Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[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, 2001.
Documents incorporated by reference:
None
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 2 PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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 software and 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 software 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 facilitates 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 software
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)software 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)software 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 software 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 software 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 software 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)software 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)software 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)software suite of products includes:
---------------------------- --------------------------------------
o Pharmacy benefit manager
Cymedix(R)Pharmacy >>>> 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
o Complete lab order entry.
Cymedix(R)Lab >>>> o Medical necessity verification.
o 24/7 results reporting (partial
and full).
o Specimen tracking.
o Messaging and prompts.
o Cumulative and custom reporting.
o Eligibility verification.
Cymedix(R)PlanConnect >>>> 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 software products 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 software 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 software
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:
|X| Medix establishes a connection between sponsor organizations and
physicians.
|X| 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.
|X| Sponsor organizations pay for transactions.
|X| 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)software
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
software 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 the Cymedix
software. Materials to promote the various Cymedix applications 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
Cymedix 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 obligations 0 0 400,000 0 0
Stockholders' Equity 1,345,000 4,202,000 2,376,000 (218,000) 4,504,000
(Deficit)
The following is supplementary information related to software development
expenses
2001 2000(1) 1999 1998(2) 1997
----------- ----------- ----------- ------------ -------------
Software
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
software and 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 software 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)software 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 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
software products require 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 software
products, providing software support services, evaluating demand for products,
financing a software business and dealing with government regulation of software
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 software products, we
will be required to anticipate and adapt to evolving industry standards and new
technological developments. The market for our software products 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 software 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.
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 totaling $668,000
agreement 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.
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.
Currently, we are funding our development and deployment activities through
an equity line of credit financing. 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 software 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) (3) (24/28/35 Director and Chair of the 1999
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").
Long-Term
Annual Compensation Compensation
-------------------- ------------
Securities
Underlying
Name and Fiscal Options
Principal Position Year Salary Bonus Other(1) (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
Number of
Shares of Percentage
Common of
Stock Total Valuation
Underlying Options under
Options Granted to Black-
Granted Employees Scholes
in in Exercise Expiration Pricing
Name 2001 2001 Price Date Method(1)
- ------------------ ------------- ------------- --------- ----------- ----------
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.
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Year-End at Year-End(1)
Shares Value ----------------------------- --------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------- --------- -------- ------------ ------------- ----------- -------------
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
Louis E. Hyman 0 0 112,500 137,500 $ 8,325 $12,375
Brian R. Ellacott 0 0 312,500 12,500 $ 16,000 $ 0
- --------------
(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 compares the performance of the Company's common stock
with the performance of the AMEX Composite Index and on Custom Composite Index
(4 stocks) over the five year period extending through the end of 2001. The
graph assumes that $100 was invested on December 31, 1996 in the Company's
common stock, the AMEX Composite Index and the Custom Composite index, with any
dividends being reinvested. The Company has provided this graph 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 businesses. The Company believes that this peer group
provides that the Company believes are its peers and 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 Resources, Inc. $ 100 $ 23 $ 9 $ 288 $ 100 $ 65
AMEX Composite Index $ 100 $ 120 $ 120 $ 153 $ 155 $ 148
Custom Composite Index $ 100 $ 98 $ 165 $ 138 $ 16 $ 20
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 on pages 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 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
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 March 28, 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 President and Chief Executive
------------------- Officer (Principal Executive
John R. Prufeta Officer March 28, 2002
/s/ Gary L. Smith Executive Vice President and
----------------- Chief Financial Officer (Principal)
Gary L. Smith Accounting and Financial Officer) March 28, 2002
/s/Joan E. Herman Director March 28, 2002
-----------------
Joan E. Herman
/s/ Dr. David B. Skinner Director March 28, 2002
----------------------
Dr. David B. Skinner
/s/ John T. Lane Director March 28, 2002
----------------
John T. Lane
/s/ Samuel H. Havens Director March 28, 2002
---------------------
Samuel H. Havens
- ------------------ Director March 28, 2002
Patrick W. Jeffries
/s/ Guy L. Scalzi Director March 28, 2002
- -----------------
Guy L. Scalzi
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
The Company recognizes revenue on its Internet connectivity solutions software
business as services are provided.
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)