present at the meeting of the Board of Directors or a
committee thereof that approves such transaction or solely because their votes are counted
for such purpose. In addition, interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee thereof that
approves such a transaction. We have also adopted a policy that any loans to officers,
directors and 5% or more shareholders are subject to approval by a majority of the
disinterested directors. All of the transactions described below have been approved
according to this policy.
Before Mr. Prufeta was elected to our Board of Directors in 1999, OnPoint Partners
(formerly known as Creative Management Strategies) ("OPP"), a company partially owned by
Mr. John Prufeta, entered into agreements with us to provide executive search services and
sales and marketing services to us. In connection with those agreements, we issued a
3-year option to acquire up to 25,000 shares of our Common Stock at an exercise price of
$0.55 per share to OPP. We also paid such company $71,000 during 1999. In addition, for
Mr. Prufeta's service to us as Chief Executive Officer until he became a full-time
employee, and the above services provided by the affiliated company, we have paid $110,000
to OPP in 2000. At the time Mr. Prufeta became a full-time employee of the Company in
January of 2000, such agreements with OPP were terminated. During 2001 and 2000, we have
paid OPP approximately $111,000 and $93,000, respectively, as reimbursements for rents and
services for our former New York office space, which was leased in the name of OPP. In
addition, we have paid OPP employee search fees of approximately $38,361 and $152,000
during 2001 and 2000, respectively, for their employee search services. OPP is a
recognized provider of executive and employee search services to all areas of the health
care industry, and provides it services to us at standard rates. The Board of Directors,
through the Audit Committee, reviews and approves of our contractual arrangements with
OPP.
We have entered into a consulting agreement with Mr. Samuel Havens, which provides
that we pay Mr. Havens $5,000 per month for his consulting services in connection with our
marketing efforts. Mr. Havens has deferred his monthly payment since April 2001, with the
accrued amount payable to Mr. Havens at March 15, 2002 being $55,000. During 2001, we paid
Mr. Havens $20,000 for his services.
See "EXECUTIVE COMPENSATION - Compensation Committee Interlocks and Insider
Participation" for a description of other related party transactions.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) Financial Statements
See Financial Statements included after the signature page beginning at page F-1.
(2) Financial statement schedules
All schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or the notes thereto.
(3) List of Exhibits
See Index to Exhibits in paragraph (c) below.
(b) Reports on Form 8-K. The Company filed seven reports on Form 8-K during the
last quarter of 2001 as follows:
1. Report filed with the SEC on October 9, 2001, reporting under Item 5, the issuance of a
press release announcing that Medix Resources and Express Scripts will jointly deploy
web-based pharmacy transaction services to physicians.
2. Report filed with the SEC on October 24, 2001, reporting under Item 5, the issuance of a
press release announcing that a strategic alliance between Medix Resources and Merck-Medco
to provide physicians with point of care access to clinical information and electronic
prescribing through Cymedix(R)suite of web-based pharmacy benefit management
transaction services.
3. . Report filed with the SEC on October 31, 2001, reporting under Item 5, the issuance of
a press release announcing that a strategic alliance between Medix Resources and
Merck-Medco to provide physicians with point of care access to clinical information and
electronic prescribing through Cymedix(R)suite of web-based pharmacy benefit management
transaction services.
4. Report filed with the SEC on November 2, 2001, reporting under Item 5, the issuance of a
press release announcing the introduction of Cymedix(R)III, the next generation of Medix's
proprietary, point-of-care products.
5. Report filed with the SEC on November 15, 2001, reporting under Item 5, the issuance of
a press release announcing that Medix Resources will assist Georgia doctors with electronic
Medicaid claims filing.
6. Report filed with the SEC on December 11, 2001, reporting under Item 5, the issuance of
a press release announcing that Medix will provide a telephonic progress report.
7. Report filed with the SEC on December 26, 2001, reporting under Item 5, that Medix
Resources had announced that its business plan indicates that the certain financial goals
could be attained provided adequate financing is available.
(c) Exhibits required by Item 601 of Regulation S-K. We will furnish to our shareholders
a copy of any of the exhibits listed below upon payment of $.25 per page to cover the
costs of the Company of furnishing the exhibits.
Exhibit No. Description
---------- -----------
3.1.1 Articles of incorporation of the Company as filed on April 22, 1988 with the
Secretary of State of the State of Colorado, incorporated by reference to
Exhibit 3.1.1 to the Registration Statement on Form SB-2 (Reg. No. 33-81582-D),
filed with the SEC in July 14,1994 (the "1994 Registration Statement").
3.1.2 Articles of Amendment to Articles of Incorporation of the Company as filed on
May 24, 1988 with the Secretary of State of the State of Colorado, incorporated
by reference to Exhibit 3.1.2 to the 1994 Registration Statement.
3.1.3 Articles of Amendment to Articles of Incorporation of the Company as filed on
February 16, 1990 with the Secretary of State of the State of Colorado,
incorporated by reference to Exhibit 3.1.3 to the 1994 Registration Statement.
3.1.4 Articles of Amendment to Articles of Incorporation of the Company as filed on
August 12, 1994 with the Secretary of State of the State of Colorado,
incorporated by reference to Exhibit 3.1.4 to Amendment No. 1 to the 1994
Registration Statement, filed with the SEC on August 15, 1994.
3.1.5 Articles of Amendment to Articles of Incorporation of the Company as filed on
September 12, 1994 with the Secretary of State of the State of Colorado,
incorporated by reference to Exhibit 3.1.5 to Amendment No. 3 to the 1994
Registration Statement, filed with the SEC on September 12, 1994.
3.1.6 Certificate of Designation of 1996 Convertible Preferred Stock, incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the Registration Statement of
the Company on Form S-3, filed with the SEC October 10, 1996.
3.1.7 Articles to Amendment to Articles of Incorporation filed with the Secretary of
State of the State of Colorado on October 9, 1996, incorporated by reference to
Exhibit 3.2 to Amendment No. 1 to the Registration Statement of the Company on
Form S-3 filed with the SEC on October 10, 1996.
3.1.8 Articles of Amendment containing Articles of Designation of 1997 Convertible
Preferred Stock, incorporated by reference to Exhibit 3.1.8 to the Company's
Form 10-KSB filed with the SEC on March 31, 1997.
3.1.9 Articles of Amendment to Articles of Incorporation of the Company as
filed on November 14, 1997 with the Secretary of State of the State of
Colorado, incorporated by reference to Exhibit 3.1.9 to the Company's Form
10-KSB filed with the SEC on March 30, 1998.
3.1.10 Articles of Amendment to Articles of Incorporation of the Company as
filed on February 17, 1998 with the Secretary of State of the State of
Colorado, incorporated by reference to Exhibit 3.1.10 to the Company's Form
10-KSB filed with the SEC on March 30, 1998.
3.1.11 Articles of Amendment to Articles of Incorporation of the Company as filed on
March 17, 1998 with the Secretary of State of the State of Colorado,
incorporated by reference to Exhibit 3.1.11 to the Company's Form 10-KSB filed
with the SEC on March 30, 1998.
3.1.12 Articles of Amendment of Articles of Incorporation establishing the 1999
Series A Convertible Preferred Stock as filed on April 21, 1999, with Secretary
of State of the State of Colorado, incorporated by reference to Exhibit 3.1.12
to the Company's Form 10-KSB, filed with the SEC on March 30, 2000.
3.1.13 Articles of Amendment of Articles of Incorporation increasing the
authorized capital of the Company as filed on June 11, 1999, with Secretary of
State of the State of Colorado, incorporated by reference to Exhibit 3.1.13 to
the Company's Form 10-KSB, filed with the SEC on March 30, 2000.
3.1.14 Articles of Amendment of Articles of Incorporation establishing the 1999
Series B Convertible Preferred Stock as filed on July 22, 1999, with Secretary
of State of the State of Colorado, incorporated by reference to Exhibit 3.1.14
to the Company's Form 10-KSB, filed with the SEC on March 30, 2000.
3.1.15 Articles of Amendment of Articles of Incorporation establishing the 1999
Series C Convertible Preferred Stock as filed on January 21, 2000, with
Secretary of State of the State of Colorado, incorporated by reference to
Exhibit 3.1.15 to the Company's Form 10-KSB, filed with the SEC on March 30,
2000.
3.1.16 Articles of Amendment of Articles of Incorporation increasing the
authorized capital of the Company as filed on March 22, 2000, with Secretary of
State of the State of Colorado, incorporated by reference to Exhibit 3.1.16 to
the Company's Form 10-KSB, filed with the SEC on March 30, 2000.
3.2 Amended and Restated By-Laws of the Company, incorporated by reference to
Exhibit 3.2.2 to Amendment No. 1 to the Registration Statement filed with the
SEC on August 15, 1994.
4.1 Form of specimen certificate for common stock of the Company,
incorporated by reference to Exhibit 4.1. to the Company's Form 10-KSB filed
with the SEC on March 30, 1998.
4.2 Form of 1996 Unit Warrant, incorporated by reference to Exhibit 4.1 to Amendment No.
1 to the Registration Statement of the Company on Form S-3 filed with the SEC
on October 10, 1996.
4.3 Warrant issued January 28, 1997 to Millenco, L.P, Incorporated by reference to
Exhibit 4.9 to the Company's Form 10-KSB filed with the SEC on March 31, 1997.
4.4 Form of 1997 Unit Warrant, incorporated by reference to Exhibit 4.11 to the
Company's Form 10-KSB filed with the SEC on March 31, 1997.
4.5 Form of Warrant issued with the 1999 Series A, B, and C Convertible Preferred
Stock, incorporated by reference to Exhibit 4.7 to the Company's Form 10-KSB,
filed with the SEC on March 30, 2000.
4.6 Amended and Restated Warrant to Purchase Common Stock issued to Wellpoint
Pharmacy Management, dated September 8, 1999 and amended February 18, 2002,
incorporated by reference to Exhibit 10.7 to the Company's Amendment No.1 to
Registration Statement on Form S-2 (Reg. No. 333-73572), filed with the SEC on
February 28, 2002.
10.1.1 Incentive Stock Option Plan, adopted May 5, 1988, authorizing 100,000
shares of common stock for issuance pursuant to the Plan, incorporated by
reference to Exhibit No. 10.2.1 of the 1994 Registration Statement.
10.1.2 Omnibus Stock Option Plan, adopted effective January 1, 1994, authorizing
500,000 shares of common stock for issuance pursuant to the Plan, incorporated
by reference to Exhibit No. 10.2.2 of the 1994 Registration Statement.
10.1.3 1996 Stock Incentive Plan, adopted by the Company's Board of Directors on
November 27, 1996, authorizing 4,000,000 shares of common stock for issuance
pursuant to the Plan., incorporated by reference to Exhibit 10.2.3 to the
Company's Form 10-KSB filed with the SEC on March 30, 1998.
10.1.4 1999 Stock Option Plan, adopted by the Board of Directors on August 16,
1999, as amended, incorporated by reference to Exhibit 10.2.4 to the Company's
Form 10-KSB filed with the SEC on March 21, 2001.
10.2 Agreement and Plan of Merger, dated as of November 17, 1997, among
International Nursing Services, Inc., Cymedix Lynx Corporation and Cymedix
Corporation, incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed with the SEC on December 24, 1997.
10.3 Amendment No. 1 to Agreement and Plan of Merger, dated as of December 10, 1997,
among International Nursing Services, Inc., Cymedix Lynx Corporation and
Cymedix Corporation, incorporated by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K filed with the SEC on December 24, 1997.
10.4 Purchase and Sale Agreement, dated September 14, 1998, among Premier Home
Health Care Services, Inc., National Care Resources-New York, Inc., and Medix
Resources, Inc., incorporated by reference to Exhibit 10.23 to the Company's
Form 8-K, filed with the SEC on September 28, 1998.
10.5 Employment Agreement between the Company and Mr. John R. Prufeta, dated as of
February 1, 2002.*
10.6 Employment Agreement between the Company and Mr. Brian R. Ellacott, dated as of
February 11, 2000, incorporated by reference to Exhibit 10.21 to the Company's
Form 10-KSB, filed with the SEC on March 30, 2000.
10.7 Employment Agreement between the Company and Ms. Patricia A. Minicucci, dated as of
February 15, 2000, incorporated by reference to Exhibit 10.22 to the Company's
Form 10-KSB, filed with the SEC on March 30, 2000.
10.8 Asset Purchase Agreement, dated as of February 19, 2000, among Medix Resources, Inc.,
Medical Staffing Network, Inc., National Care Resources - Texas, Inc., National
Care Resources - Colorado, Inc. and TherAmerica, Inc., incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K, filed with the SEC on
March 7, 2000.
10.9 Agreement and Plan of Merger, dated as of March 8, 2000, among Medix Resources, Inc.,
Cymedix Lynx Corporation, Automated Design Concepts, Inc. and David R. Pfeil,
incorporated by reference to Exhibit 10.24 to the Company's Form 10-KSB, filed
with the SEC on March 30, 2000.
10.10 Consulting Agreement between the Company and Mr. Samuel H. Havens, dated as of
October 1, 1999, incorporated by reference to Exhibit 10.25 to the Company's
Form 10-KSB, filed with the SEC on March 30, 2000.
10.11 Executive Employment Agreement between the Company and Mr. Gary L. Smith, dated as of
December 11, 2000, incorporated by reference to Exhibit 10.20 to the Company's
Form 10-KSB filed with the SEC on March 21, 2001.
10.12 Executive Employment Agreement between the Company and Louis E. Hyman, dated May 14,
2001*
10.13 Securities Purchase Agreement, dated as of December 29, 2000,
between RoyCap Inc. and Medix Resources, Inc., incorporated
by reference to Exchibit 10.1 to the Company's form S-2 registration Statement
filed with the SEC on January 29, 2001.
10.14 Convertible Note of Medix Resources, Inc., dated as of December 29, 2000 in the
principal amount of up to $2,500,000, in favor of RoyCap Inc., incorporated by
reference to Exchibit 10.2 to the Company's form S-2 registration Statement
filed with the SEC on January 29, 2001.
10.15 Registration Rights Agreement, dated as of December 29, 2000,
between RoyCap Inc. and Medix Resources, Inc. incorporated
by reference to Exchibit 10.3 to the Company's Form S-2 Registration Statement
filed with the SEC on January 29, 2001.
10.16 Warrant Agreement, dated as of December 29, 2000, between RoyCap Inc. and Medix
Resources, Inc., incorporated by reference to Exchibit 10.4 to the Company's
Form S-2
Registration Statement filed with the SEC on January 29, 2001.
10.17 Securities Purchase Agreement, dated February 19, 2002, between Medix
and Wellpoint Health Networks Inc. incorporated by reference to Exhibit 10.8 to
the Company's Amendment No.1 to Registration Statement on Form S-2 (Reg. No.
333-73572), filed with the SEC on February 28, 2002.
10.18 General Security Agreement, dated February 19, 2002, among Medix, Cymedix
and Wellpoint Health Networks Inc., incorporated by reference to Exhibit 10.9
to the Company's Amendment No.1 to Registration Statement on Form S-2 (Reg. No.
333-73572) filed with the SEC on February 28, 2002.
10.19 Participation Agreement, dated as of April 2, 2001, between Medix
and Kaiser Foundation Health Plan of Georgia, Inc., incorporated by reference
to Exhibit 10.1 to the Company's Amendment No.1 to Registration Statement on
Form S-2 (Reg. No. 333-73572), filed with the SEC on February 28, 2002.
(Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment filed with the Office of the Secretary of the
SEC)
10.20 Agreement, dated as of October 18, 2001, between Medix and
Merck-Medco Managed Care, L.L.C., incorporated by reference to Exhibit 10.2 to
the Company's Amendment No.1 to Registration Statement on Form S-2 (Reg. No.
333-73572), filed with the SEC on February 28, 2002. (Portions of this Exhibit
have been omitted pursuant to a request for confidential treatment filed with
the Office of the Secretary of the SEC)
10.21 Vendor Services Agreement, dated as of September 28, 2001, between Medix
and Express Scripts, Inc., incorporated by reference to Exhibit 10.3 to the
Company's Amendment No.1 to Registration Statement on Form S-2 (Reg. No.
333-73572), filed with the SEC on February 28, 2002. (Portions of this Exhibit
have been omitted pursuant to a request for confidential treatment filed with
the Office of the Secretary of the SEC)
10.22 Binding Letter of Intent for Pilot and Production Programs, dated
September 8, 1999, between Medix, Cymedix and Professional Claims Services,
Inc. (d/b/a Wellpoint Pharmacy Management), incorporated by reference to
Exhibit 10.4 to the Company's Amendment No.1 to Registration Statement on Form
S-2 (Reg. No. 333-73572), filed with the SEC on February 28, 2002. (Portions
of this Exhibit have been omitted pursuant to a request for confidential
treatment filed with the Office of the Secretary of the SEC)
10.23 Pilot Agreement, dated as of December 28, 1999, between Cymedix and
Professional Claims Services, Inc. (d/b/a Wellpoint Pharmacy Management),
incorporated by reference to Exhibit 10.5 to the Company's Amendment No.1 to
Registration Statement on Form S-2 (Reg. No. 333-73572), filed with the SEC on
February 28, 2002. (Portions of this Exhibit have been omitted pursuant to a
request for confidential treatment filed with the Office of the Secretary of
the SEC)
10.24 Agreement For Internet Medical Communications Network, dated March 2, 2000,
between Cymedix and Loyola University Medical Center, incorporated by reference
to Exhibit 10.6 to the Company's Amendment No.1 to Registration Statement on
Form S-2 (Reg. No. 333-73572), filed with the SEC on February 28, 2002.
(Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment filed with the Office of the Secretary of the SEC)
10.25 Lease between SLG Graybar Sublease, LLC and the Company, dated
January 17, 2002 for the Company's principal executive office.*
21. Subsidiaries of the Company.*
23. Consent of Ehrhardt Keefe Steiner & Hottman PC, independent certified public
accountants for the Company, to the incorporation by reference of its report
dated March 19, 2002, appearing elsewhere in this From 10-KSB into the
Company's Registration Statements on Form S-3 (Reg. No. 333-32308 and
333-85483) and Registration Statements on Form S-8 (Reg. No. 333-31684,
333-57558 and 333-73578).*
--------------
*Filed herewith
Medix.resources, inc.
Connecting the world of healthcare
Consolidated Financial Statements
and
Independent Auditors' Report
December 31, 2001 and 2000
Table of Contents
Independent Auditors' Report
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Medix Resources, Inc.
Englewood, CO
We have audited the accompanying consolidated balance sheets of Medix Resources,
Inc. as of December 31, 2001 and 2000, and the related consolidated statements
of operations, changes in stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medix Resources,
Inc. as of December 31, 2001 and 2000, and the results of their operations and
their cash flows for each of the years in the three year period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced recurring losses
and has a working capital deficit which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Ehrhardt Keefe Steiner & Hottman PC
March 19, 2002
Denver, Colorado
MEDIX RESOURCES, INC.
Consolidated Balance Sheets
December 31,
---------------------------
2001 2000
------------- --------------
Assets
Current assets
Cash $ 8,000 $ 1,007,000
Accounts receivable, net - 49,000
Prepaid expenses and other 344,000 225,000
------------- --------------
Total current assets 352,000 1,281,000
------------- --------------
Non-current assets
Software development costs, net 649,000 371,000
Property and equipment, net 365,000 418,000
Intangible assets, net 1,735,000 3,019,000
------------- --------------
Total non-current assets 2,749,000 3,808,000
------------- --------------
Total assets $ 3,101,000 $ 5,089,000
============= ==============
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 158,000 $ 137,000
Accounts payable 851,000 159,000
Accounts payable - related parties 166,000 -
Accrued expenses 450,000 391,000
Accrued payroll taxes, interest and penalties 131,000 200,000
------------- --------------
Total current liabilities 1,756,000 887,000
------------- --------------
Commitments and contingencies
Stockholders' equity
1996 Preferred stock, 10% cumulative convertible, $1
par value 488 shares authorized, 155 issued, 1
share outstanding, liquidation preference $17,000 - -
1997 convertible preferred stock, $1 par value 300
shares authorized 167.15 shares issued, zero shares
outstanding - -
1999 Series A convertible preferred stock, $1 par
value, 300 shares authorized, 300 shares issued,
zero shares outstanding - -
1999 Series B convertible preferred stock, $1 par
value, 2,000 shares authorized, 1,832 shares
issued, 50 shares outstanding, liquidation
preference $50,000 - -
1999 Series C convertible stock, $1 par value, 2,000
shares authorized, 1,995 shares issued, 375 and 875
shares outstanding as of December 31, 2001 and
2000, respectively, liquidation preference $375,000
and $875,000 - 1,000
Common stock, $.001 par value, 100,000,000 shares
authorized, 56,651,409 and 46,317,022 issued and
outstanding, respectively 56,000 46,000
Dividends payable with common stock 7,000 5,000
Additional paid-in capital 35,341,000 27,573,000
Accumulated deficit (34,059,000) (23,423,000)
------------- --------------
Total stockholders' equity 1,345,000 4,202,000
------------- --------------
Total liabilities and stockholders' equity $ 3,101,000 $ 5,089,000
============= ==============
See notes to consolidated financial statements.
Consolidated Statements of Operations
For the Years Ended
December 31,
-------------------------------------------
2001 2000 1999
-------------- ------------- --------------
Sales
Revenues $ 29,000 $ 326,000 $ 24,000
-------------- ------------- --------------
29,000 326,000 24,000
-------------- ------------- --------------
Cost of goods sold
Direct costs of services 213,000 180,000 2,000
-------------- ------------- --------------
Total cost of goods sold 213,000 180,000 2,000
-------------- ------------- --------------
Gross (loss) profit (184,000) 146,000 22,000
-------------- ------------- --------------
Operating expenses
Software research and development
costs 1,075,000 685,000 596,000
Selling, general and administrative
expenses 5,746,000 5,925,000 3,777,000
Impairment of intangible assets 1,111,000 - -
-------------- ------------- -------------
Total operating expenses 7,932,000 6,610,000 4,373,000
-------------- ------------- --------------
Other income (expense)
Other income 12,000 163,000 7,000
Interest expense (104,000) (43,000) (204,000)
Financing costs (2,428,000) - -
-------------- ------------- -------------
(2,520,000) 120,000 (197,000)
-------------- ------------- --------------
Loss from continuing operations (10,636,000) (6,344,000) (4,548,000)
-------------- ------------- --------------
Discontinued operations
Discontinued operations - 929,000 (299,000)
-------------- ------------- --------------
- 929,000 (299,000)
-------------- ------------- --------------
Net loss (10,636,000) (5,415,000) (4,847,000)
Preferred stock dividends - (1,000) (2,212,000)
-------------- ------------- --------------
Net loss available to common Stockholders $(10,636,000) $ (5,416,000) $ (7,059,000)
============== ============= ==============
Basic and diluted weighted average
common shares outstanding 50,740,356 41,445,345 23,384,737
============== ============= ==============
Basic and diluted (loss) per common share
- continuing operations $ (0.21) $ (0.15) $ (0.29)
Basic and diluted income (loss) per
common share - discontinued operations - 0.02 (0.01)
-------------- ------------- --------------
Basic and diluted loss per common share $ (0.21) $ (0.13) $ (0.30)
============== ============= ==============
See notes to consolidated financial statements.
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999
1999 Series A 1999 Series B 1999 Series C Dividend Total
1996 Preferred Stock 1997 Preferred Stock Preferred Stock Preferred Stock Preferred Stock Common Stock Additional Payable Stockholders'
-------------------- -------------------- ------------------ ------------------- ----------------- --------------------- Paid-in with Common Accumulated Equity
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Stock Deficit (Deficit)
--------- --------- -------- --------- -------- --------- --------- --------- -------- --------- ----------- --------- ------------ ----------- ------------ --------------
Balance - December 31,
1998 8.00 $ - 19.50 $ - - $ - $ - $ - $ - $ - 21,500,724 $ 22,000 $ 12,882,000$ 39,000 $(13,161,000) $ (218,000)
Issuance of warrants
with convertible note
payable - - - - - - - - - - - - 238,000 - - 238,000
1999 preferred stock
issuances (net of
$15,500 of offering
costs) - - - - 300 - 1,832 2,000 1,995 2,000 - - 4,108,000 - - 4,112,000
Preferred stock
conversions (4.50) - (14.50) - (115) - (1,015) (1,000) - - 3,161,342 3,000 10,000 (12,000) - -
Repurchase of 1996
preferred stock (2.50) - - - - - - - - - - - (17,000) (8,000) - (25,000)
Conversion of note
payable into common
stock - - - - - - - - - - 200,000 - 100,000 - - 100,000
Conversion of
redemption payable
into common stock - - - - - - - - - - 2,115,241 2,000 633,000 - - 635,000
Exercise of warrants - - - - - - - - - - 400,000 - 123,000 - - 123,000
Exercise of stock
options - - - - - - - - - - 256,384 - 27,000 - - 27,000
Stock issued for
services - - - - - - - - - - 9,000 - 5,000 - - 5,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 2,226,000 - - 2,226,000
Net loss - - - - - - - - - - - - - - (4,847,000) (4,847,000)
Dividends declared - - - - - - - - - - - - (6,000) 6,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ----------- ---------- ----------- -------------
Balance - December 31,
1999 1.00 - 5.00 - 185 - 817 1,000 1,995 2,000 27,642,691 27,000 20,329,000 25,000 (18,008,000) 2,376,000
Conversion of note
payable into common
stock - - - - - - - - - - 800,000 1,000 399,000 - - 400,000
Warrants issued in
settlement - - - - - - - - - - - - 238,000 - - 238,000
Common stock issued in
connection with ADC
merger - - - - - - - - - - 60,400 - 374,000 - - 374,000
Preferred stock
conversions - - (5.00) - (185) - (767) (1,000) (1,120) (1,000) 4,564,000 5,000 18,000 (21,000) - -
Exercise of warrants - - - - - - - - - - 9,352,620 9,000 4,585,000 - - 4,594,000
Exercise of stock
options - - - - - - - - - - 4,039,734 4,000 1,493,000 - - 1,497,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 138,000 - - 138,000
Cancellation of shares
issued in error - - - - - - - - - - (142,423) - - - - -
Net loss - - - - - - - - - - - - - - (5,415,000) (5,415,000)
Dividends declared - - - - - - - - - - - - (1,000) 1,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ------------ ---------- ----------- -------------
Balance - December 31,
2000 1.00 - - - - - 50 - 875 $ 1,000 46,317,022 $ 46,000 $ 27,573,000$ 5,000 $(23,423,000) $ 4,202,000
Exercise of options and
warrants - - - - - - - - - - 1,462,642 1,000 368,000 - - 369,000
Warrants and in the
money conversion
feature issued with
convertible note
payable - - - - - - - - - - - - 581,000 - - 581,000
Stock issued on
conversion of note
payable - - - - - - - - - - 2,618,066 3,000 2,823,000 - - 2,826,000
Stock and warrants
issued in private
placement - - - - - - - - - - 1,872,308 2,000 2,061,000 - - 2,063,000
Preferred stock
conversions - - - - - - - - (500) (1,000) 1,000,000 1,000 - - - -
Stock issued with
equity line - - - - - - - - - - 3,291,369 3,000 1,507,000 - - 1,510,000
Stock issued in legal
settlements - - - - - - - - - - 90,000 - 285,000 - - 285,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 145,000 - - 145,000
Net loss - - - - - - - - - - - - - - (10,636,000) (10,636,000)
Dividends declared - - - - - - - - - - - - (2,000) 2,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ------------ ---------- ----------- -------------
Balance - December 31,
2001 1.00 $ - - $ - - $ - 50 $ - 375 $ - 56,651,407 $ 56,000 $ 35,341,000 $ 7,000 $(34,059,000) $ 1,345,000
========= ========= ========= ========= ========= ========= ========= ========= ========= ======== =========== ========= ============ ========== ============ =============
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
-------------------------------------------
2001 2000 1999
------------- ------------ -------------
Cash flows from operating activities
Net loss $ (10,636,000) $ (5,415,000) $ (4,847,000)
------------- ------------ -------------
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 488,000 426,000 243,000
Impairment of intangible assets 1,111,000 - -
Financing costs 2,428,000 - 238,000
Common stock, options and warrants
issued for settlements 149,000 - -
Common stock, options and warrants
issued for services 145,000 376,000 2,231,000
Discontinued operations - - 299,000
Gain on sale of staffing business - (1,102,000) -
Change in net assets of discontinued
operations - 857,000 (1,243,000)
Changes in assets and liabilities
Accounts receivable, net 49,000 (29,000) 2,046,000
Prepaid expenses and other (119,000) (49,000) 5,000
Accounts payable and accrued
liabilities 988,000 (237,000) (2,141,000)
Checks written in excess of bank
balance - - (72,000)
------------- ------------ ------------
5,239,000 242,000 1,606,000
------------- ------------ ------------
Net cash used in operating
activities (5,397,000) (5,173,000) (3,241,000)
------------- ------------ ------------
Cash flows from investing activities
Proceeds from sale of divisions - 500,000 -
Software development costs incurred (434,000) (495,000) -
Purchase of property and equipment (70,000) (400,000) (72,000)
Purchase of software license - (720,000) -
Proceeds from notes receivable - 500,000 563,000
Business acquisition costs, net of
cash acquired - (94,000) -
------------- ------------ ------------
Net cash (used in) provided by
investing activities (504,000) (709,000) 491,000
------------- ------------ ------------
Cash flows from financing activities
Proceeds from issuance of debt and
notes payable 1,824,000 178,000 500,000
Advances under financing agreement - - 11,272,000
Payments under financing agreement - (484,000) (11,781,000)
Principal payments on debt and notes
payable (303,000) (125,000) (289,000)
Issuance of preferred and common
stock, net of offering costs 3,012,000 - 4,112,000
Proceeds from the exercise of options
and warrants 369,000 6,091,000 150,000
Repurchase of preferred stock - - (25,000)
------------- ------------ ------------
Net cash provided by financing
activities 4,902,000 5,660,000 3,939,000
------------- ------------ ------------
Net (decrease) increase in cash (999,000) (222,000) 1,189,000
Cash - beginning of year 1,007,000 1,229,000 40,000
------------- ------------ ------------
Cash - end of year $ 8,000 $ 1,007,000 $ 1,229,000
============= ============ ============
Supplemental disclosure of cash flow information:
Cash paid for: Interest
------------
2001 $ 42,000
2000 $ 21,000
1999 $ 324,000
Supplemental disclosure of non-cash activity:
Dividends declared payable in common stock were $2,000, $1,000 and $6,000
for December 31, 2001, 2000 and 1999, respectively.
During 2001, 500 shares of the series C preferred stock was converted into
1,000,000 shares of common stock.
During 2001, $1,500,000 note payable advances under a credit facility and
$40,000 of accrued interest were converted and redeemed into 2,618,066
shares of common stock.
During 2001, the Company issued 90,000 shares of common stock and warrants
valued at $285,000 in connection with settlement of certain legal claims,
of which $137,000 was an adjustment to goodwill related to the Cymedix
acquisition.
During 2001, the Company issued options and warrants valued at $145,000 for
services provided.
During 2001, the Company issued 829,168 warrants valued at $506,000 in
connection with a convertible note payable credit facility. The Company
also recorded $75,000 for the value of the in-the-money conversion feature
on the debt.
During 2001, shares issued in private placements in connection with its note
payable credit facility at below market prices resulted in financing costs of
$448,000.
During 2001, shares issued for conversions and redemptions under the
convertible notes payable credit facility at below market prices resulted
in financing costs of $1,286,000.
During 2001, the Company issued warrants in connection with private
placements of common stock in connection with its note payable credit facility
valued at $415,000.
During 2001, the Company wrote off old payroll tax liabilities of $100,000
assumed in the Cymedix acquisition which reduced goodwill.
During 2000, 5.0 units of the 1997 preferred stock, 185 shares of the 1999
Series A preferred stock, 767 shares of the Series B preferred stock, and
1,120 shares of the series C preferred stock were converted into 3,161,342
shares of common stock.
During 2000, the Company acquired the assets and assumed certain
liabilities of a business from a related party (Note 4).
During 2000, the Company disposed of the remainder of its staffing business
(Note 2).
During 2000, the Company converted a $400,000 note payable into 800,000
shares of common stock.
During 1999, the Company issued a $500,000 convertible note payable with
warrants to purchase common stock, of which $100,000 of principal was
converted into 200,000 shares of common stock. The warrant was valued at
$238,000 and recorded as additional interest expense.
During 1999, the Company converted $635,000 of preferred stock redemption
payable into 2,115,241 shares of common stock.
During 1999, 4.50 units of the 1996 preferred stock, 14.50 units of the
1997 preferred stock, 1,015 shares of the 1999 series A preferred stock, and
1,015 shares of the series B preferred stock were converted into 3,161,342
shares of common stock.
Note 1 - Description of Business and Summary of Significant Accounting Policies
Medix Resources, Inc. and subsidiary (the Company), main business focus is a
suite of fully secure, patented Internet communication software for the
healthcare industry. The Company divested its remaining healthcare related
staffing businesses in February of 2000 (Note 3).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Medix
Resources, Inc. and its subsidiary, Cymedix Lynx Corporation (Cymedix). All
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures 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.
Concentrations of Credit Risk
The Company grants credit in the normal course of business to customers in the
United States. The Company periodically performs credit analysis and monitors the
financial condition of its customers to reduce credit risk.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including accounts receivable,
notes receivable, accounts payable and accrued expenses approximate their fair
value as of December 31, 2001 and 2000 due to the relatively short maturity of
these instruments.
The carrying amounts of notes payable and debt issued approximate their fair
value as of December 31, 2001 and 2000 because interest rates on these instruments
approximate market interest rates.
Revenue Recognition
We earn revenue as transaction services are provided to our customers throught
the use of our suite of communication software, and currently do not generate
any revenue from the licensing, slae or installation of our suite of
communication software.
We recognize revenue is earned when the communication transaction has bee
completed by the customner, persuasive evidence of the terms of the arrangement
exist, our fee is fixed and determinable, and collectibility is reasonably
assured. Delivery takes place electronically when the customer has completed the
exchange (transmission or receipt) of data. Revenue is charged to the customer
on a per transaction basis as each transaction is completed and is billed
monthly.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. The Company's temporary differences result primarily
from capitalized software development costs, depreciation and amortization, and
net operating loss carryforwards.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 7 years.
Software Development Costs
The Company applies the provisions of Statement of Position 98-1, "Accounting for
Costs of Computer Software Developed for Internal Use". The Company accounts for
costs incurred in the development of computer software as software research and
development costs until the preliminary project stage is completed. Direct costs
incurred in the development of software are capitalized once the preliminary
project stage is completed, management has committed to funding the project and
completion and use of the software for its intended purpose are probable. The
Company ceases capitalization of development costs once the software has been
substantially completed and is ready for its intended use. Software development
costs are amortized over their estimated useful lives of five years. Costs
associated with upgrades and enhancements that result in additional functionality
are capitalized.
Financing Costs
The company records as financing costs in its statement of operations
amortization of in-the-money conversion features on convertible debt accounted
for in accordance with EITF 98-5 and 00-27, amortization of discounts from
warrants issued with debt securities in accordance with APB No. 14 and
amortization of discounts resulting from other securities issued in connection
with debt based on their relative fair values, and any value associated with
inducements to convert debt in accordance with FASB 84.
Intangible assets
Intangible assets are stated at cost, and consist of goodwill, which is being
amortized using the straight-line method over fifteen years.
The Company reviews its long-lived asset for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company looks primarily to the undiscounted future cash flows
of its acquisition in its assessment of whether or not goodwill has been
impaired.
Reclassifications
Certain amounts in the 2000 and 1999 consolidated financial statements have been
reclassified to conform to the 2001 presentation.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising expenses were $23,000, $36,000 and $45,000 for the years ended December
31, 2001, 2000 and 1999.
Basic Loss Per Share
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" (FAS 128). All dilutive potential common shares
have an antidilutive effect on diluted per share amounts and therefore have been
excluded in determining net loss per share. The Company's basic and diluted loss
per share are equivalent and accordingly only basic loss per share has been
presented.
For the years ended December 31, 2001, 2000 and 1999 total stock options,
warrants and convertible debt and preferred stock of 14,693,254, 13,767,143 and
23,109,003, were not included in the computation of diluted loss per share
because their effect was antidilutive, however, if the company were to achieve
profitable operations in the future, they could potentially dilute such earnings.
Recently Issued Accounting Pronouncements
In July 2001, the FASB issued SFAS Nos. 141 and 142 " Business Combinations " and
" Goodwill and other Intangible Assets ". Statement 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the purchase
method. Under the guidance of Statement 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill will be subject to
at least an annual assessment for impairment by applying a fair value base test.
Statement 142 is effective for financial statement dates beginning after January
1, 2001. Goodwill will be tested for impairment at the time of adoption and on
an annual basis. As allowed under Statement 142, the Company will complete its
goodwill impairment test within the first six months of the fiscal year. As a
result of Statement 142, the Company will no longer be recognizing approximately
$155,000 in annual amortization expense related to goodwill.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for the Company for fiscal years beginning after June
15, 2002. The Company believes the adoption of this statement will have no
material impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value, less cost to
sell, whether reported in continuing operations or discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively.
Note 2 - Going Concern
The accompanying financial statements have been prepared on a going concern basis
which contemplates the realization of assets and liquidation of liabilities in
the ordinary course of business.
Management's Plan for Continued Existence
The Company has incurred operating losses for the past several years, the
majority of which are related to the development of the Company's healthcare
connectivity technology and were fully anticipated by management. These losses
have produced operating cash flow deficiencies, and negative working capital which
raise substantial doubt about its ability to continue as a going concern.
Management has secured an equity line of credit, as further described in Note 8,
and management is presently in discussions regarding alternative sources of
additional equity capital, which would enable the Company to continue to fund
operations until such time as revenues from the Company's internet communication
products for the healthcare industry will be sufficient to fund operations.
Management reports that progress continues with regard to new strategic alliances
with major healthcare organizations as well as in advancing the Company's
existing alliances from the "pilot program" stage toward the "production contract
stage".
Note 3 - Discontinued Operations
In February 2000, the Company closed on the sale of the assets of its remaining
staffing businesses for $1,000,000. The purchase price was paid with $500,000
cash at closing and the Company receiving a $500,000 subordinated note
receivable. The note provided for interest at prime plus 1% and was due in May
of 2001. The note was repaid on December 29, 2000. This sale was the final step
of a plan approved by the board of directors in December 1999 for the Company to
divest itself of the staffing businesses and focus its efforts on its internet
communication software products for the healthcare industry.
The accompanying financial statements reflect the results of operations of the
remaining staffing businesses as a discontinued business segment. The
discontinued results of operations include those direct revenues and expenses
associated with running the remaining staffing businesses as well as an
allocation of corporate costs.
The results of operations of the Company's discontinued remaining staffing
businesses are as follows:
For the Years Ended
December 31,
---------------------------
2000 1999
---------------------------
Revenue $ 1,128,000 $ 10,812,000
Direct costs of services 927,000 8,472,000
---------------------------
Gross margin 201,000 2,340,000
---------------------------
Selling, general and administrative 219,000 2,193,000
Interest expense 18,000 446,000
Litigation settlement 137,000 -
---------------------------
Net loss $ (173,000) $ (299,000)
===========================
During the fourth quarter of 2000, the Company wrote off unrealizable assets
related to the discontinued operations in the amount of $43,000, and $322,000 in
remaining related liabilities. The net write-off of assets and liabilities
totaling $279,000, less net assets acquired by the purchaser of $77,000, has been
recorded as an increase of $202,000 to the gain from the disposal of the
remaining staffing businesses as of December 31, 2000.
During the first quarter of 2000, the Company reported the following gain on the
disposal of the assets of its remaining staffing businesses:
Sales price $ 1,000,000
Accounts receivable collection costs (100,000)
------------
900,000
Net assets acquired, liabilities assumed and
liabilities written off 202,000
------------
Gain on disposal of the remaining staffing businesses 1,102,000
Loss from operation of the remaining staffing
businesses through the disposal date (173,000)
------------
Net gain on disposal of the remaining staffing
businesses $ 929,000
============
Also as previously noted the purchaser did not acquire the Company's accounts
receivable as part of the sale. However, in connection with the sale, the
purchaser will collect the Company's receivables and remit the proceeds to the
Company net of a 10% collection fee. The $100,000 reflected above represents the
Company's estimate of the collection costs to be paid to purchaser for performing
this function.
Note 4 - Acquisition of Assets
On March 1, 2000, the Company purchased the assets and assumed certain
liabilities of Automated Design Concepts, Inc., an entity owned by a director of
the Company, for the issuance of 60,400 shares of common stock valued at $374,000
and a payment of $100,000. The Company also entered into a two-year lease for
$1,000 per month expiring in February 2002. Assets purchased include cash and
accounts receivable.
The purchase was accounted for under the purchase method. The purchase price was
allocated to the assets purchased and liabilities assumed based on the fair
market values at the date of acquisition as follows:
Cash $ 6,000
Accounts receivable 27,000
Goodwill 487,000
Accounts payable (41,000)
Accrued liabilities (5,000)
------------
$ 474,000
============
The results of operations have been reflected from the date of acquisition
forward. The resulting goodwill is being amortized over 15 years.
During the third quarter of 2001, the Company discontinued operation of its
Automated Design Concepts division to focus on its core business and as a cost
saving measure. As a result, $443,000 of impairment expense has been included
in Consolidated Statements of Operations for the year ended December 31, 2001.
This amount represents the unamortized balance of the investment at the time of
discontinuance.
The following table summarizes the unaudited pro forma results of the Company
giving effect to the acquisition as if it had occurred on January 1, 2000. The
unaudited pro forma information is not necessarily indicative of the results of
operations of the Company had this acquisition occurred at the beginning of the
years presented, nor is it necessarily indicative of future results.
For the Years Ended
December 31,
---------------------------
2000 1999
---------------------------
Sales $ 440,000 $ 569,000
===========================
Net income (loss) $ (5,408,000) $ (4,816,000)
===========================
Loss per share $ (0.13) $ (0.20)
===========================
Note 5 - Balance Sheet Disclosures
Software development costs consist of the following:
December 31,
---------------------------
2001 2000
---------------------------
Software development costs $ 929,000 $ 495,000
Less accumulated amortization (280,000) (124,000)
---------------------------
$ 649,000 $ 371,000
===========================
Annual amortization expense, which is included in costs of services provided was
$156,000 and $124,000 for the years ended December 31, 2001 and 2000,
respectively.
Property and equipment consists of the following:
December 31,
---------------------------
2001 2000
---------------------------
Furniture and fixtures $ 103,000 $ 91,000
Computer hardware and purchased software 609,000 552,000
Leasehold improvements 29,000 28,000
---------------------------
741,000 671,000
Less property, plant and equipment - accumulated
depreciation (376,000) (253,000)
---------------------------
$ 365,000 $ 418,000
===========================
Depreciation expense was $123,000, $97,000 and $86,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Intangible assets consist of the following:
December 31,
---------------------------
2001 2000
---------------------------
Goodwill acquired through Cymedix acquisition $ 2,369,000 $ 2,332,000
Goodwill acquired through the Automated Design
Concepts, Inc. acquisition - 487,000
License agreement with ZirMed.com - 720,000
---------------------------
2,369,000 3,539,000
Less accumulated amortization (634,000) (520,000)
---------------------------
$ 1,735,000 $ 3,019,000
===========================
Amortization expense was $209,000, $205,000, and $157,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
During the third quarter of 2001, the Company discontinued operation of its
Automated Design Concepts, division, and terminated its license agreement with
ZirMed.com. As a result, $1,111,000 of impairment expense has been included in
the Consolidated Statements of Operations for the year ended December 31, 2001.
This amount represents the unamortized balance of each investment at the time of
discontinuance.
Accrued expenses consists of the following:
December 31,
---------------------------
2001 2000
---------------------------
Accrued payroll and benefits $ 294,000 $ 310,000
Accrued professional fees 57,000 60,000
Accrued license fees 53,000 -
Other accrued expenses 29,000 21,000
Accrued interest 17,000 -
---------------------------
$ 450,000 $ 391,000
===========================
At various times during 2001, the Company was delinquent with payroll tax
deposits. At December 31, 2001 and 2000, $131,000 and $200,000, respectively was
accrued for estimated taxes, interest and penalties. During 2001, the Company
wrote off $100,000 of previously recorded accrued payroll tax liabilities assumed
in the Cymedix acquisition as management determined the Company was over accrued
and has recorded the write-off as an adjustment to previously recorded goodwill.
Note 6 - Long-Term Debt
Long-term debt consists of:
December 31,
---------------------------
2001 2000
---------------------------
Notes payable - finance company, interest accrues at
7%, monthly payments of principal and interest of
$23,730 are payable through July 2002. $ 140,000 $ 115,000
Notes payable - finance company, interest accrues at
7%, monthly payments of principal and interest of
$1,417 are payable through October 2002. 18,000 22,000
---------------------------
158,000 137,000
Less current portion (158,000) (137,000)
---------------------------
$ - $ -
===========================
Convertible Promissory Note
In October 1999, the Company raised approximately $488,000 net of expenses
through the issuance of a $500,000 14% Convertible Promissory Note and warrants
to purchase 500,000 shares of the Company's common stock at $.50 per share. The
$500,000 in principal plus accrued interest was payable on June 28, 2000. The
note was convertible into the Company's common stock at a conversion price of
$.50 per share, for the first 90 days outstanding, and at the lower of $.50 per
share or 80% of the lowest closing bid price for the Common Stock during the last
five trading days prior to conversion, for the remaining life of the note. The
note was secured by the intellectual property of the Company's wholly owned
subsidiary Cymedix Lynx Corporation. The warrants were recorded as a discount on
the debt valued at $238,000 using the Black-Scholes option pricing model using
assumptions of life of 3 years, volatility of 225%, no dividend payment, and a
risk-free rate of 5.5%. The discount was fully amortized at December 31, 1999,
as the remaining debt of $400,000 at December 31, 1999, was converted in January
2000 into 800,000 shares of common stock and the security interest released.
Convertible Note Payable Credit Facility
In December 2000, the Company obtained a credit facility under which it issued a
convertible promissory note and common stock purchase warrants. The credit
facility provided that the Company could draw against this facility in increments
as follows: $750,000 upon closing, which occurred January 10, 2001; $250,000
within 10 days of an effective registration statement, which occurred February
13, 2001; and $500,000 draws at the 60th day, 90th day and the 150th day from the
effective registration statement. These advances could be made only if the
Company's common stock price remained above $1 for five business days prior to
the draw. During the draw down periods, the Company drew $1,500,000 under the
convertible note. Advances under the convertible note bear interest at an annual
rate of 10% and provide for semi-annual payments on July 10, 2001 and January 10,
2002. All outstanding balances under this arrangement were converted or redeemed
during 2001 into common shares. The note payable balance was convertible at $.90
per share for up to the first $750,000 and any remaining balance at $1.00 per
share. The initial $750,000 draw on this arrangement has an imputed discount
recorded, which was valued at $75,000 for the "in-the-money" conversion feature
of the first advance. In addition, the noteholder can force a redemption of the
note or any portion thereof, for either cash or stock at the option of the
Company, but if for stock, at a redemption price of eighty (80%) percent of the
Volume Weighted Market Price (as defined) per common share during the twenty
Trading Days ending on the day of the notice delivered by the holder.
In connection with this credit facility, the Company also agreed to issue
warrants to purchase common stock to the holder of the convertible promissory
note. The Company issued 750,000 warrants in connection with drawdowns under the
convertible note. The warrants have an exercise price of $1.75 and terms of two
years from the date of issuance. The Company also issued 54,167 warrants to
purchase common stock to two finders assisting with the transaction. The finder
warrants also have terms of two years and an exercise price of $1.75.
The Company has imputed values for the 750,000 and 54,168 warrants issued to the
provider of the credit facility and the finders using the Black-Scholes Option
pricing model. The first 500,000 warrants issued to the provider of the credit
facility were valued at $249,000 and have been treated as a discount on the debt
to be amortized over its remaining life. The related 54,168 warrants issued to
finders which have been recorded as debt issue costs and amortized over the
remaining life of the debt. In connection with the final draw under the
credit facility in May, the Company issued 250,000 warrants to the provider of
the credit facility. The 250,000 warrants issued to the provider of the credit
facility were valued at $209,000 using the Black-Scholes pricing model and have
been treated as a discount on the debt to be amortized over its remaining life.
In connection with the final draw under the credit facility, The Company issued
warrants to purchase 25,000 shares issued to the finders. The total finder
warrants have been valued at $48,000 using the Black-Scholes option-pricing
model, and have been treated as a discount on the debt to be amortized over its
remaining life. The values of all warrants issued under this facility were
determined using the following assumptions; lives of two years, exercise prices
of $1.75, volatility of 117%, no dividend payment and a risk-free rate of 5.5%.
During February 2001, $100,000 of the convertible note was converted into 111,111
shares of common stock. During the period April through September, $900,000 of
the note was redeemed. These redemptions were satisfied by the issuance of
1,384,661 shares of common stock. During October 2001, the remaining $500,000
convertible note was redeemed by the issuance of 1,069,368 shares of common
stock. During July 2001, 52,928 shares of common stock was issued as payment of
accrued interest of $40,000 through July 10, 2001. As a result of conversions
and redemptions at modified conversion prices $1,286,000 of financing costs were
recorded reflecting the intrinsic value of the share differences from issuable
shares at the date the advances were received.
During March 2001, the Company, under an amendment to its convertible note
payable credit facility, received $350,000 from the credit facility provider for
the issuance of 636,364 shares of its common stock as a private placement
transaction. As a part of this common stock issuance, the Company issued
warrants to purchase 636,364 shares of common stock at $.80 per share with a term
of two years from the date of issuance. As a result of the warrant issuance, the
Company has recorded financing expense of $262,000 in the accompanying financial
statements, using the Black-Scholes option-pricing model. The company also
issued warrants to purchase 63,636 shares of common stock at $.80 per share with
a term of two years to two finders assisting the transaction. The finders
warrants have been valued at $40,000 using the Black-Scholes pricing model and
have been included as financing costs in the accompanying financial statements.
The calculated values were computed using the following assumptions: lives of 2
years, exercise prices of $.80, volatility of 117%, no dividend payments and a
risk free rate of 5.5%.
During the period May through December 2001, the Company received $850,000, under
a second amendment to the credit facility, for the issuance of 1,235,944 shares
of its common stock, in additional private placement transactions. As a part of
these common stock issuances, the Company issued warrants to purchase 168,919
shares of common stock at $1.00 per share with a term of two years from the date
of issuance. The Company has recorded finanacing expense of $113,000 related to
the warrant issuance in the accompanying financial statements, using the
Black-Scholes option-pricing model. The calculated values were computed using the
following assumptions: lives of 2 years, exercise prices of $.80, volatility of
117%, no dividend payments and a risk free rate of 5.5%.
As a result of shares issued under the private placements at below market prices,
which have been treated as a discount on the debt based on their fair market
values at issuance, financing costs of $448,000 have been recorded.
Note 7 - Commitments and Contingencies
Operating Leases
The Company leases office facilities in New York, New Jersey, Colorado and
California and various equipment under non-cancelable operating leases.
Rent expense for these leases was:
Year Ending December 31,
------------------------
2001 $ 396,000
2000 $ 315,000
1999 $ 293,000
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31,
------------------------
2002 $ 550,000
2003 413,000
2004 309,000
2005 26,000
-------------
$ 1,298,000
=============
Litigation
In the normal course of business, the Company is party to litigation from time to
time. The Company maintains insurance to cover certain actions and believes that
resolution of such litigation will not have a material adverse effect on the
Company.
During the fourth quarter of 1997, an action was filed against the Company in the
Eastern District of New York under the caption New York Healthcare, Inc. v.
International Nursing Services, Inc., et al. On February 15, 2000, the Company
agreed in principle to settle this claim. In connection with the settlement, the
Company issued a warrant to purchase 35,000 of the Company's common stock at
$3.96 per share. The Company recorded expense of approximately $137,000 related
to the issuance of the warrant, which has been included in the results of
discontinued operations. The warrants were valued using the Black-Scholes
pricing model, using assumptions of volatility of 273%, no dividend payments and
a risk free rate of 5.5%.
On November 12, 1999, an action was filed in California Superior Court, which has
since been removed to the U. S. District Court, Central District of California,
against Medix Resources, Inc. and its wholly owned subsidiary, Cymedix Lynx
Corporation. As of November 3, 2000, a settlement agreement was reached between
the Company and the plaintiff whereby the company paid the plaintiff $66,000
cash, and issued an option to purchase 50,000 of the Company's common stock at
$.25 per share. The Company recorded expense of approximately $102,000 related
to the issuance of the option. The warrants were valued using the Black-Scholes
pricing model, using assumptions of volatility of 273%, no dividend payments and
a risk free rate of 5.5%.
On June 1, 2000, an action was filed in the District Court of the City and County
of Denver, Colorado, against Medix Resources, Inc., and its wholly-owned
subsidiary, Cymedix Lynx Corporation, alleging that a predecessor company of
Cymedix Lynx Corporation had promised to issue stock options to the plaintiff but
had failed to honor that promise. On June 15, 2001, the matter was settled by
paying the plaintiff $35,000 and issuing to him 2 year warrants to purchase
195,000 shares of the Company's common stock at $.50 per share. The settlement
was approved by the court on July 6, 2001. The case has been dismissed with
prejudice. The warrants issued in this settlement have been valued at $137,000
using the Black-Scholes pricing model, using assumptions of volatility of 132%,
no dividend payments and a risk-free rate of 5.5%, and have been included as an
increase to goodwill in the accompanying financial statements, as a result of an
unrecorded liability that existed at the time of the Cymedix merger.
On July 11, 2000, an action was filed in the United States District Court,
Southern District of New York, against Medix Resources, Inc., alleging that the
Company granted to plaintiff the right to purchase preferred stock convertible
into the Company's common stock and warrants to purchase the Company's common
stock in connection with the Company's private financings during 1999, and then
failed to permit plaintiff to exercise that right. On May 2, 2001, the Company
agreed to settle the matter by paying the plaintiff $20,000 and issuing him a
three year warrant (issued over a 18 month period) to purchase 137,500 shares of
the Company's common stock at $.50 per share. The settlement was approved by the
Court on May 3, 2001. The case has been dismissed with prejudice. The warrants
issued in this settlement have been valued at $64,000 using the Black-Scholes
pricing model, using assumptions of volatility of 132%, no dividend payments, and a
risk-free rate of 5.5%, and have been included as an expense in the Consolidated
Statement of Operations.
On September 27, 2000, an action was filed in the United States District Court,
Eastern District of New York, against Medix Resources, Inc. alleging that the
Company failed to properly and fully convert the Company's convertible preferred
stock held by one of the Plaintiffs, and had failed to maintain the registration
for public sale with the Securities and Exchange Commission of shares underlying
warrants held by both Plaintiffs. The Company settled the litigation by issuing
to one plaintiff 90,000 shares of the Company's common stock, valued at $51,000,
and extending the exercise period of the warrants of the other plaintiff until
December 31, 2003, valued at $33,000. The shares and warrants issued in this
settlement have been valued at $84,000 using the Black-Scholes pricing model, for
the modification to the warrant, using assumptions of a life of 2 years, exercise
price of $1.00, volatility of 132%, no dividend payments and a risk-free rate of
5.5%, and have been included as an expense in the Consolidated Statement of
Operations.
On August 7, 2001, a former officer of the Company filed an action in the
District Court of Arapahoe County, Colorado, against the Company and its former
President and CEO. The plaintiff alleges (1) breach of an employment agreement,
a stock option agreement and the related stock option plan, (2) a duty of good
faith and fair dealing, and (3) violation of the Colorado Wage Claim Act.
Plaintiff's seeks unspecified damages to be determined at jury trail, including
interest, punitive damages, plaintiff's attorney fees, and a 50% penalty under
the Colorado Wage Claim Act. The Company and its co-defendants have answered the
plaintiff's complaint, denying any liability. The court set discovery to be
completed by July 31, 2002, and the trial to begin on September 9, 2002.
Management of the Company intends to vigorously defend this action, and does not
expect any resolution of this matter to have a material adverse effect on the
Company's financial condition or results of operation. Currently an estimate of
possible loss to the Company if unsucessful in defending this action cannot be
made.
On December 17, 2001, Plantiff, Vision Management Consulting, L.L.C., filed suit
against us in the Superior Court of New Jersey, Law Division - Essex County,
entitled Vision Managment Consulting, L.L.C. v. Medix Resources, Inc., Docket No.
ESX-L-11438-01. The complaint alleges breach of contract, unjust enrichment,
breach of duty in good faith and fair dealing and misrepresentations by us in
connection with a negotiated settlement agreement, which had resulted from claims
between the parties arising out of the termination of operations by our Automated
Design Concepts division earlier in 2001. Plaintiff seeks unspecified damages to
be proven at jury trial, together with attorneys fees, costs of suit and interest
on judgement, as well as such further relief as the Court deems just and
equitable. We have answered the plaintiff's complaint, denying any liability and
setting forth a counterclaim seeking the award to us of our costs of defending
this action and such further relief as the Court deems just and proper.
Management intends to vigorously defend this action and does not expect any
resolution of this matter to have a material adverse effect on the Company's
results of operations or financial condition. The Court has appointed a mediator
for the case to try to facilitate a settlement between the parties. Currently an
estimate of possible loss to the Company if unsucessful in defending this action
cannot be made.
Note 8 - Stockholders' Equity
On March 20, 2000, the Company authorized 2,500,000 shares of preferred stock.
1996 Private Placement
In July and September 1996, the Company completed a private placement of 244
units, each unit consisting of a share of convertible preferred stock, $10,000
per unit, $1 par value ("1996 Preferred Stock"), a warrant to purchase 8,000
shares of the Company's common stock at $2.50 per share and a unit purchase
option to purchase an additional unit at $10,000 per unit.
During 1998, 18.25 units were converted resulting in the issuance of an
additional 939,320 shares of common stock in 1998.
During 1999 4.5 units were converted into 241,072 shares of common stock.
Additionally, the Company repurchased from another holder 2.5 units in a
negotiated agreement for $25,000. The Company has 1.0 remaining unit of its 1996
preferred stock outstanding at December 31, 2001 and 2000. The remaining unit
may be converted into the Company's common stock including accrued dividends at
the lesser of $1.25 per common share or 75% of the prior five day trading average
of the Company's common stock.
1997 Private Placement
In January and February 1997, the Company completed a private placement of 167.15
Units, each unit consisting of one share of convertible preferred stock, $10,000
per unit, $1 par value, "1997 Preferred Stock", and a warrant to purchase 10,000
shares of common stock at $1.00 per share.
In 1998, 5.0 units were converted resulting in the issuance of 178,950 shares of
common stock.
During 1999 14.5 units were converted into 572,694 shares of common stock. During
2000, the remaining 5.0 units were converted into 50,000 shares of common stock.
1999 Private Placement
During 1999, the Company initiated three private placement offerings each
consisting of one share of preferred stock (as designated) and warrants to
purchase common stock. There are no dividends payable on the preferred stock if
a registration statement is filed by a certain date as specified in the offering
agreements and remains effective for a two year period. If dividends are
payable, the preferred stock will provide for a 10% dividend per annum for each
day during which the registration statement is not effective. The preferred
shares are also redeemable at the option of the Company after a date as specified
in the offering agreements for $1,000 per share plus any accrued unpaid
dividends. In addition, if a registration statement is not effective by the date
as specified in the offering agreements the shares may be redeemed at the request
of the holder at $1,000 per share plus any accrued unpaid dividends.
The first private placement consisted of 300 shares of Series A preferred stock
each with 1,000 warrants for $1,000 per unit, which raised total proceeds of
$300,000. The warrants included with each unit entitle the holder to purchase
common shares at $1.00 per share, expiring in October 1, 2000. The preferred
shares are currently convertible into common shares at $.25 per common share
through March 1, 2003. During 1999, 115 shares of Series A preferred stock were
converted into 460,000 common shares. During 2000, 185 shares of Series A
preferred stock were converted into 740,000 common shares. All of the warrants
included with the Series A preferred stock were exercised in 2000.
The second private placement consisted of 1,832 shares of Series B preferred
stock each with 2,000 warrants for $1,000 per unit, which raised total proceeds
of $1,816,500 (net of offering costs of $15,500). The Company also issued a
warrant to purchase 50,000 shares of common stock at $.50, which expires in May
2002, for services rendered in connection with the private placement. The
warrants included with each unit entitle the holder to purchase common shares at
$.50 per share, expiring in October 1, 2003. The preferred shares are currently
convertible into common shares at $.50 per common share through October 1, 2003.
During 1999, 1,015 shares of Series B preferred stock were converted into
2,030,000 common shares. During 2000, 767 shares of Series B preferred stock
were converted into 1,534,000 common shares. The warrants are callable by the
Company for $.01 upon thirty days written notice. The Company has not called any
of these warrants as of the date hereof.
The third private placement consisted of 1,995 shares of Series C preferred stock
each with 4,000 warrants for $1,000 per unit, which raised total proceeds of
$1,995,000. The warrants, included with each unit, entitled the holder to
purchase common shares at $.50 per share, expiring in April 1, 2003. The
preferred shares are convertible beginning April 1, 2000 into common shares at
$.50 per common share through April 1, 2003. During 2000, 1,120 shares of Series
C preferred stock were converted into 2,240,000 common shares. During 2001, 500
shares of Series C preferred stock were converted into 1,000,000 shares of common
stock. After April 1, 2000, the warrants are callable by the Company for $.01
upon thirty days written notice. The Company has not called any of these
warrants as of the date hereof.
Equity Line
The Company has entered into an Equity Line of Credit Agreement dated as of June
12, 2001, which provides that the Company can put to the provider, subject to
certain conditions, the purchase of common stock of the Company at prices
calculated from a formula as defined in the agreement. Under the agreement, the
providers of the Equity Line of Credit have committed to advance to the Company
funds in an amount of up to $10,000,000, as requested by the Company, over a
24-month period in return for common stock issued by the Company to the
providers. The principal conditions to any such advance, which may be waived,
are as follows:
o There must be thirteen stock market trading days between any two requests
for advances made by the Company.
o The Company can only request an advance if the volume weighted average
price of the common stock as reported by Bloomberg L.P. for the day before the
request is made is equal to or greater than the volume weighted average price as
reported by Bloomberg L.P. for the 22 trading days before a request is made.
o The Company will not be able to receive an advance amount that is greater
than 175% of the average daily volume of its common stock over the 40 trading
days prior to the advance request multiplied by the purchase price.
The purchase price for each advance will be equal to 91% of the three lowest
daily volume weighted average prices during the 22 trading days before a request
is made.
The Company will receive the amount requested as an advance within 10 days of its
request, subject to satisfying standard closing conditions. The issuance of
shares of common stock to the providers in connection with the equity line
financing will be exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof. The Company has agreed to register for
immediate re-sale the shares being issued to the providers of the Equity Line of
Credit before any drawdowns may occur. The Company has registered 9,500,000
shares. The related Registration Statement was declared effective by the SEC on
August 6, 2001. The Company has also agreed that its executive officers and
directors will not sell any shares of its common stock during the ten trading
days following any advance request by the Company.
The Company will pay an aggregate of 7% of each amount advanced under the equity
line financing to two parties affiliated with the providers of the Equity Line of
Credit for their services relating thereto. In addition, upon the effective date
of this Registration Statement registering the securities to be issued under the
Equity Line of Credit, the Company issued to those same two parties an aggregate
of 198,020 shares of common stock, and on December 9, 2001 (180 days after the
date of the Equity Line of Credit Agreement) the Company issued to them an
additional 344,827 shares of our common stock shares. In addition, the Company
has paid legal fees in an aggregate amount of $15,000.
During the period August to December 2001, the company received $1,510,000, net
of commissions and escrow fees from nine equity line advances, resulting in the
issuance of 2,748,522 shares of common stock. The 542,847 shares issued to
finders in connection with the equity line, described above, were valued at
$407,000, additionally the incremental differences of shares issued at below market
prices on the line totaled $391,000, both of which have been presented as a
reduction to net proceeds from the advances received.
Accumulated Deficit
Of the $34,059,000 cumulative deficit at December 31, 2001 and $23,423,000 at
December 31, 2000, the approximate amount relating to the Company's technology
business from inception is $21,112,000 and $10,631,000, respectively. In
addition, a premium of $2,332,000 was paid upon the acquisition of Cymedix Lynx
in 1998, producing a total investment of $23,544,000 at December 31, 2001 and
$12,963,000 at December 31, 2000 in the technology to date.
Stock Options
In May 1988, the Company adopted an incentive stock option plan (ISO), which
provides for the grant of options representing up to 100,000 shares of the
Company's common stock to officers and employees of the Company upon terms and
conditions determined by the Board of Directors. Options granted under the plan
are generally exercisable immediately and expire up to ten years after the date
of grant. Options are granted at a price equal to the market value at the date
of grants, or in the case of a stockholder who owns greater than 10% of the
outstanding stock of the Company, the options are granted at 110% of the fair
market value.
In 1994, the Board of Directors established, the Omnibus Stock Plan of 1994 (1994
Plan) and reserved 500,000 shares of the Company's common stock for grant under
terms, which could extend through January 2004. All options and warrants issued
under this plan are non-qualified. Grants under the 1994 Plan may be to
employees, non-employee directors, and selected consultants to the Company, and
may take the form of non-qualified options, not lower than 50% of fair market
value. To date, the Company has not issued any options below fair market value
at the date of grant.
In 1996, the Board of Directors established the 1996 Stock Option Plan (the "1996
Plan") with terms similar to the 1994 Plan. The Board of Directors of the
Company reserved 4,000,000 shares of common stock for issuance under the 1996
Plan.
In August 1999, the Board of Directors established the 1999 Stock Option Plan
(the "1999 Plan"), which provides for the grant of incentive stock options
("ISOs") to officers and other employees of the Company and non-qualified options
to directors, officers, employees and consultants of the Company. Options
granted under the plan are generally exercisable immediately and expire up to ten
years after the date of grant. Options are granted at a price equal to the
market value at the date of grant. The Board of Directors has reserved
10,000,000 shares of common stock for granting of options under the 1999 Plan.
The following table presents the activity for options outstanding:
Weighted
Incentive Non-qualified Average
Stock Stock Exercise
Options Options Price
------------ ------------ ------------
Outstanding - December 31, 1998 3,054,065 1,157,050 $ 0.35
Granted 5,050,000 662,500 0.31
Forfeited/canceled (586,188) (930,366) 0.41
Exercised - (256,184) 2.78
------------ ------------ ------------
Outstanding - December 31, 1999 7,517,877 633,000 0.32
Granted 2,255,000 110,000 3.82
Forfeited/canceled (10,000) - 0.25
Exercised (3,900,235) (139,499) 0.28
------------ ------------ ------------
Outstanding - December 31, 2000 5,862,642 603,501 1.62
Granted 2,289,000 - 0.71
Forfeited/canceled (865,000) (65,834) 3.03
Exercised (1,267,142) (173,500) 0.25
------------ ------------ ------------
Outstanding - December 31, 2001 6,019,500 364,167 $ 1.40
============ ============ ============
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
----------------------- -----------------------
Range of Exercise Prices Number Price* Life* Number Price*
------------------------ ----------- ----------- ----------- ----------- -----------
$.19 - .55 2,723,667 $ 0.41 7.46 2,601,833 $ 0.40
$.60 - 1.88 2,365,000 0.76 0.54 1,943,750 0.73
$2.25 - 4.97 1,295,000 4.67 6.45 800,000 4.56
----------- ----------- ----------- ----------- -----------
Total - December 31,
2001 6,383,667 $ 1.40 4.69 5,345,583 $ 1.14
=========== =========== =========== =========== ===========
*Price and Life reflect the weighted average exercise price and weighted average
remaining contractual life, respectively.
The Company has issued 110,000 stock options to consultants which have been
valued at $79,000 and recorded as consulting expense, using the Black-Scholes
options pricing model. The assumptions used include lives ranging from 2 to 5
years, exercise prices ranging from $0.67 to $0.92, volatility of 132%, no
dividend payments and a risk free rate of 5.5%.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's option been determined based on
the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Corporation's net loss and basic loss per common share would
have been changed to the pro forma amounts indicated below:
For the Years Ended
December 31,
-----------------------------------------
2001 2000 1999
-------------- ------------- ------------
Net loss - as reported $(10,636,000) $ (5,415,000) $ (4,847,000)
Net loss - pro forma (12,035,000) (14,256,000) (6,136,000)
Basic loss per common share - as reported (0.21) (0.13) (0.30)
Basic loss per common share - pro forma (0.24) (0.34) (0.36)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
For the Years Ended
December 31,
----------------------------------------
2001 2000 1999
-------------- ------------- -----------
Approximate risk free rate 5.50% 5.50% 5.50%
Average expected life 5 years 10 years 10 years
Dividend yield 0% 0% 0%
Volatility 132% 273% 225%
Estimated fair value of total options
granted $1,399,000 $8,841,000 $1,289,000
Warrants
The Company has an obligation to issue up to 7,000,000 warrants under an
agreement with a pharmacy management company for the Company's proprietary
software to be interfaced with core medical service providers, in which one of
the Company's audit committee members is a related party to the pharmacy
management company. The agreement provides for 3,000,000 warrants with an
exercise price of $.30, 3,000,000 warrants with an exercise price of $.50, and
1,000,000 warrants with an exercise price of $1.75 all expiring September 8,
2004. The warrants to be issued by the Company are granted in 1,000,000
increments based on certain performance criteria. At December 31, 1999,
1,000,000 of the warrants had been granted but were not issued yet. In
connection with the obligation to issue the 1,000,000 warrants earned, the
Company recorded expense of $1,364,000 valued using the Black-Scholes option
pricing model, with assumptions of 132% volatility, no dividend yield and a
risk-free rate of 5.5%. No warrants were granted during 2000. During 2001,
850,000 of the warrants had been granted but were not issued by December 31,
2001. In connection with the obligation to issue the 850,000 warrants earned,
the Company recorded expense of $590,000 during the third quarter of 2001 valued
using the Black-Scholes option pricing model, with assumptions of 132%
volatility, no dividend yield and a risk-free rate of 5.5%.
At December 31, 2001, the Company will have the obligation to grant 5,150,000
warrants under the agreement in the future if the performance criteria specified
are met.
The Company also issued and modified warrant terms in the settlement of certain
litigation (Note 7). These warrants and modifications have been valued at
$234,000 using the Black-Scholes option pricing model. (See assumptions used in
Note 7).
The following table presents the activity for warrants outstanding:
Weighted
Average
Number of Exercise
Warrants Price
---------------------------
Outstanding - December 31, 1998 3,463,954 $ 1.81
Issued 12,721,000 0.51
Forfeited/canceled (993,828) 4.84
Exercised (400,000) 0.31
---------------------------
Outstanding - December 31, 1999 14,791,126 0.53
Issued 35,000 3.96
Forfeited/canceled (32,506) 0.71
Exercised (9,352,620) 0.53
---------------------------
Outstanding - December 31, 2000 5,441,000 0.53
Issued 2,066,587 1.12
Forfeited/canceled (36,000) 0.80
Exercised (22,000) 0.19
---------------------------
Outstanding - December 31, 2001 7,449,587 $ 0.69
===========================
All of the outstanding warrants are exercisable and have a weighted average
remaining contractual life of 2.31 years.
Note 9 - Income Taxes
As of December 31, 2000, the Company has net operating loss (NOL) carryforwards
of approximately $21,800,000, which expire in the years 2000 through 2021. The
utilization of the NOL carryforward is limited to $469,000 on an annual basis for
net operating loss carryforwards generated prior to September 1996, due to an
effective change in control, which occurred as a result of the 1996 private
placement. As a result of the significant sale of securities during 1999, the
Company's net operating loss carryforwards will be further limited in the future
to an annual amount of $231,000 due to those changes in control. The Company
also has a deferred tax liability of approximately $221,000 related to
capitalized software development costs. The Company has concluded it is
currently more likely than not that it will not realize its net deferred tax
asset and accordingly has established a valuation allowance of approximately
$7,400,000 and $5,000,000, respectively. The change in the valuation allowance
for 2001 and 2000 was approximately $2,413,000 and $1,668,000, respectively.
Note 10 - Employee Benefit Plan
Effective March 25, 1997, the Company adopted a defined contribution retirement
savings plan, which covers all employees age 21 or older with one thousand hours
of annual service. Matching contributions are made by the Company at $0.25 for
each $1 that the employee contributes up to 8% of compensation during 1998.
The Company has certain violations under the plan, which are considered
reportable transactions. The Company was delinquent in filing a complete Form
5500, and was notified by the Department of Labor to complete its filing. The
Company has complied in filing the Form 5500 within the specified time period,
however, the Company could be subject to certain penalties as a result.
The Company's matching contributions vest to the participant according to the
following vesting schedule:
Years of Service
----------------
1 10%
2 20%
3 30%
4 40%
5 60%
6 80%
7 100%
Note 11 - Related Party Transactions
Prior to being elected to the board of directors of the Company in 1999, a
company affiliated with one of the Company's directors, entered into agreements
with us to provide executive search services and sales and marketing service to
us. In connection with those agreements, the Company issued a 3-year option to
acquire up to 25,000 shares of the Company's common stock at an exercise price of
$.55 per share. An expense of approximately $13,000 related to the issuance of
the option was recorded. The Company paid the related company approximately
$51,000 and $152,000 during 2001 and 2000, respectively. The Company also
entered into an agreement with the affiliated company for rental space, use of
clerical employees and to pay a portion of utility and telephone costs. Rent
expense for 2001 and 2000 was approximately $111,000 and $93,000, respectively.
During 2000, the Company paid two companies affiliated with another of the
Company's directors $118,000 for services and related expenses and approximately
$66,000 for software development and web-site hosting and development services
and purchase of computer equipment. The Company also acquired a business from a
director of the Company for $474,000 in 2000 (Note 4).
The Company also has an obligation to issue warrants to a pharmacy management
company in which a member of the Company's audit committee is a related party,
if certain performance criterion are met in the future (Note 7).
The Company has a consulting agreement with one of the Company's directors to
assist with marketing of the Company's products. The Company paid the director
$0 and $52,000 for such consulting services in 2001 and 2000, respectively.
During July 2001, the Company received $136,000 as a short- term advance from a
related party, $50,000 of which was repaid during August 2001. An additional
$30,000 and $50,000 was advanced to the company by the related party during
September and December 2001, leaving an outstanding balance of $166,000 at
December 31, 2001. The entire amount was repaid during February 2002.
Note 12 - Subsequent Events
The Company entered into a secured convertible loan agreement with a Company,
dated February 19, 2002, pursuant to which we borrowed $1,000,000 from WellPoint
Health Networks Inc. The loan becomes payable on February 19, 2003, if not
converted into our common stock. The loan earns annual interest at a floating
rate of 300 basis points over prime, as it is adjusted from time to time, which
is also payable at maturity and may be converted into common stock. Conversion
into common stock is at the option of either WellPoint or Medix at a contingent
conversion price. The conversion price will be either (i) at the price at which
additional shares are sold to other private placement investors if Medix obtains
written commitments for at least an additional $4,000,000 of equity by the close
of business on September 30, 2002, from persons not affiliates of WellPoint, and
if such sales are closed by the maturity date of the loan, or (ii) at a price
equal to 80% of the then-current Fair Market Value (as defined below) if Medix is
unable to obtain a written commitment for the additional equity investment by the
close of business on September 30, 2002 or close the sales by the maturity date.
For this purpose, "Fair Market Value" shall be the average closing price of Medix
common stock for the twenty trading days ending on the day prior to the day of
the conversion. The Company will be required to record financing costs
during the first quarter of 2002 associated with this loan agreement as a result
of the in-the-money conversion feature totalling approximately $70,000. The
loan is secured by the grant of a security interest in all Medix's
intellectual property, including its patent, copyrights and trademarks. While
Medix can cure a default in the repayment of the loan at the fixed maturity date
by the forced conversion of the loan into its common stock, a cross default,
breach of representation or warranty, and bankruptcy or similar event of default
will trigger the foreclosure provision of the security agreement.
Note 13 - Summarized Quarterly Results (Unaudited)
The following table presents unaudited operating results for each quarter within
the two most recent years. The Company believes that all necessary adjustments
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the following quarterly results when read
in conjunction with the financial statements. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full fiscal year.
First Second Third Fourth
Quarter (4) Quarter Quarter (2) Quarter (3),(5)
----------- ----------- ----------- ---------------
December 31, 2000
Revenues $ 64,000 $ 126,000 $ 104,000 $ 32,000
Operating expenses 1,054,000 2,011,000 1,455,000 2,090,000
Gross profit (loss) 61,000 106,000 31,000 (52,000)
Loss from continuing operations (981,000) (1,849,000) (1,380,000) (2,134,000)
Gain (loss) from discontinued
operations 650,000 - - 279,000
Net income (loss) (331,000) (1,849,000) (1,380,000) (1,855,000)
Basic earnings (loss) per share (1) (0.01) (0.04) (0.03) (0.02)
Diluted earnings (loss) per share (1) (0.01) (0.04) (0.03) (0.02)
December 31, 2001
Revenues $ 30,000 $ - $ - $ (1,000)
Operating expenses 2,190,000 1,427,000 3,053,000 1,261,000
Gross profit (loss) 25,000 (28,000) (5,000) (176,000)
Loss from continuing operations (2,259,000) (1,635,000) (3,183,000) (2,912,000)
Net income (loss) (2,259,000) (1,635,000) (3,183,000) (2,912,000)
Basic earnings (loss) per share (1) (0.05) (0.03) (0.06) (0.07)
Diluted earnings (loss) per share (1) (0.05) (0.03) (0.06) (0.07)
(1) Earnings per share are computed independently for each quarter and the full
year based upon respective average shares outstanding. Therefore, the sum
of the quarterly net earnings per share amounts may not equal the annual
amounts reported.
(2) Included in third quarter 2001 operating expense is $1,111,000 of expenses
related to the impairment of intangible assets. (Note 4)
(3) Included in fourth quarter 2001 operating loss is $1,022,000 in financing
costs. (Notes 6 and 8)
(4) During the first quarter of 2000, the Company closed on the sale of assets
of its remaining staffing business and discontinued these operations.
(Note 3)
(5) During the fourth quarter of 2000, the Company wrote off unrealizable
assets related to the discontinued operations, and adjusted remaining
liabilities settled for less than recorded amounts. (Note 3)
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on behalf by the undersigned, thereunto duly
authorized on May 23, 2002.
MEDIX RESOURCES, INC.
By: /s/ John R. Prufeta
President and CEO
In accordance with 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 indicated and on
the dates indicated.
Signature Title Date
/s/ John R. Prufeta
-------------------
May 24, 2002
John R. Prufeta President and Chief Executive
Officer (Principal Executive
Officer)
/s/ Gary L. Smith
----------------- May 24, 2002
Gary L. Smith Executive Vice President and
Chief Financial Officer(Principal
Accounting and Financial Officer)
/s/Joan E.Herman
----------------- Director May 24, 2002
Joan E. Herman
/s/ Dr. David B. Skinner
------------------------ Director May 24, 2002
Dr. David B. Skinner
/s/ John T. Lane
---------------- Director May 24, 2002
John T. Lane
/s/ Samuel H. Havens
--------------------- Director May 24, 2002
Samuel H. Havens
------------------ Director May 24, 2002
Patrick W. Jeffries
/s/ Guy L. Scalzi
----------------- Director May 24, 2002
Guy L. Scalzi