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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO 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.
(Exact name of registrant as specified in its charter)
Colorado 84-1123311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
The Graybar Building
420 Lexington Avenue
Suite 1830 10170
New York, New York
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including (212) 697-2509
area code:
Securities registered pursuant to Section Common Stock - $.001 par value
12(b) of the Act: The Common Stock is listed on the
American Stock Exchange
Securities registered pursuant to Section None
12(g) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of June 30, 2002 was approximately $23.3 million based upon
the closing price of the registrant's common stock on the American Stock
Exchange, as of the last business day of the most recently completed second
fiscal quarter (June 28, 2002). (For purposes of determining this amount, only
directors, executive officers, and 10% or greater stockholders have been deemed
affiliates.)
On February 28, 2003, 80,877,065 shares of the registrant's common stock, par
value $0.001 per share, were outstanding.
This Annual Report on Form 10-K and the documents incorporated herein contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Annual Report, statements that are not statements of current or historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing,
the words "plan", "intend", "may," "will," "expect," "believe", "could,"
"anticipate," "estimate," or "continue" or similar expressions or other
variations or comparable terminology are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. Except
as required by law, the Company undertakes no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Table of Contents
Form 10-K Index
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 the 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 Operations
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 and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions
Item 14 Controls and Procedures
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports
on Form 8-K
Signatures
PART I
Item 1. BUSINESS
Medix Resources, Inc. ("the Company", "we", "us", or "our") was
incorporated under the laws of the State of Colorado in 1988 under the name
Nur-Staff West, Inc. On May 24, 1988, we changed our name to Med-Temps,
Incorporated, and on February 16, 1990, we changed our name to International
Nursing Services, Inc. On February 17, 1998, we changed our name to Medix
Resources, Inc. From 1988 until 2000, we operated as a temporary healthcare
staffing company, with offices at various times in Colorado, New York, Texas and
California. We disposed of the healthcare staffing operations in February 2000
and retained only the offices in Colorado. In January 1998, we acquired Cymedix
Corporation, which was merged into our wholly owned healthcare technology
subsidiary, Cymedix Lynx Corporation, and in 2000 began focusing solely on the
development and commercialization of software and connectivity solutions for
certain areas of the healthcare industry.
Overview
We develop and intend to market communication technologies for use in the
healthcare industry primarily at the point of care. We have focused on
electronic prescribing of drugs, laboratory orders and laboratory results
because these represent the majority of the transactions performed at the point
of care, and remain largely a paper-based starting point for transferring
information in the healthcare system. Our goal is to close the gap in electronic
or automated processing by providing technologies and work-flow processes at the
point of care. Our technologies would enable point-of-care providers ("POCs")
(i.e. physician or caretaker) to connect with other participants in the
healthcare system. At this time, we are focused primarily on healthcare value
chain intermediaries ("HVCIs") (e.g. pharmacy, lab, pharmacy benefit managers,
pharmaceutical companies, etc.). Our products are designed to improve the
accuracy and the efficiency of the processes of drug prescribing and the
ordering of laboratory tests and the receiving of laboratory results.
When we shifted to this business in 2000, our plan was initially to deploy
the technology in a single market. We began to test this approach in April 2002
with a small, local sales and installation team in Georgia that deployed the
Cymedix technology to physician practices. By August 2002 it was clear to us
that although the technology worked and physicians were using the system, this
approach was not going to be commercially viable for several reasons including
slow adoption by physicians unless there was an economic incentive, limited
support by major HVCIs, and the high cost of marketing, sales, installation and
service associated with serving individual and small medical practices. Based on
these results, the initial deployment in Georgia was halted in August 2002.
At that time, we evaluated the business of automating the transaction at
the point of care and concluded that a viable business could be built, but a
different approach would be required than originally anticipated. Based on this
evaluation, in September 2002, our Board recruited certain new senior managers
including a new chief executive officer to assist us in pursuing alternative
approaches to developing and deploying technology at the point of care.
Our current plan for the commercialization of our technology is to target
physician practices and other POC centers that have the following
characteristics: sufficient patient volume; clear economic incentive, such as
administrative savings and time savings; commitment to electronic transfer of
point of care information; and HVCI or other healthcare participant support for
the rollout of the technology. Subject to the above criteria, our goal remains
to connect from the point of care to the various segments of the healthcare
industry that meet these criteria, such as health plans, insurers, skilled
nursing facilities, pharmacy benefit management companies ("PBMs"), pharmacies
and pharmaceutical companies.
We believe that it is important to deploy technologies that are easy to
adopt or already have established markets. As such, on March 4, 2003 we acquired
assets from Comdisco Ventures, Inc. that were formerly used by ePhysician, Inc.
in its software and technology business prior to its cessation of operations in
2002. ePhysician point-of-care technologies enable physicians to securely access
and send information to pharmacies, billing service companies, and practice
management systems via the Palm OS(R)-based handheld device and the Internet,
meeting our objective of deploying a recognized technology. Our goal is the
integration of the Cymedix and e-Physician technologies and to market them on a
commercial basis.
We have been in business since 1988. We decided in 2000 to dispose of the
temporary healthcare staffing business to focus on the healthcare software and
connectivity solutions industry. The development of technology and the future
marketing of connectivity solutions is our sole business at this time. Our net
operating loss is due to this transition and the ongoing efforts to build a
commercially viable business in point-of-care automation. We currently do not
have any active users of our products.
Our principal executive office is located at The Graybar Building, 420
Lexington Avenue, Suite 1830, New York, New York 10170, and our telephone number
is (212) 697-2509. We have closed our California and Colorado offices, and we
are actively pursuing an exit to our leases in Georgia and California.
Industry Background
Growth of the medical information management marketplace is driven by the
need to share significant amounts of accurate clinical and patient information
among all participants in the healthcare system. The U.S. Centers for Medicare
and Medicaid Services estimates that $1.4 trillion dollars, (14% of the U.S.
gross domestic product) was spent on healthcare in 2001. It also estimates that
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. Health economists estimate that 20% or more of the nation's
total healthcare expenditures are spent on backroom administration. These
economists also estimate that another 10% of these expenditures are attributable
to the consequences of adverse health events caused by inaccurate or unavailable
patient information.
Healthcare has many participants. For Medix, the relevant participants
include the approximately 645,000 practicing physicians, 6,200 hospitals, 16,500
nursing homes, 8,000 home healthcare agencies, 4,500 independent laboratories
and thousands of managed care organizations and other ancillary healthcare
providers in the U.S. The larger organizations in healthcare have over the years
installed large-scale automated systems to structure and share uniform
information. Physician practices, which are mostly comprised of five or fewer
physicians, have systems to support billing, and some clinical activity. The
same is true of hospitals. However, very few provider organizations have
automated the first point of a transaction, which is often at the point of care.
At the point of care, most practitioners rely on paper and pen, which is only
later converted to electronic form. Generally, the industry has large-scale
administrative and financial processing systems, but little transaction
automation at the point of care.
The industry is highly regulated. There are both federal and state
regulations. A federal regulation has been established relating to, among other
areas, the management of information, called the Health Insurance Portability
and Accountability Act ("HIPAA"). This act, among other things, specifies the
communication standards for administrative and clinical electronic health
information. Under HIPAA, by October 16, 2003, POCs and HVCIs, who transmit data
electronically will be required to use technology that meets HIPAA security
standards with respect to electronic transactions and code sets.
Technology
Our developing technology platform and its resulting products, as discussed
below, are intended to provide connectivity of medical related information from
the point of care to HVCIs, over the Internet, safely, efficiently and easily.
It is our intention to combine aspects of the ePhysician product functionality
with our existing Cymedix technologies, resulting in our ultimate technology
platform, which we intend to commercialize (these combined technologies are the
"Merged Technology"). The Merged Technology is intended to improve the accuracy
and the efficiency of the processes of drug prescribing and the ordering of
laboratory tests and the receiving of laboratory results and will be focused
around a device-neutral architecture that uses proven workstation, handheld and
wireless technologies.
The technology assets acquired from ePhysician include product modules that
we believe will allow us to augment the feature set of our software. Aspects of
ePhysician's core technology architecture, including product functionality such
as charge capture and partner messaging, will be evaluated for inclusion in our
technology foundation.
The existing Cymedix technology is divided into three distinct areas,
Cymedix Pharmacy, Cymedix Laboratory and the Cymedix Universal Interface
("CUI"). Our Cymedix Pharmacy product automates the prescription writing process
for a medical practice. The Cymedix Pharmacy product allows a POC to perform
real-time transactions to determine patient eligibility for drug benefit
coverage, and medication history and formulary compliance at the point-of-care.
Our Cymedix Laboratory product allows a POC to electronically submit lab test
orders and to receive lab test results. The Cymedix Lab product can exchange
real-time lab orders and lab results with reference and facility based
laboratories. The CUI enables our Cymedix Pharmacy and Laboratory products to
extract data from a POC's practice management system in an automated and secure
manner. While we have not yet deployed these products with customers, we believe
that these technologies are all functional, subject to appropriate integration
with potential customers' systems.
The laboratory product that will be included in the Merged Technology is
solely based on Cymedix's technology, as ePhysician does not have any laboratory
functionality. The CUI will be combined with ePhysician's extraction
technologies, which had been developed to work with over 150 practice management
systems. Access to patient data appears to be a key aspect of any of our
potential product offerings, irrespective of target market, so we expect to
continue investing in the expansion of the extraction capabilities of the Merged
Technology.
The feature set of our Merged Technology will include most of the
functionality described in the following charts. However, we expect to add and
subtract functionality based on the needs of the end-users we pursue.
- ----------------------- -------------------------------------------------
PRODUCT TARGETED FUNCTIONALITY
Pharmacy o Pharmacy benefit manager identification
(eligibility verification and an
automatic link to formulary / benefits
information).
o Electronic Prescribing (retail and mail
order)
o Medication History
o Treatment and formulary compliance
o Drug to Drug interaction, drug to
allergy, duplicate therapy and other
clinical checks
o Messaging and prompts
o Compliance analysis
Lab o Complete Lab Order Entry
o Medical necessity verification
o 24/7 results reporting (partial and full)
o Specimen tracking
o Messaging and prompts
Patents, Trademarks and Copyrights
US Patent No 5,995,939 was issued on November 30, 1999 to our wholly owned
subsidiary, Cymedix Lynx Corporation. That patent covers our automated service
request and fulfillment system and will expire October 14, 2017.
Cymedix registered 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. We
do not intend to utilize these trademarks as part of the Merged Technology.
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 copyright registrations to Medix. It is unclear whether any of the
existing copyrights or the patent will inure any significant value to our
business in the future.
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, restricting
access to our source code and requiring those persons with access to our
proprietary information to execute confidentiality agreements with us.
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 may be involved in intellectual property disputes. We
may notify others that we believe their products infringe upon our intellectual
property rights, and others may notify us 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 healthcare 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 the commercialization 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.
Business Strategy
While we continue the development of our Merged Technology, we are
evaluating ways to deploy these technologies to the healthcare marketplace. We
are currently exploring whether individual potential markets for deployment are
on financial terms that would be commercially feasible and worth pursuing. We
currently do not have any customers for our products.
Some PBMs have been willing to pay transaction fees to electronic
prescribers for prescriptions delivered electronically for their covered lives.
These transaction fees may not justify the cost of deploying our Merged
Technology to POCs. Our existing contract with Medco Health Solutions, when
implemented, would pay us transaction fees on their covered lives. We intend to
explore the possibilities of PBMs, health plans and other interested parties
providing us with additional financial assistance that might better justify
deploying our Merged Technology to a targeted POC audience of their choosing. At
this time, it is not certain whether this plan will be a viable part of our
business if and when our Merged Technology is available for commercial
deployment.
We are also beginning to explore other distribution channels and venues
through which our Merged Technology could be deployed. We believe potentially
attractive areas for us to pursue must offer us an opportunity to aggregate POCs
or prescriptions in a concentrated manner. Skilled nursing facilities,
institutional pharmacies, hospices and veteran's hospitals appear to be venues
that may have attractive characteristics for the commercialization of our
products. While the Merged Technology may meet certain aspects of these
opportunities, we expect that each area we ultimately pursue, if any, would
require us to undertake additional development work. In evaluating these
distribution channels and venues, we plan to focus on ease of entry into a given
distribution channel or venue, and the potential to extract a reasonable
economic return from a paying customer. We do not intend to deploy our products
to areas where we would need to invest significant financial resources. Instead,
we are seeking opportunities where we perceive that we might be able to generate
attractive levels of revenue over reasonable periods of time. Our intention is
to develop short pilot opportunities with interested potential customers, with
the hope of moving to a revenue producing relationship within the 2003 calendar
year. No assurance can be given that this goal can be achieved. It is important
to note that we have never deployed our Cymedix product in any meaningful
manner, and have not yet attempted to deploy our Merged Technology, and in fact,
the development process of our Merged Technology is still underway, precluding
us from attempting to deploy our Merged Technology at this time.
Formulary compliance, which is the ability of an HVCI to have a POC
prescribe a pharmaceutical product of the HVCI's choice, is an area that we
intend to explore. We believe our technologies have the possibility of enabling
an HVCI to achieve better formulary compliance. We may seek to prove this
premise in a given marketplace through pilot projects, so as to attract HVCIs
for whom this capability would be a material attraction. The key manner in which
our Merged Technology could affect formulary compliance is through messaging and
placement of information, intended to affect the POCs prescribing behavior prior
to having prescribed any product. We have not yet explored this area, and our
Merged Technology may not prove to be commercially viable in the manner in which
we contemplate its use in this area.
RISK FACTORS
In addition to the other information contained in this report, the
following risk factors should be considered carefully in evaluating an
investment in Medix Resources, Inc. and in analyzing our forward-looking
statements.
Risks Related to Medix
Our continuing losses endanger our viability as a going-concern and caused our
accountants to issue a "going concern" exception in their annual audit report.
We reported net losses of $9,014,000, $10,636,000 and $5,415,000 for the
years ended December 31, 2002, 2001 and 2000, respectively. At December 31,
2002, we had an accumulated deficit of $43,073,000 and a net working capital
deficit of $252,000. Our products are in the development and early deployment
stage and have not generated any revenue to date. We are funding our operations
through the sale of our securities. Our independent accountants have included a
"going concern" exception in their audit reports on our audited 2002, 2001 and
2000 financial statements.
Our need for additional financing is acute and failure to obtain adequate
financing could lead to the financial failure of our company.
We expect to continue to experience losses, in the near term, until such
time as the Merged Technology can be successfully deployed with physicians and
produce revenue. The continuing development, marketing and deployment of the
Merged Technology will depend upon our ability to obtain additional financing.
The Merged Technology is in the development stage and has not generated any
revenue to date. We are funding our operations now through the sale of our
securities. There can be no assurance that additional investments or financings
will be available to us on favorable terms or at all as needed to support the
development and deployment of Merged Technology. Failure to obtain such capital
on a timely basis could result in lost business opportunities, the sale of the
Merged Technology at a distressed price or the financial failure of our company.
We have a limited number of authorized shares of common stock for issuance, and
if our shareholders do not approve of an increase in the authorized number of
shares of our common stock, we will be unable to raise additional capital.
We currently have 125,000,000 shares of common stock authorized for
issuance under our certificate of incorporation, and as of February 28th 2002,
have 80,877,065 outstanding shares of common stock and 37,064,527 shares of
common stock reserved for issuance under existing options, warrants and
outstanding shares of our convertible preferred stock. Thus, we only have
7,058,408 shares of common stock that are available for issuance. We intend to
request that our shareholders approve, at a special meeting of shareholders, an
increase in the number of shares of common stock that we are authorized to
issue. However, we cannot predict the outcome of that vote. If our shareholders
do not approve of the increase in the number of shares of common stock that we
are authorized to issue, we will be unable to raise additional capital.
Medix has frequent cash flow problems that often cause us to be delinquent in
making payments to our vendors and other creditors, which may cause damage to
our business relationships and cause us to incur additional expenses in the
payment of late charges and penalties.
During 2002, from time to time, our lack of cash flow caused us to delay
payment of our obligations as they came due in the ordinary course of our
business. In some cases, we were delinquent in making payments by the legally
required due dates. At our four office locations, we had 48 monthly rental
payments due in the aggregate during 2002. Two of those payments were late. Such
payments were paid within 30 days of their due date. All payments plus any
required penalties were ultimately paid with respect to our 2002 obligations. We
had 26 Federal withholding and other payment due dates. Of those, three due
dates were missed. The resulting delinquencies ranged from one to ten days
before the required payments were made. We paid the resulting penalties as they
were billed. We had state withholding obligations in five states, Colorado,
California, Georgia, New Jersey and New York. Although we were not late in
making withholding payments in those five states during 2002, we have been late
in prior periods. Similarly, although we were not late in making deposits of our
employees' 401(k) contributions during 2002, we have been late in making such
deposits in the past. During 2003, we may be delinquent from time to time in
meeting our obligations as they become due.
While we have had operations since 1988, we are better considered a development
stage company, which means our products and services have not yet proved
themselves commercially viable and therefore our future is uncertain.
Although we have had operations since 1988, because of our move away from
temporary healthcare staffing, we have a relatively short operating history and
limited financial data upon which you may evaluate our business and prospects,
and are better considered a development stage company. In addition, our business
model is likely to continue to evolve as we attempt to develop our product
offerings and enter new markets. As a result, our potential for future
profitability must be considered in light of the risks, uncertainties, expenses
and difficulties frequently encountered by development stage companies that are
attempting to move into new markets and continuing to innovate with new and
unproven technologies. We are still in the process of gaining experience in
marketing physician connectivity products, providing support services,
evaluating demand for products, financing a technology business and dealing with
government regulation of health information technology 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 rely on healthcare professionals for the quality of the information that is
transmitted through our interconnectivity systems, and we may not be paid for
our services by third-party payors if that quality does not meet certain
standards.
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. Such failure may negatively affect our ability to generate
revenue and our reputation.
Our market, healthcare services, is rapidly changing and the introduction of
Internet connectivity services and products into that market has been slow,
which may cause us to be unable to develop a profitable market for our services
and products.
o As a developer of connectivity technology products, we will be required to
anticipate and adapt to evolving industry standards and new technological
developments. The market for the Merged Technology 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 that are functional and meet the evolving
needs of our clients and users in the healthcare information systems
market.
o The introduction of physician connectivity products in our market has been
slow due, in part, to the large number of small practitioners who are
resistant to change and the implicit costs associated with change,
particularly in a period of rising pressure to reduce costs in the market.
In addition, the integration of processes and procedures with several
payors and management intermediaries in a market area has taken more time
than anticipated. The resulting delays continue to prevent the receipt of
transaction fees and cause us to continue to raise money by the sale of our
securities to finance our operations.
o Our early-stage market approach concentrated product distribution efforts
in a single market (Atlanta, Georgia), thereby amplifying the effect of
localized market restrictions on our prospects, and delaying large-scale
distribution of our products. While we intend to mitigate these local
factors with a strategy to develop alternate distribution channels in
multiple markets, there can be no assurance that we will be successful.
o We cannot assure you that we will successfully complete the development of
the Merged Technology in a timely fashion or at all or that our current or
future products will satisfy the needs of the healthcare information
systems market. Further, we cannot assure you that products or technologies
developed by others will not adversely affect our competitive position or
render our products or technologies noncompetitive or obsolete.
As a provider of medical connectivity products and services, we may become
liable for product liability claims that could have a materially adverse effect
on our financial condition.
Certain of our products provide applications that relate to patient medical
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 are seeking product
liability coverage, which may be prohibitive in cost. There can be no assurance
that we will be able to obtain such coverage at an acceptable cost or that our
insurance coverage would adequately cover any claim asserted against us. Such a
claim could be in excess of the limits imposed by any policy we might be able to
obtain. A successful claim brought against us in excess of any insurance
coverage we might have 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.
Our industry, healthcare, continually experiences rapid change and uncertainty
that could result in issues for our business planning or operations that could
severely impact on our ability to become profitable.
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 physician users and
customers. Particularly, HIPAA and the regulations that are being promulgated
under it 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 business.
We rely on intellectual property rights, such as copyrights and trademarks, and
unprotected propriety technology in our business operations and to create value
in our companies; however, protecting intellectual property frequently requires
litigation and close legal monitoring and may adversely affect our ability to
become profitable.
o Our wholly owned subsidiary, Cymedix Lynx Corporation, has certain
intellectual property relating to its software business. These rights have
been assigned by our subsidiary to the parent company, Medix Resources. The
intellectual property legal issues for software programs, such as the
Cymedix(R)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 the first to
file any patent application. In addition, we cannot assure you 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 the Merged Technology. 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. While we have no prospects for marketing or
operations in foreign countries at this time, future opportunities for
growth in foreign markets, for that reason, may be limited. We cannot give
any assurance that the scope of the rights that we have been granted are
broad enough to fully protect the Merged Technology from infringement.
o Litigation or regulatory proceedings may be necessary to protect our
intellectual property rights, such as the scope of our patent rights. In
fact, the information technology and healthcare industries in general are
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. A party has notified us 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.
o We also rely upon unprotected 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 commercial efforts to protect such information and techniques;
however, we cannot assure you 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.
Because our business is highly competitive and there are many competitors who
are financially stronger than we are, we are at risk of being outperformed in
staffing, marketing, product development and customer services, which could
severely limit our ability to become profitable.
o eHealth Services. 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. Many of these competitors will have access to substantially
greater amounts of capital resources than we have access to, for the
financing of technical, manufacturing and marketing efforts. Frequently,
these competitors will have affiliations with major medical product or
software development companies, who may assist in the financing of such
competitor's product development. We will seek to raise capital to develop
the Merged Technology in a timely manner, however, so long as our
operations remain under-funded, as they now are, we will be at a
competitive disadvantage.
o Personnel. The success of the development, distribution and deployment of
the Merged Technology 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 the Merged Technology operates. 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.
We have relied on the private placement exemption to raise substantial amounts
of capital, and could suffer substantial losses if that exemption was determined
not to have been properly relied upon.
We have raised substantial amounts of capital in private placements from
time to time. The securities offered in such private placements were not
registered with the SEC or any state agency in reliance upon exemptions from
such registration requirements. Such exemptions are highly technical in nature
and if we inadvertently failed to comply with the requirements of any of such
exemptive provisions, investors would have the right to rescind their purchase
of our securities or sue for damages. If one or more investors were to
successfully seek such rescission or institute any such suit, we could face
severe financial demands that could materially and adversely affect our
financial position.
The impact of shares of our common stock that may become available for sale in
the future may result in the market price of our stock being depressed.
As of December 31, 2002, we had 77,160,815 shares of common stock
outstanding. As of that date approximately 33,153,728 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 $.25 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
our 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.
Because of dilution to our outstanding common stock from the below market
pricing features of financings that are available to us, the market price of our
stock may be depressed.
Financings that may be available to us under current market conditions
frequently involve below market sales, as well as the issuance of warrants or
convertible debt that require exercise or conversion prices that are calculated
in the future at a discount to the then market price of our common stock. Any
agreement to sell, or convert debt or equity securities into, common stock at a
future date and at a price based on the then current market price will provide
an incentive to the investor or third parties to sell the common stock short to
decrease the price and increase the number of shares they may receive in a
future purchase, whether directly from us or in the market. The issuance of our
common stock in connection with such exercise or conversion may result in
substantial dilution to the common stock holdings of other holders of our common
stock.
Because of market volatility in our stock price, investors may find that they
have a loss position if emergency sales become necessary.
Historically, our common stock has experienced significant price
fluctuations. One or more of the following factors influence these fluctuations:
o unfavorable announcements or press releases relating to the technology
sector;
o regulatory, legislative or other developments affecting our company or the
healthcare industry generally;
o conversion of our preferred stock and convertible debt into common stock at
conversion rates based on current market prices or discounts to market
prices, of our common stock and exercise of options and warrants at below
current market prices;
o sales by those financing our company through an equity line of credit or
convertible securities which have been registered with the SEC and may be
sold into the public market immediately upon receipt; and
o market conditions specific to technology and internet companies, the
healthcare industry and general market conditions.
In addition, in recent years the stock market has experienced significant price
and volume fluctuations. These fluctuations, which are often unrelated to the
operating performance of specific companies, have had a substantial effect on
the market price for many healthcare related technology companies. Factors such
as those cited above, as well as other factors that may be unrelated to our
operating performance, may adversely affect the price of our common stock.
The application of the "penny stock" rules to our common stock may depress the
market for our stock.
Trading of our common stock may be subject to the penny stock rules under
the Securities Exchange Act of 1934, as amended, unless an exemption from such
rules is available. Broker-dealers making a market in our common stock will be
required to provide disclosure to their customers regarding the risks associated
with our common stock, the suitability for the customer of an investment in our
common stock, the duties of the broker-dealer to the customer and information
regarding bid and asked prices for our common stock, and the amount and
description of any compensation the broker-dealer would receive in connection
with a transaction in our common stock. The application of these rules may
further result in fewer market makers making a market in our common stock and
further restrict the liquidity of our common stock.
RECENT DEVELOPMENTS
On March 4, 2003, we purchased from Comdisco Ventures, Inc. substantially
all of the assets formerly used by ePhysician, Inc. in its software and
technology business prior to its cessation of operations in 2002. We are
evaluating the newly acquired technology to determine how best to integrate our
Cymedix technology with the ePhysician technology, resulting in our Merged
Technology. From its formation in 1998, through its cessation of operations in
November 2002, ePhysician developed and provided ePhysician Practice, a suite of
software products that enables physicians to prescribe medications, access drug
reference data, schedule patients, view formulary information, review critical
patient information and capture charges at the point of care using a Palm
OS(R)-based handheld device and the Internet.
On March 5, 2003, we terminated our merger agreement with PocketScript,
LLC. We had entered into a non-binding Letter of Intent with PocketScript on
October 30, 2002 and had executed a definitive merger agreement on December 19,
2002 to acquire PocketScript subject to certain conditions of closing.
COMPETITION
Healthcare Connectivity Services. The market for healthcare connectivity
services continues to be evolving and highly fragmented. No clear leader has
emerged. Several competitors have exited the market during the past two years,
having failed to prove the viability of their businesses or having depleted
their financial resources. The technology companies in this market include,
large traditional technology vendors such as Siemens, General Electric and
Hewlett Packard, as well as various healthcare-centric technology companies such
as Misys Healthcare Systems, WebMD, ProxyMed, NaviMedix and Allscripts.
There are other connectivity companies in the United States, both publicly
and privately held, that compete directly or indirectly with us. 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, as well
as practice management system vendors that may elect to build versus partner.
These competitors have greater financial resources and marketing capability than
we do and may have technology resources that are superior to ours. We will seek
to raise capital to develop and implement our Merged Technology in a timely
manner, however, as long as our operations remain under funded, as they are now,
we will be at a competitive disadvantage.
We believe that we can be competitive in this industry because our Merged
Technology will be built on a scalable technology architecture, our product
features appear to fill a need in the healthcare connectivity marketplace and we
will have extraction capabilities allowing us to interface with a significant
number of practice management systems.
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 business. 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 healthcare 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 Administrative Simplification provision of the Health
Insurance Portability and Accountability Act of 1996 (HIPAA), under which
regulations for governing privacy, electronic transactions and code sets,
security and unique identifiers have been, or are in the process of being,
implemented. Our products must contain features and functionality that allow our
customers and users to comply with existing law and regulations.
HIPAA regulations will have a major effect on us as well as other
participants 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 difficult to implement and maintain because they are
broad in scope and require ongoing vigilance to assure compliance. Estimated
costs of implementation vary widely, but will be in the billions of dollars
throughout the United States. Failure to comply could put us or other healthcare
participants out of business.
We believe that the Merged Technology is designed to comply 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. New laws and regulations may be
adopted with respect to the Internet or other on-line services covering issues
such as privacy, pricing, content, copyrights, distribution and characteristics
and quality of products and services. The adoption of any new laws or
regulations may impede the growth of the Internet or other on-line services,
which could 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 manner in
which existing laws in various jurisdictions governing issues such as property
ownership, sales and other taxes, libel and personal privacy will be applied to
activities on the Internet 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, as discussed above, is expected
to be the most important set of laws and regulations regarding confidentiality
and security issues for companies in the healthcare industry, state regulations
may also continue to 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 regulations could require holders of
such information, including us, to implement costly security measures, or may
materially restrict the ability of healthcare 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 technical
security procedure is infallible, and we will always be at risk of a breach of
security by either willful 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 that knowingly makes or uses 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 healthcare 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 looked
beyond the formalities of business arrangements to determine the underlying
purposes of payments between healthcare 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 healthcare 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 implement our business
plan, or we may have to abandon a product or service we are providing or plan to
provide altogether.
Employees
As of March 14, 2003, we had 21 full-time and no part-time employees. Ten
of these employees are involved in software programming and support of the
Cymedix network, four are involved in the marketing and deployment of product,
and seven 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 .
Lease
Square Expiration 2003
Footage Date Rent (est.)
--------- ---------- ----------
New York, New York 10,495 1-31-2005 $288,560
Greenwood Village,
Colorado (1) 2,967 7-31-2003 58,185
Agoura Hills, California
(2) 3,474 3-31-2007 79,207
Marietta, Georgia (2) 2,060 2-28-2004 31,930
--------- ----------
Totals 18,996 $ 457,882
========= ==========
- ----------------
(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, 2003. In 2002, we
sublet an additional 2,269 square feet at market rates until July 31, 2003.
We remain jointly liable for rental payments on such subleased spaces until
the end of the sublease and liable for all the space until the end of the
lease indicated above.
(2) As a result of the cessation of our deployment efforts in Georgia, and in
order to eliminate overhead, we have closed our California and Colorado
offices, and we are actively pursuing an exit to our leases in Georgia and
California. Given current market conditions, we are not optimistic that an
attractive exit strategy exists, but we are seeking to mitigate our
obligations on these two leases. Our lease in Colorado is scheduled to
expire in mid-2003, and will not be renewed, as we have consolidated all
previous functions performed in Colorado to New York City. We believe that
our New York facility 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
In the normal course of business, the Company may be party to litigation
from time to time. Current legal proceedings are as follows:
Tufts Associated Health Plans, Inc. has threatened to commence litigation
against us for allegedly breaching the Services and Support Agreement between
Tufts and the Company. Tufts has alleged that because of the termination of the
merger agreement between the Company and PocketScript, the Company is unable to
provide the products and services as contemplated by the Services and Support
Agreement and is in "material breach" thereunder. We disagree with Tufts'
allegations. At this time, litigation has not been commenced.
On August 7, 2001, a former officer of the Company filed an action,
entitled Barry J. McDonald v. Medix Resources, Inc., f/k/a International Nursing
Services, Inc., and John Yeros, CN 01CV2119, in the District Court of Arapahoe
County, Colorado, against the Company and its former President and CEO. The
plaintiff alleged (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. On
August 13, 2002, we reached an agreement in principal with the plaintiff to
settle the litigation by paying plaintiff $25,000 on or before October 1, 2002,
with no admission of liability on our part. This settlement agreement has been
signed and the $25,000 was paid during September 2002.
On December 17, 2001, Vision Management Consulting, L.L.C., filed suit
against us in the Superior Court of New Jersey, Law Division - Essex County, in
an action entitled Vision Management Consulting, L.L.C. v. Medix Resources,
Inc., Docket No. ESX-L-11438-01. The complaint filed by Vision alleged breach of
contract, unjust enrichment, breach of the duty of good faith and fair dealing
and misrepresentation on the part of Medix in connection with our performance
under a negotiated settlement agreement which we had entered into to resolve
certain claims that existed between the parties and that arose out of the
termination of operations of our Automated Design Concepts division earlier in
2001. On August 12, 2002, we reached an agreement in principle with Vision to
settle this litigation by payment from us to Vision of $55,000, to be paid over
the next three months, with no admission of liability on our part. The
settlement agreement has been signed and the full $55,000 was paid in 2002 in
compliance with the settlement.
A party has notified us 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The following matters were submitted to our shareholders at the 2002 Annual
Meeting of Shareholders held on October 8, 2002:
Proposal #1 Election of Directors For Withheld
--------------------- --- --------
Mr. Samuel H. Havens 52,420,897 3,376,780
Mr. Guy L. Scalzi 52,420,897 3,376,780
Patrick W. Jeffries', Joan E. Herman's, Darryl R. Cohen's, John T. Lane's and
David B. Skinner's respective terms as directors did not expire during 2002 and
each continued to serve as a director following the October 8, 2002 meeting. Mr.
Skinner died in January 2003 and Mr. Lane resigned from the Board in February
2003.
Proposal # 2 Approval of the proposed amendment to the Company's Articles of
Incorporation to increase the number of shares of the Company's Common Stock
authorized for issuance from 100 million to 125 million.
For Against Abstained
--- ------- ---------
52,130,969 3,193,726 472,982
Proposal #3 Ratification of the appointment of Ehrhardt Keefe Steiner & Hottman
PC, independent public accountants, to audit the financial statements of the
Company for the fiscal year ended December 31, 2002.
For Against Abstained
--- ------- ---------
51,191,307 3,400,113 1,206,257
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 time, our common
stock was traded on the OTC Bulletin Board under the symbol "MDIX." The
following table shows high and low sale prices for each quarter in the last two
calendar years as reported by the American Stock Exchange. On March 14, 2003,
the last sales price reported on the American Stock Exchange was $0.40.
Common Stock Price
----------------------
High Low
----------------------
2002
First Quarter $0.91 $0.47
Second Quarter 0.62 0.27
Third Quarter 0.62 0.31
Fourth Quarter 0.94 0.48
2001
First Quarter $1.62 $0.52
Second Quarter 1.49 0.41
Third Quarter 1.36 0.50
Fourth Quarter 1.09 0.49
There were approximately 500 holders of record (and approximately 9,000
beneficial owners) of our common stock as of March 14, 2003. The number of
record holders includes shareholders who may hold stock for the benefit of
others.
We did not declare or pay a dividend for the years ending December 31, 2002
or December 31, 2001 and do not expect to pay any dividends on our common stock
in the foreseeable future. We currently intend to retain all available funds for
the development of our business and for use as working capital. The payment of
dividends on our common stock is subject to our prior payment of all accrued and
unpaid dividends on any preferred stock outstanding.
Equity Compensation Plan Information
The following table provides information about compensation plans
(including individual compensation arrangements) under which our equity
securities are authorized for issuance to employees or non-employees (such as
directors and consultants), as of December 31, 2002:
Plan Category
Number of Number of securities
securities to be remaining available for
issued upon future issuance under
exercise of Weighted-average equity compensation
outstanding exercise price of plans (exluding)
options, warrants outstanding options, securities reflected in
and rights warrants and rights column (a))
(a) (b) (c)
------------------ --------------------- ------------------------
Equity 9,340,000 $1.11 505,000
compensation plans
approved by
security holders
o 1999 Stock
Option Plan
Equity 10,955,777 $0.63 -
compensation plans
not approved by
security holders
---------- ------ ---------
Total 20,295,777 $0.85 505,000
========== ====== =========
Recent Sales of Unregistered Securities
From October 2002 through February 2003, in private placements, the Company
sold to accredited investors 10,151,250 shares of its common stock and warrants
covering 10,151,250 shares of common stock for aggregate proceeds of $4,060,500.
In addition, from January 2003 through February 2003, the Company issued
warrants covering 960,966 shares of common stock to accredited investors who are
finders who assisted the Company in the private placements and to consultants
who provided services to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data, at the end of and for
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 that 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.
2002 2001 2000 (1) 1999 1998 (2)
------------ ------------ -------------- -------------- -------------
Operating revenues $ 0 $29,000 $326,000 $24,000 $17,412,000
Software and technology
costs 2,366,000 1,288,000 865,000 596,000 780,000
(Loss) or profit from
continuing operations (9,014,000) (10,636,000) (6,344,000) (5,422,000) (515,000)
(Loss) or profit from
continuing operations per
share (0.14) (0.21) (0.15) (0.29) (0.15)
Total Assets 3,793,000 3,101,000 5,089,000 4,629,000 5,175,000
Working Capital (252,000) (1,404,000) 394,000 644,000 (2,612,000)
Long Term Obligations - - - 400,000 -
Stockholder's Equity
(Deficit) 1,618,000 1,345,000 4,202,000 2,376,000 (218,000)
The following supplemental information is related to software development
expenses.
Software Development Costs: 2002 2001 2000 (1) 1999 1998 (2)
------------ ------------ -------------- -------------- -------------
Software research and
development
costs (3) $691,000 $1,075,000 $685,000 $596,000 $780,000
Capitalized software
development costs 633,000 434,000 495,000 - -
Total Software Development
Costs incurred 1,324,000 1,509,000 1,180,000 596,000 780,000
- -----------------------
(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
and license fees and impairment write-off of capitalized costs included in
software costs in the Company's Statement of Operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Overview
Currently, we develop and market healthcare communication technology
products. Our technologies are designed to provide connectivity of medical
related information between POCs and HVCIs. Our products are designed to improve
the accuracy and the efficiency of the processes of prescribing medications and
the ordering of laboratory tests and the receiving of laboratory results.
Our current financial condition is a direct result of the efforts to
develop a commercially viable healthcare connectivity business.
Critical Accounting Policies
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results.
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ significantly from those estimates under different
assumptions and conditions. We believe that the following discussion addresses
our most critical accounting policies, which are those that are most important
to the portrayal of our financial condition and results of operations and
require our most difficult, subjective, and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
Revenue Recognition
Our policy is to recognize revenue when the communication transaction has
been completed by the customer, persuasive evidence of the terms of the
arrangement exist, our fee is fixed and determinable, and collectibility is
reasonably assured. Our plan is that delivery will take place electronically
when the customer has completed the exchange (transmission or receipt) of data
or as monthly service is provided. Revenue will be charged to the customer on a
per transaction basis as each transaction is completed or as monthly
subscription services are provided and are billed monthly.
Valuation of Goodwill
In accordance with SFAS No. 142 we no longer amortize goodwill, but rather
perform an annual assessment as to whether any impairment has occurred. We also
assess the impairment of goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important that could trigger an impairment review include the following:
o significant under-performance relative to expected historical or
projected future operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
We determine whether the carrying value of goodwill may not be recoverable
annually and more frequently based upon events and circumstances including the
existence of one or more of the above indicators of impairment. We determine
whether impairment has occurred by first, comparing the fair value of our only
reporting unit to the carrying value of the reporting unit. If the fair value of
the reporting unit is less than the carrying value of the net assets, then the
second step is to initially determine the fair value of the net assets in the
reporting unit exclusive of goodwill, and record any necessary impairment of
assets other than goodwill in accordance with SFAS No. 144 or other applicable
standards. The difference in the fair value of the individual net assets
exclusive of goodwill and the reporting unit results in the implied value of
goodwill. The implied value of goodwill is compared to its carrying value and
the difference is recorded as an impairment charge, if necessary. We performed
our annual evaluation of goodwill and the fair value of the reporting unit
exceeded its carrying value, therefore, no impairment of goodwill existed. Net
goodwill amounted to $1.6 million as of December 31, 2002.
Software and Technology Costs
We capitalize costs, which primarily include salaries in connection with
developing software for internal use. We use judgment in determining whether
development costs meet the criteria for immediate expense or capitalization.
Direct costs incurred in the development of software are capitalized once the
preliminary project stage is completed, management has committed to funding the
project, and completion and use of the software for its intended purpose are
probable. We cease capitalization of development costs once the software has
been substantially completed and is ready for its intended use. We capitalized
$633,000, $434,000 and $495,000 of costs during the years ended December 31,
2002, 2001 and 2000, respectively. The software development costs capitalized
were amortized over the estimated useful life of the software, which was
estimated to be five years. Amortization expense was $216,000, $156,000 and
$134,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Included in software costs are those costs associated with software
research and development efforts that have not been capitalized under SOP 98-1.
Software research and development costs totaled $691,000, $1,075,000 and
$685,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Software costs also include the amortization of capitalized software costs
and license fees paid to service providers, which totaled $609,000, $213,000 and
$180,000 for the years, ended December 31, 2002, 2001 and 2000, respectively.
Uncertainties regarding future cash flows did not support the carrying
value of those costs at December 31, 2002. In accordance with SFAS No. 144 , the
Company wrote-off the remaining $1,066,000 of previously capitalized net costs
during the forth quarter of 2002. Future performance will be enhanced with the
acquisition of assets formerly used by e-Physician, the merger of the acquired
technologies with the Cymedix technologies and the implementation of the revised
business strategies.
While the Company's business model has changed potentially affecting the
Company's anticipated near term future operating results, the Company believes
its modified plan continues to rely on the same technology that was acquired
from Cymedix in 1998. Accordingly, management does not believe an impairment of
goodwill has occurred and it continues to have a viable long-term strategy that
is supported by its current market capitalization at December 31, 2002, which
supports the fair value of its only reporting unit.
Results of Operation
Comparison of years ended December 31, 2002 and December 31, 2001
At present we are not receiving revenue from the sale of our products. In
2001, we recognized $29,000 in revenue primarily from the sales of ADC Hardware,
a product that we no longer sell.
Software and technology costs of $2,366,000 were incurred in 2002, an
increase of $1,078,000 compared to $1,288,000 for 2001. The increase is
primarily related to the write-off of $1,066,000 of previously capitalized net
software development costs for which recoverability became uncertain due to
uncertainty in future cash flows. The increase also reflects additional license
costs incurred in 2002 of $336,000 over 2001 due to added infrastructure to
support our transaction service capabilities in 2002 as we placed a major focus
on deployment of our technologies with PBMs during the first three quarters of
2002. Amortization of capitalized software development costs increased $60,000,
while research and development costs decreased by $384,000 due to increased
capitalization of costs associated with active projects in 2002.
Selling, general and administrative expenses increased $166,000 or 3% from
$5,746,000 in 2001 to $5,912,000 in 2002. The increase is primarily attributable
to $374,000 of leasehold abandonment costs incurred in 2002 due to the closure
of our California and Georgia offices, offset by a reduction in outside
consulting fees.
During 2001, we recorded impairment expense of $1,111,000 resulting from
the discontinuance of our Automated Design Concepts division which totaled
$443,000, to focus staff resources on our primary technology, and the
cancellation of our Zirmed license totaling $668,000 which was a result of
management's assessment that our needs would be better served by superior
technology. There were no comparable expenses in 2002.
Interest expense decreased by $28,000 due to a decrease in the amount of
debt financing we had outstanding in 2002 compared to 2001. Additionally,
financing costs decreased in 2002 by $2,124,000 as we obtained most of our
financing through the direct sale of equity securities compared to 2001 when,
(1) shares were issued for conversions and redemptions under the convertible
notes payable credit facility at modified conversion prices resulting in
financing costs of $1,286,000, (2) shares were issued in private placements in
connection with our note payable credit facility at below market prices
resulting in financing costs of $448,000 and (3) warrants valued at $415,000,
were issued in connection with private placements of common stock in connection
with our note payable credit facility.
During 2002, we disposed of certain fixed assets that resulted in a loss of
$69,000. We did not have any of these disposals in 2001.
Net loss improved approximately $1,622,000 from $10,636,000 in 2001 to
$9,014,000 in 2002 due to the reasons discussed above.
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.
Software and technology costs increased $423,000 or approximately 49% from
$865,000 in 2000 to $1,288,000 in 2000, as a result of increased personnel 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, we recorded impairment expense of $1,111,000 resulting from
the discontinuance of our Automated Design Concepts division which totaled
$443,000, to focus staff resources on our primary technology, and the
cancellation of our Zirmed license totaling $668,000 which was a result of
management's assessment that our 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.
Liquidity and Capital Resources
We had $1,369,000 in cash as of December 31, 2002 compared to $8,000 in
cash as of December 31, 2001 and $1,007,000 as of December 31, 2000. Net working
capital reflected a deficit of ($252,000) as of December 31, 2002, compared to a
deficit of ($1,404,000) at December 31, 2001 and a surplus of $394,000 as of
December 31, 2000.
During 2002, net cash used in operating activities was $5,469,000 compared
to $5,397,000 in 2001. During 2002, we raised $5,125,000 from private placements
of our common stock net of offering costs, $1,000,000 from the issuance of a
convertible debenture, $972,000 from our equity line of credit net of offering
costs and $817,000 from exercise of options and warrants. 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. Our equity line of credit was terminated in
August 2002.
We are funding our operations now through the sale of our securities. There
can be no assurance that additional investments or financings will be available
to us on favorable terms or at all as needed to support the development and
deployment of the Merged Technology. Failure to obtain such capital on a timely
basis could result in lost business opportunities, the sale of the Merged
Technology at a distressed price or the financial failure of our company.
Impacts of Accounting Standards
In June 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 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 August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 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 in 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 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, are to be applied
prospectively. The Company believes that the adoption of this statement will
have no material impact on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44
and 64, Amendment of FASB No. 13, and Technical Corrections." SFAS No. 145
rescinds FASB No. 4 "Reporting Gains and Losses from Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS
No. 44 "Accounting for Intangible Assets of Motor Carriers" and amends SFAS No.
13, "Accounting for Leases." This statement is effective for fiscal years
beginning after May 15, 2002. The Company believes the adoption of this
statement will have no material impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value when the liability is incurred.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002, with early application encouraged. The Company believes
the adoption of this statement will have no material impact on its consolidated
financial statements.
In November 2002, the FASB published interpretation No, 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, that company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company believes the adoption of this statement will have no material
impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure provision of SFAS 123 to require more prominent disclosure about the
effects of an entity's accounting policy decisions with respect to stock-based
employee compensation on reported net income. The effective date for this
Statement is for fiscal years ended after December 15, 2002. The adoption of
this statement did not have a material effect on the consolidated financial
statements as the Company continues to account for stock based compensation
under the intrinsic value approach, and follows the pro-forma disclosure
requirements of SFAS No. 123, as amended by SFAS No 148.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do 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 Annual Report on 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 March 14, 2003, and their
biographical information are set forth below:
- ----------------------------------------------------------------------------------
Name Age Position Director or
Officer Since
- ----------------------------------------------------------------------------------
Darryl R. Cohen (3) 50 President, Chief Executive 2002
Officer and a Director
- ----------------------------------------------------------------------------------
Louis E. Hyman 35 Executive Vice President and 2001
Chief Technology Officer
- ----------------------------------------------------------------------------------
James Q. Gamble 52 Executive Vice President for 2002
Operations
- ----------------------------------------------------------------------------------
Mark W. Lerner 49 Executive Vice President and 2002
Chief Financial Officer
- ----------------------------------------------------------------------------------
Brian R. Ellacott 46 Senior Vice President of 2000
Corporate Development
- ----------------------------------------------------------------------------------
Patrick W. Jeffries (1)(3) 50 Director; Chairman of 2001
the Board and Chair of the
Finance Committee
- ----------------------------------------------------------------------------------
Samuel H. Havens (2)(4) 59 Director and Chair of the 1999
Nominating Committee
- ----------------------------------------------------------------------------------
Joan E. Herman (1)(2) 49 Director and Chair of the 2000
Audit Committee
- ----------------------------------------------------------------------------------
Guy L. Scalzi (1)(2)(4) 56 Director and Chair of the 2001
Compensation Committee
- --------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Finance Committee
(4) Member of Nominating Committee
All of our executive officers devote full-time to our business and affairs.
Biographical information on each current executive officer and director is
set forth below.
Biographical Information
Darryl R. Cohen. Mr. Cohen joined Medix in September 2002 as President and Chief
Executive Officer. His support for Medix began in 1999 as both a shareholder and
strategic advisor. As an investor in private and public companies, Mr. Cohen
frequently works with the management of the companies in which he is invested,
assisting them in the areas of marketing strategy and financing efforts. Mr.
Cohen was President of DCNL Incorporated, a privately held beauty supply
manufacturer and distributor he founded in 1988 and sold to Helen of Troy in
1998. During his tenure as President of DCNL, Mr. Cohen was also co-owner and
President of Basics Beauty Supply Stores. The innovative business building
strategies developed by Mr. Cohen not only launched DCNL to success, but have
become standard practice in a variety of industries to create effective
marketing and distribution channels. Since the sale of DCNL, he has remained
active as a co-owner of a financial services advisory firm, Omni Financial,
providing financial restructuring services for individuals. Mr. Cohen is also a
member of the Board of Directors of Access Marketing and consults for a major
media company in the cable television market. Mr. Cohen holds a BA in Political
Science from the University of California at Berkeley.
Louis E. Hyman. Mr. Hyman joined Medix in May 2001 as Executive Vice President
and Chief Technology Officer. He was a consultant to the Company, serving as
interim Chief Technology Officer from March 2001 until May 2001. 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 its profitability. He graduated Summa Cum Laude from St. John's
University where he earned a B.S. degree in Computer Science.
James Q. Gamble. Mr. Gamble joined Medix in December 2002 as Executive Vice
President Operations. Prior to joining Medix, Mr. Gamble was with Perot Systems
where he served as the Director of Consulting. Mr. Gamble was with Perot Systems
from 1999 to 2002. At Perot Systems, he managed the Healthcare Payer Consulting
team in the creation and implementation of creative business solutions for
health plans. Additionally, Mr. Gamble managed a corporate turnaround and
numerous business re-engineering projects at Harvard Pilgrim Healthcare, a major
regional health plan, from 1999 to 2001, where he served as a member of the
Executive Turnaround Steering Committee. Previously, Mr. Gamble was a Senior
Director at Alamo Rent-A-Car from 1980 to 1999, responsible for the development
and implementation of corporate strategic planning initiatives as well as a
variety of other executive operations positions. Mr. Gamble holds a BBA in
Business Administration from the University of Georgia.
Mark W. Lerner. Mr. Lerner joined Medix in July 2002 as Chief Financial Officer.
Prior to joining Medix, Mr. Lerner was with Boardroom, Inc., a direct marketing
company located in Greenwich, Connecticut, where he served as Vice President in
charge of Finance Operations and Development. Mr. Lerner was at Boardroom, Inc.
from December 2000 to June 2002. Prior to Boardroom Inc., Mr. Lerner served as
the Senior Vice President in charge of eCommerce for Weinstein & Holtzman, Inc.
from 1998 to 2000 and as Vice President and CFO for The Thompson Corporation's
Science & Professional Division from 1993 to 1998 and as well as a variety of
executive positions within Pfizer Inc. Mr. Lerner holds a BS degree in Finance
from Miami University, Ohio and an MBA in Finance from Emory University. He is
also a graduate of Columbia University's Executive Program.
Brian R. Ellacott. Mr. Ellacott joined Medix in March 2000 as Senior Vice
President of Business Development. In mid-2001, Mr. Ellacott was appointed as
the Division CEO for Southeast Region Markets for the Company. Prior to joining
Medix, Mr. Ellacott served as president of Cosmetic Surgery Consultants from
November 1998 until March 2000. From 1996 to 1998 he was executive vice
president of Alignis Inc., an alternative healthcare PPO. Before that, he was
President of 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).
Patrick W. Jeffries. Mr. Jeffries joined Medix as a director in 2001. In 1997,
Mr. Jeffries founded, and since that time has served as the President of, the
predecessor company of Health Technology Partners, L.L.C., a privately-held
provider of investment guidance, CEO- and Board-level counseling, and management
consulting services. Mr. Jeffries also served as the CEO and Chairman of the
Board of OpTx Corporation in 1997 and 1998. From December 1995 to July 1997, he
was Executive Vice President of Salick Health Care, Inc., a publicly-traded
company that managed 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.
Samuel H. Havens. Mr. Havens joined Medix as a director in 1999. 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. Mt. 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 an AB degree
from Hamilton College.
Joan E. Herman. Ms. Herman joined Medix as a director in 2000. Ms. Herman is the
President of WellPoint's Senior, Specialty, and State Sponsored Programs
division and is responsible for its 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.
Guy L. Scalzi. Mr. Scalzi joined Medix as a director in 2001. 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.
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 2002, except for Samuel H. Havens, John T. Lane (a former director),
Patrick W. Jeffries and James Q. Gamble, for each of whom one Form 4 and in the
case of Mr. Gamble one Form 3 inadvertently was filed late, and David Skinner, a
former director who died prior to a Form 5 filing date, and Gary Smith a former
executive officer who failed to file a Form 5 after his termination of
employment.
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, 2002, awarded or paid to, or earned by our Chief
Executive Officer ("CEO"), the former executive officer who served as such
during 2002, the three other most highly compensated officers who were serving
as such at December 31, 2002 (the "Named Officers") and two additional executive
officers who would otherwise have been included had they remained executive
officers at December 31, 2002.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
-------------------------------------------- ----------------
Securities
Name and Other Annual Underlying
Principal Position Year Salary Bonus Compensation Options (Shares)
- -----------------------------------------------------------------------------------------
Darryl R. Cohen
President and
CEO (2) 2002 $124,135(2) - - 2,220,000
John Prufeta
CEO (former)
(3) 2002 $200,137 - -
2001 $114,000 - - 425,000
Louis E. Hyman
Executive Vice
President
And Chief
Technology
Officer (4) 2002 $220,096 - - 125,000
2001 $156,625(4) - - 250,000
Mark W. Lerner
Executive Vice
President and
Chief
Financial
Officer (5) 2002 $107,481 - - 275,000
Brian R.
Ellacott
Senior Vice
President 2002 $185,032 - - 50,000
2001 $165,000 - - 175,000
2000 $125,769 - - 150,000
Patricia
Minicucci
Chief
Operating
Officer
(former) (6) 2002 $228,363 - -
2001 $197,000 - - 175,000
Gary Smith
Chief
Financial
Officer
(former) (7) 2002 $140,844 - -
2001 $197,000 - - 175,000
(1) Other annual compensation 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) Mr. Cohen joined the Company as CEO in September 2002. During 2002,
Mr. Cohen served as a consultant to the Company from June through
September. The $124,135 includes the consulting compensation paid to
Mr. Cohen. He was not employed by the Company in 2001 or 2000.
(3) Mr. Prufeta's employment with the Company was terminated in September
2002. Mr. Prufeta received $ 7,150 from the Company following his
termination pursuant to a Separation Agreement and General Release,
which amount is included in his $200,137 compensation for 2002.
(4) During 2001, Mr. Hyman, through an affiliated entity, served as a
consultant to the Company before he became a full time employee and
executive officer in May 2001. The $156,625 includes the consulting
compensation paid to Mr. Hyman's firm. Mr. Hyman also received a grant
of options to purchase 20,000 shares for his consulting services,
which are included in the 250,000 options granted in 2001. He was not
employed by the Company in 2000.
(5) Mr. Lerner joined the Company as CFO in July 2002. He was not employed
by the Company in 2001 or 2000.
(6) Ms. Minicucci's employment with the Company was terminated in October
2002. Ms. Minicucci received $46,800 from the Company following her
termination pursuant to a Separation Agreement and General Release,
which amount is included in her $228,363 compensation for 2002.
(7) Mr. Smith's employment with the Company was terminated in July 1,
2002.
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 various statutory requirements. 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
total amount of shares of our common stock reserved for issuance under the 1999
Plan.
As of March 14, 2003, we had issued 6,197,260 shares of our common stock upon
exercise of options to current or former employees and directors, and have
10,555,000 shares currently covered by outstanding options held by current or
former employees and directors, with exercise prices ranging form $.25 to $4.97.
Such options have been granted under the 1999 Plan and earlier stock option
plans.
Option information for fiscal 2002 relating to the Named Officers is set
forth below:
Options Granted in 2002
- ---------------------------------------------------------------------------------------
Percentage of
Total Options Valuation
Granted to under Black-
Share Employees in Exercise Expiration Scholes Pricing
Name Granted 2002 Price Date Method (1)
- ---------------------------------------------------------------------------------------
Darryl Cohen 2,220,000 62.9% $0.69 11-20-2007 1,367,042
Brian
Ellacott 50,000 1.4% $0.59 3-8-2007 22,141
Mark W.
Lerner 275,000 7.8% $0.38 7-1-2007 78,430
Louis Hyman 125,000 3.5% $0.70 3-8-2007 53,633
- ----------------
(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 95%, a risk-free rate of 5.5%, no dividend yield and anticipated exercise at
the end of the term.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of shares underlying Value of Unexercised in-the-
Unexercised Options at Year-End Money Options at Year-End(1)
Shares Value ------------------------------- -----------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------
Darryl Cohen 0 0 780,000 1,440,000 $39,000 $72,000
Mark W.
Lerner 0 0 78,125 196,875 $28,125 $70,875
Brian
Ellacott 0 0 350,000 25,000 $26,750 $3,750
Louis Hyman 0 0 285,000 90,000 $29,625 $6,075
- ------------------
(1) The dollar values are calculated by determining the difference between
$0.74 per share, the fair market value of the Common Stock at December
31, 2002, and the exercise price of the respective options.
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. Cohen has an Employment Agreement with the Company, which has a term of
one year, ending on September 24, 2003. The agreement provides that he will be
compensated at a salary of $175,000 annually. He holds the position of President
and Chief Executive Officer, and reports to the Chairman of the Board. In
addition, Mr. Cohen serves as a member of the Board of Directors. Pursuant to
his Employment Agreement, he has been granted options to purchase 780,000 shares
of common stock at price of $0.69 per share, all of which vested upon execution
of the agreement. An additional 1,440,000 options to purchase shares of common
stock also at a price of $0.69 per share were granted under the Employment
Agreement and vest upon the achievement of milestones fully described in the
agreement. The Employment Agreement provides that, upon the occurrence of a
Change in Control of the Company, all Options and Additional Options described
in the Employment Agreement shall be deemed fully vested and exercisable upon
the effective date of the Change in Control Mr. Cohen's Employment Agreement is
terminable by either the Company or Mr. Cohen for any reason on sixty days
notice.
Mr. Gamble has an Employment Agreement with the Company, which has a term
of one year, ending on December 9, 2003, and is renewable for additional
one-year terms. The agreement provides that he will be compensated at a salary
of $175,000 annually. He holds the position of Executive Vice President and
Chief Operating Officer, and reports to the President and CEO. Pursuant to his
Employment Agreement, he has been granted options to purchase 300,000 shares of
common stock at a price of $0.68 per share, of which 75,000 vested upon
execution of the agreement with the remainder vesting equally over the next
three quarters (April 1, July 1 and October 1, 2003), and an additional 150,000
options to purchase shares were granted under the Employment Agreement and vest
upon the achievement of milestones fully described in the 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 a period which is the lesser of
three months or the period from the effective date of termination to the last
day of the Initial Term (as defined in the Employment Agreement). 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.
Mr. Hyman has an Employment Agreement with the Company, which has a term of
one year, ending on May 14, 2003, and is renewable for additional one year
terms. The agreement provides that he will be compensated at a salary of
$225,000 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 125,000 shares of
common stock at a price of $.70 per share, which vested 50% on September 8, 2002
and the remainder on March 8, 2003. 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 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 has an Employment Agreement with the Company, which has a term
of one year, ending on May 1, 2003, and is renewable for additional one-year
terms. The agreement provides that he will be compensated at a salary of
$180,000 annually. He holds the position of 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
50,000 shares of common stock at a price of $0.59 per share, which vested in
equal parts on September 8, 2002 and March 8, 2003. 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. 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. Lerner has an Employment Agreement with the Company, which has a term
of one year, ending on July 1, 2003, and is renewable for additional one year
terms. The agreement provides that he will be compensated at a salary of
$207,000 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 275,000 shares of
Common Stock at a price of $.38 per share, of which 50,000 vested immediately
and the remaining 225,000 vest in equal quarterly increments over the next eight
calendar quarters. 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 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.
Director Compensation
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. On January 22, 2002, each Director, other than 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, on the date of grant,
provided that the Director remains on the Board of the Company.
In November 2002, the following options, each with an exercise price of
$0.69, were granted;
1. To Mr. Havens and Mr. Scalzi options to purchase 120,000 shares of
common stock vesting September 1, 2003, provided that the Director
remains on the Board of the Company.
2. To Mr. Cohen, as part of his employment agreement, options to purchase
Shares of
Common Stock Vesting
------------ -------
780,000 Immediately
240,000 4-1-03 if still a Board Member
240,000 10-1-03 if still a Board Member
480,000 Upon achieving $5,000,000 in financing
480,000 Upon achieving $500,000 in monthly revenue
3. To Mr. Jeffries, Chairman of the Board, options to purchase
Shares of
Common Stock Vesting
------------ -------
520,000 Immediately
120,000 4-1-03 if still a Board Member
120,000 10-1-03 if still a Board Member
240,000 Upon achieving $5,000,000 in financing
240,000 Upon achieving $500,000 in monthly revenue
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. This agreement concludes
April 2003. Mr. Havens has deferred his monthly payment since April 2001. During
2002, we paid Mr. Havens $20,000 for his services and as of March 14, 2003 we
owed Mr. Havens $85,000 under this agreement, which amount will be paid 50% in
cash and the remainder in options to acquire our common stock.
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 a purchase
price of $1.75 per share. At March 15, 2003, 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, which note was converted into 2,405,216 shares of our common stock
in 2002. In addition, Mr. Jeffries, who became a director of Medix in 2001, was
a consultant to WellPoint Health Networks.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 14, 2003 by (i) each person known by
us to own beneficially more than 5% of the outstanding shares of our common
stock (ii) each director, named executive officer and (iii) all executive
officers and directors as a group. On such date, we had 80,917,065 shares of
common stock outstanding. Shares not outstanding but deemed beneficially 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.
Number of Shares Percentage of Class
---------------- -------------------
Darryl R. Cohen (1) (2) 2,688,320 3.1%
420 Lexington Avenue, Suite 1830
New York, NY 10170
Patrick W. Jeffries (2) 1,635,000 1.9%
15332 Antioch Street, Suite 320
Pacific Palisades, CA 90272
Joan E. Herman (2) (3) None *
One WellPoint Way
Thousand Oaks, CA 91362
Guy L. Scalzi (2) 240,000 *
First Consulting Group
405 Lexington Avenue, 37th Floor
New York, NY 10174
Samuel H. Havens (2) 290,000 *
58 Winged Foot Drive
Livingston, NJ
Mark W. Lerner (2) 184,375 *
420 Lexington Avenue, Suite 1830
New York, NY 10170
Louis E. Hyman (2) 475,000 *
420 Lexington Avenue, Suite 1830
New York, NY 10170
Brian R. Ellacott (2) 425,000 *
101 Villager Parkway, Building 1
Marietta, Georgia 30067
James Q. Gamble (2) 150,000 *
101 Villager Parkway, Building 1
Marietta, Georgia 30067
All Directors and Officers as a 7.1%
group (9) 6,087,695
* Less than 1% of outstanding shares
- --------------------
(1) Mr. Cohen disclaims beneficial ownership of 67,950 of these shares held
in trust for his minor children
(2) Represents shares of common stock available upon the exercise of
outstanding options.
(3) 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.
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. This agreement concludes
April 2003. Mr. Havens has deferred his monthly payment since April 2001. During
2002, we paid Mr. Havens $20,000 for his services and as of March 14, 2003 we
owed Mr. Havens $85,000 under this agreement, which amount will be paid 50% in
cash and the remainder in options to acquire our common stock.
See "EXECUTIVE COMPENSATION - Compensation Committee Interlocks and Insider
Participation" for a description of other related party transactions.
ITEM 14 CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
been no significant changes in our internal controls or in other factors that
could significantly affect internal controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
(1) Financial Statements
See Financial Statements included after the signature page beginning
at page F-1.
(2) Financial statement schedules
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or the
notes thereto.
(3) List of Exhibits
See Index to Exhibits in paragraph (c) below.
(b) Reports on Form 8-K. The Company filed four reports on Form 8-K during
the last quarter of 2002 as follows:
1. Report filed with the SEC on October 11, 2002, reporting under Item 5, the
issuance of a press release respecting the conversion of debt into equity.
2. Report filed with the SEC on October 16, 2002, reporting under Item 5, the
issuance of a press release respecting the results from Medix's October 8,
2002 shareholder meeting.
3. Report filed with the SEC on November 1, 2002, reporting under Item 5, the
issuance of a press release respecting the execution of a letter of intent to
merge with PocketScript, LLC.
4. Report filed with the SEC on December 23, 2002, reporting under Item 5,
the issuance of a press release respecting the execution of a definitive
agreement to acquire PocketScript, LLC.
(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.
3.1.17 Articles of Amendment of Articles of Incorporation increasing the
authorized capital of the Company filed on October 14, 2002, the
Secretary of State of the State of Colorado.*
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 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.
4.4 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.
4.5 Form of Warrant issued with the 2002 private placement of stock with
warrants.*
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.
10.1.5 Form of non-plan Option Agreement issued to five Directors on
November 20, 2002*
10.2 Employment Agreement between the Company and Mr. Darryl R. Cohen,
dated as of September 25, 2002.*
10.3 Employment Agreement between the Company and Mr. James Q. Gamble,
dated as of December 9, 2002*
10.4 Employment Agreement between the Company and Mr. Mark W. Lerner,
dated as of July 1, 2002, incorporated by reference to Exhibit 10.3
to the Company's Form 10-Q, filed with the SEC on August 20, 2002.
10.5 Employment Agreement between the Company and Louis E. Hyman dated as
of May 14, 2002, incorporated by reference to Exhibit 10.5 to the
Company's Form 10-Q, filed with the SEC on August 20, 2002.
10.6 Employment Agreement between the Company and Bryan R. Ellacott dated
as of March 1, 2002, incorporated by reference to Exhibit 10.6 to the
Company's Form 10-Q, filed with the SEC on August 20, 2002.
10.7 Employment Agreement between the Company and Mr. John R. Prufeta,
dated as of February 1, 2002, incorporated by reference to Exhibit
10.5 to the Company's Form 10-K filed with the SEC on March 31, 2002.
10.8 Separation Agreement between the Company and Mr. John R. Prufeta,
dated December 20, 2002*
10.9 Employment Agreement between the Company and Patricia A. Minicucci
dated as of February 15, 2002, incorporated by reference to Exhibit
10.4 to the Company's Form 10-Q, filed with the SEC on August 20,
2002.
10.10 Separation Agreement between the Company and Ms. Patricia Minicucci,
dated December 12, 2002. *
10.11 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.
10.12 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.
10.13 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.
10.14 Registration Rights Agreement, dated as of December 29, 2000,
between RoyCap Inc. and Medix Resources, Inc. incorporated by
reference to Exhibit 10.3 to the Company's Form S-2 Registration
Statement filed with the SEC on January 29, 2001.
10.15 Warrant Agreement, dated as of December 29, 2000, between RoyCap
Inc. and Medix Resources, Inc., incorporated by reference to Exhibit
10.4 to the Company's Form S-2 Registration Statement filed with the
SEC on January 29, 2001.
10.16 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.
10.17 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.
10.18 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)
10.19 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
10.20 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 10.1 to the Company's Form 10-Q filed with the
SEC on August 20, 2002.
10.21 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 10.2 to the
Company's Form 10-Q filed with the SEC on August 20, 2002.
10.22 Registration Rights Agreement, dated March 4, 2003, between T3
Group, LLC and Medix.*
10.23 Asset Purchase Agreement among Medix, Comdisco Ventures, Inc. and T3
Group, LLC, dated March 4, 2003.*
10.24 Lease between SLG Graybar Sublease, LLC and the Company, dated
January 17, 2002 for the Company's principal executive office,
incorporated by reference to Exhibit 10.25 to the Company's Form 10-K
filed with the SEC on March 31, 2002.
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 February 14, 2003, appearing elsewhere
in this From 10-K into the Company's Registration Statements on Form
S-3 (Reg. No. 333-32308, 333-85483 and 333-100650) and Registration
Statements on Form S-8 (Reg. No. 333-31684, 333-57558 and 333-73578).*
99.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
99.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
- ----------------------
*Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDIX RESOURCES, INC.
By: /s/ Darryl R. Cohen
-------------------------------------
Darryl R. Cohen
President and Chief Executive Officer
Dated: March 22, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/Darryl R. Cohen President, Chief Executive March 22, 2003
__________________________ Officer and Director
Darryl R. Cohen (Principal Executive
Officer)
/s/Mark W. Lerner Executive Vice President, March 25, 2003
__________________________ Chief Financial Officer and
Mark W. Lerner Secretary (Principal
Financial and Accounting
Officer)
/s/Patrick W. Jeffries Director March 24, 2003
- --------------------------
Patrick W. Jeffries
/s/Joan E. Herman Director March 24, 2003
- --------------------------
Joan E. Herman
/s/ Guy L. Scalzi Director March 24, 2003
- --------------------------
Guy L. Scalzi
Certifications
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Darryl R. Cohen, certify that:
1. I have reviewed this annual report on Form 10-K of Medix Resources, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 22, 2003
/s/ Darryl R. Cohen
- ------------------------------
President and Chief Executive Officer
I, Mark W. Lerner, certify that:
1. I have reviewed this annual report on Form 10-K of Medix Resources, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
/s/ Mark W. Lerner
- ------------------------------
Executive Vice President
and Chief Financial Officer
MEDIX RESOURCES, INC.
Consolidated Financial Statements
and
Independent Auditors' Report
December 31, 2002 and 2001
MEDIX RESOURCES, INC.
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.
New York, NY
We have audited the accompanying consolidated balance sheets of Medix Resources,
Inc. and subsidiaries (the Company) as of December 31, 2002 and 2001, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. 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. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2002 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.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 14, 2003
Denver, Colorado
MEDIX RESOURCES, INC.
Consolidated Balance Sheets
December 31,
--------------------
2002 2001
-----------------------
Assets
Current assets
Cash .................................................... $ 1,369,000 $ 8,000
Stock subscription receivable ........................... 76,000 --
Prepaid expenses and other .............................. 478,000 344,000
------------ ------------
Total current assets ................................ 1,923,000 352,000
------------ ------------
Non-current assets
Software development costs, net ......................... -- 649,000
Property and equipment, net ............................. 265,000 365,000
Goodwill, net ........................................... 1,605,000 1,735,000
------------ ------------
Total non-current assets ............................ 1,870,000 2,749,000
------------ ------------
Total assets .............................................. $ 3,793,000 $ 3,101,000
============ ------------
Liabilities and Stockholders' Equity
Current liabilities
Notes payable ........................................... $ 175,000 $ 158,000
Accounts payable ........................................ 961,000 851,000
Accounts payable - related parties ...................... 130,000 166,000
Accrued expenses ........................................ 736,000 581,000
Deferred revenue ........................................ 173,000 --
------------ ------------
Total current liabilities ........................... 2,175,000 1,756,000
------------ ------------
Commitments and contingencies
Stockholders' equity
1996 Preferred stock, 10% cumulative convertible, $1
par value, 488 shares authorized, 155 shares 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,
zero and 50 shares outstanding, liquidation
preference $0 and $50,000 .............................. -- --
1999 Series C convertible stock, $1 par value, 2,000
shares authorized, 1,995 shares issued, 75 and 375
shares outstanding, liquidation preference $75,000
and $375,000 ........................................... -- --
Common stock, $.001 par value, 125,000,000 shares
authorized, 77,160,817 and 56,651,407 issued and
outstanding, respectively .............................. 77,000 56,000
Dividends payable with common stock ..................... 9,000 7,000
Additional paid-in capital .............................. 44,605,000 35,341,000
Accumulated deficit ..................................... (43,073,000) (34,059,000)
------------ ------------
Total stockholders' equity .......................... 1,618,000 1,345,000
------------ ------------
Total liabilities and stockholders' equity ................ $ 3,793,000 $ 3,101,000
============ ============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Operations
For the Years Ended
December 31,
------------------------------------------
2002 2001 2000
------------ ----------- -----------
Revenues ................................ $ -- $ 29,000 $ 326,000
Costs and expenses
Software and technology costs ......... 2,366,000 1,288,000 865,000
Selling, general and administrative
expenses ............................ 5,912,000 5,746,000 5,925,000
Costs associated with terminated
acquisition ......................... 309,000 -- --
Impairment of intangible assets ....... -- 1,111,000 --
------------ ----------- -----------
Total operating expenses .......... 8,587,000 8,145,000 6,790,000
------------ ----------- -----------
Other income (expense)
Other income .......................... 22,000 12,000 163,000
Interest expense ...................... (76,000) (104,000) (43,000)
Loss on disposal of assets ............ (69,000) -- --
Financing costs ....................... (304,000) (2,428,000) --
------------ ----------- -----------
Total other (expense) income ...... (427,000) (2,520,000) 120,000
------------ ----------- -----------
Loss from continuing operations ......... (9,014,000) (10,636,000) (6,344,000)
------------ ----------- -----------
Discontinued operations ................. -- -- 929,000
------------ ----------- -----------
Net loss ................................ (9,014,000) (10,636,000) (5,415,000)
Preferred stock dividends ............... -- -- (1,000)
------------ ----------- -----------
Net loss available to common stockholders $ (9,014,000) $(10,636,000) $(5,416,000)
============ =========== ===========
Basic and diluted weighted average
common shares outstanding .............. 63,417,283 50,740,356 41,445,345
============ =========== ===========
Basic and diluted loss per common share
- continuing operations ................ $ (0.14) $ (0.21) $ (0.15)
Basic and diluted income (loss) per
common share - discontinued operations . -- -- 0.02
------------ ----------- -----------
Basic and diluted loss per common share . $ (0.14) $ (0.21) $ (0.13)
============ =========== ===========
(Continued on following page.)
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Operations
(Continued from previous page.)
Had the Company adopted SFAS 142 as of January 1, 2000, the historical amounts
previously reported would have been adjusted to the following:
For the Years Ended
December 31,
------------------------------------------
2002 2001 2000
------------ ----------- -----------
Net loss as reported $ (9,014,000) $(10,636,000) $ (5,415,000)
Add back: Goodwill amortization - 209,000 205,000
------------ ----------- -----------
Adjusted net loss $ (9,014,000) $(10,427,000) $ (5,210,000)
============ =========== ===========
Basic and diluted loss per share as $ (0.14) $ (0.21) $ (0.15)
============ =========== ===========
reported
Goodwill amortization $ - $ - $ -
============ =========== ===========
Adjusted loss per share $ (0.14) $ (0.21) $ (0.15)
============ =========== ===========
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2002, 2001 and 2000
1999 Series 1999 Series 1999 Series Dividend Total
1996 Preferred Stock Preferred Stock 1997 A Preferred Stock B Preferred Stock C 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, 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
legal 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 and warrants
issued in legal
settlement ............... -- -- -- -- -- -- -- -- -- -- 90,000 -- 285,000 -- -- 285,000
Stock options and
warrants issued for
services ................. -- -- -- -- -- -- -- -- -- -- -- -- 145,000 -- -- 145,000
Net loss .................. -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (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 -- 1,345,000
Extension of warrant
exercise period .......... -- -- -- -- -- -- -- -- -- -- -- -- 58,000 -- -- 58,000
Exercise of options and
warrants ................. -- -- -- -- -- -- -- -- -- -- 1,746,975 2,000 815,000 -- -- 817,000
In the money conversion
feature issued with
convertible note
payable .................. -- -- -- -- -- -- -- -- -- -- -- -- 70,000 -- -- 70,000
Warrants issued in
satisfaction of
liability ................ -- -- -- -- -- -- -- -- -- -- -- -- 590,000 -- -- 590,000
Stock issued on
conversion of note
payable .................. -- -- -- -- -- -- -- -- -- -- 2,405,216 2,000 1,046,000 -- -- 1,048,000
Stock and warrants
issued in private
placements, net of
offering expenses of -- -- -- -- -- -- -- -- -- -- $13,702,500 14,000 5,187,000 -- -- 5,201,000
Preferred stock
conversions .............. -- -- -- -- -- -- (50) -- (300) -- 700,000 1,000 -- -- -- 1,000
Stock issued with
equity line, net of
offering costs of -- -- -- -- -- -- -- -- -- -- 1,954,719 2,000 970,000 -- -- 972,000
Stock options and
warrants issued for
consulting services ...... -- -- -- -- -- -- -- -- -- -- -- -- 260,000 -- -- 260,000
Stock options issued to
officer for financial
support .................. -- -- -- -- -- -- -- -- -- -- -- -- 132,000 -- -- 132,000
Fair value of option
vesting acceleration ..... -- -- -- -- -- -- -- -- -- -- -- -- 94,000 -- -- 94,000
Warrants issued to
officer for cash
advance made ............. -- -- -- -- -- -- -- -- -- -- -- -- 44,000 -- -- 44,000
Net loss .................. -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (9,014,000)
Dividends declared ........ -- -- -- -- -- -- -- -- -- -- -- -- (2,000) 2,000 -- --
------------ ------------- -------------- ------------ --------------- ------------- ---------- ----------- -------- ----------- ---------- ---------- ----------- ------------ ----------- -------------
Balance - December 31, 2002 1.00 $ -- -- $ -- -- $ -- $ -- $ -- -- $ -- $77,160,817 $77,000 $44,605,000 $9,000 $(43,073,000) $ 1,618,000
============ ============= ============== ============ =============== ============== ========== =========== ======== =========== ========== ========== =========== ============ =========== =============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities
Net loss ............................. $ (9,014,000) $(10,636,000) $ (5,415,000)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization ....... 343,000 488,000 426,000
Compensation expense relating to
stock options ..................... 94,000 -- --
Loss on disposal of assets .......... 69,000 -- --
Write-off of capitalized software
project costs ..................... 1,066,000 -- --
Impairment of intangible assets ..... -- 1,111,000 --
Financing costs ..................... 304,000 2,428,000 --
Common stock, options and warrants
issued for settlements ............. -- 149,000 --
Common stock, options and warrants
issued for services ................ 260,000 145,000 376,000
Warrants issued associated with
convertible debt .................. -- -- --
Gain on sale of staffing business ... -- -- (1,102,000)
Change in net assets of discontinued
operations ........................ -- -- 857,000
Changes in assets and liabilities
Accounts receivable, net .......... -- 49,000 (29,000)
Prepaid expenses and other ........ 238,000 (119,000) (49,000)
Accounts payable and accrued
liabilities ...................... 998,000 988,000 (237,000)
Deferred revenue .................. 173,000 -- --
------------ ------------ ------------
3,545,000 5,239,000 242,000
------------ ------------ ------------
Net cash used in operating
activities ...................... (5,469,000) (5,397,000) (5,173,000)
------------ ------------ ------------
Cash flows from investing activities
Proceeds from sale of divisions ...... -- -- 500,000
Software development costs incurred .. (633,000) (434,000) (495,000)
Purchase of property and equipment ... (96,000) (70,000) (400,000)
Purchase of software license ......... -- -- (720,000)
Proceeds from notes receivable ....... -- -- 500,000
Business acquisition costs, net of
cash acquired ....................... -- -- (94,000)
------------ ------------ ------------
Net cash used in investing
activities ...................... (729,000) (504,000) (709,000)
------------ ------------ ------------
Cash flows from financing activities
Proceeds from issuance of debt and
notes payable ....................... 1,000,000 1,824,000 178,000
Payments under financing agreement ... -- -- (484,000)
Principal payments on debt and notes
payable ............................. (355,000) (303,000) (125,000)
Issuance of preferred and common
stock, net of offering costs ........ 6,097,000 3,012,000 --
Proceeds from the exercise of options
and warrants ........................ 817,000 369,000 6,091,000
------------ ------------ ------------
Net cash provided by financing
activities ...................... 7,559,000 4,902,000 5,660,000
------------ ------------ ------------
Net increase (decrease) in cash ........ 1,361,000 (999,000) (222,000)
Cash - beginning of year ............... 8,000 1,007,000 1,229,000
------------ ------------ ------------
Cash - end of year ..................... $ 1,369,000 $ 8,000 $ 1,007,000
============ ============ ============
(Continued on the following page.)
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Cash Flows
(Continued from the previous page.)
Supplemental disclosure of cash flow information:
Cash paid for: Interest
----------
2002 $ 28,000
2001 $ 42,000
2000 $ 21,000
Supplemental disclosure of non-cash activity:
Dividends declared payable in common stock were $2,000, $2,000, and $1,000
for December 31, 2002, 2001 and 2000, respectively.
During 2002, 50 and 300 shares of the series B and C preferred stock was
converted into 100,000 and 600,000 shares of common stock, respectively.
During 2002, a $1,000,000 convertible note payable and $48,000 of accrued
interest were converted and redeemed into 2,405,216 shares of common stock.
During 2002, the Company issued options and warrants valued at $260,000 for
consulting services provided.
During 2002, the Company recorded $70,000 for the value of the in-the-money
conversion feature on the debt.
During 2002, an accrued liability of $590,000 for warrants earned in 2001
was satisfied through the issuance of the warrants.
During 2002, options valued at $132,000 as financing costs were issued to
an officer for past financial support.
During 2002, warrants were issued to a related party in connection with
advances provided valued at $44,000.
During 2002, private stock offering proceeds were reduced by $76,000 for
subscription receivable for cash not received.
During 2002, the Company financed insurance premiums of $372,000 through a
finance company.
During 2002, the Company extended the exercise period of warrants that
expired. The value of the extension was $58,000 and recorded as financing
costs.
During 2002, the Company wrote off old payroll tax liabilities of $130,000
assumed in the Cymedix acquisition which were recorded as a reduction to
goodwill.
During 2002, the Company accelerated the vesting period for a former
officer's stock options pursuant to a severance agreement. Fair value of
the acceleration was calculated at $94,000.
(Continued on following page.)
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Cash Flows
(Continued from the previous page.)
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, warrants issued to finders under private placements in
connection with its note payable credit facility were valued at $113,000
and recorded as financing costs.
During 2001, shares issued for conversions and redemptions under the
convertible notes payable credit facility at modified conversion 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 4,564,000
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.
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
The Company develops and intends to market healthcare communication technology
products for electronic prescribing of drugs, laboratory orders and laboratory
results. These technologies are designed to provide connectivity of medical
related information between point-of-care providers ("POCs") (i.e. physician or
caretaker) and specific healthcare value chain intermediaries ("HVCIs") (e.g.
pharmacy, lab, pharmacy benefit managers, pharmaceutical companies, etc.). The
Company's technology is designed to improve the accuracy and the efficiency of
the processes of drug prescribing and the ordering of laboratory tests and the
receiving of laboratory results. In February of 2000, the Company completed the
divestiture of its healthcare staffing businesses in (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
It is the Company's policy to extend credit to its customers in the normal
course of business. It is also our policy to reduce credit risk by periodically
performing credit analysis and monitoring the financial condition of our
customers.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including accounts receivable,
notes receivable, accounts payable and accrued expenses approximate their fair
values as of December 31, 2002 and 2001 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, 2002 and 2001 because interest rates on these
instruments approximate market interest rates.
Revenue Recognition
It is the company's policy to record revenue when transaction services are
provided to its customers through the use of its suite of communication
software. Revenue will also be recorded for monthly subscription services earned
as those monthly services are provided. The Company does not currently generate
any revenue from the licensing, sale or installation of its suite of
communication software.
It is the Company's policy to recognize revenue when the communication
transaction has been completed by the customer, persuasive evidence of the terms
of the arrangement exist, its fee is fixed and determinable, and collectibility
is reasonably assured. Delivery takes place electronically when the customer has
completed the exchange (transmission or receipt) of data. Revenue is charged to
the customer on a per transaction basis as each transaction is completed or as
monthly subscription services are provided and are billed monthly.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. The Company's temporary differences result primarily
from capitalized software development costs, depreciation and amortization, and
net operating loss carryforwards.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 7 years.
Software and Technology Costs
The Company applies the provisions of Statement of Position 98-1 (SOP 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.
Included in software costs are those costs associated with software research and
development efforts that have not been capitalized under SOP 98-1. Software
research and development costs totaled $691,000, $1,075,000 amd $685,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.
Software costs also include the amortization of capitalized software costs and
license fees paid to service providers which totaled $609,000, $213,000 and
$180,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Additionally during the fourth quarter of 2002, the Company wrote-off $1,066,000
of previously capitalized software development costs which are included in the
accompanying financial statements in software costs.
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 Statement of Financial Accounting
Standards No. 84 (SFAS No 84).
Long Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered in accordance with Statement of Financial Accounting Standards No.
144 (SFAS No. 144). The Company looks primarily to the undiscounted future cash
flows in its assessment of whether or not long-lived assets have been impaired.
Goodwill
In accordance with SFAS 141, goodwill is no longer being amortized.
Under SFAS 142, the Company reviews its goodwill for impairment annually or
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recovered. The Company looks primarily to the market
capitalization of the Company in its assessment of whether or not goodwill has
been impaired. At December 31, 2002, the Company has determined that no
impairment of the Company's goodwill is required.
Reclassifications
Certain amounts in the 2001 and 2000 consolidated financial statements have been
reclassified to conform to the 2002 presentation.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses were as
$23,000, $23,000, and $42,000 for the years ended December 31, 2002, 2001, and
2000.
Basic Loss Per Share
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" (SFAS 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, 2002, 2001 and 2000 total stock options,
warrants and convertible debt and preferred stock of 33,166,853, 14,693,254 and
13,767,143, 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 June 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 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 August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 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 in 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
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively. The
Company believes that the adoption of this statement will have no material
impact on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44 and
64, Amendment of FASB No. 13, and Technical Corrections." SFAS No. 145 rescinds
FASB No. 4 "Reporting Gains and Losses from Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS No. 44
"Accounting for Intangible Assets of Motor Carriers" and amends SFAS No. 13,
"Accounting for Leases." This statement is effective for fiscal years beginning
after May 15, 2002. The Company believes the adoption of this statement will
have no material impact on its consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company believes the
adoption of this statement will have no material impact on its consolidated
financial statements.
In November 2002, the FASB published interpretation No, 45 "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The Interpretation expands on the
accounting guidance of Statements No. 5, 57, and 107 and incorporates without
change the provisions of FASB Interpretation No. 34, which is being superseded.
The Interpretation elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, that company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
initial measurement provisions apply on a prospective basis to guarantees issued
or modified after December 31, 2002, regardless of the guarantor's fiscal
year-end. The disclosure requirements in the Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company believes the adoption of this statement will have no material
impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation" to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock-based compensation. In addition, SFAS 148 amends the
disclosure provision of SFAS 123 to require more prominent disclosure about the
effects of an entity's accounting policy decisions with respect to stock-based
employee compensation on reported net income. The effective date for this
Statement is for fiscal years ended after December 15, 2002.
The adoption of this statement did not have a material effect on the
consolidated financial statements as the Company continues to account for stock
based compensation under the intrinsic value approach, and follows the pro-forma
disclosure requirements of SFAS No. 123, as amended by SFAS No 148.
Note 2 - Management's Plan for Continued Existence
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.
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 related marketing efforts. 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. The
Company's future operations are dependent upon management's ability to source
additional equity capital.
The Company expects to continue to experience losses in the near term, until
such time that its technologies can be merged with those acquired from
ePhysician, Inc. (see Note 12) and successfully deployed with physicians to
produce revenues. The continuing deployment, marketing and the development of
the merged technologies will depend on the Company's ability to obtain
additional financing. The merging of technologies with ePhysician, Inc. is in
the early development stage and has not generated any significant revenue to
date. The Company is currently funding operations through the sale of common
stock, and there are no assurances that that additional investment or financings
will be available as needed to support the development and deployment of the
merged technologies. The need for the Company to obtain additional financing is
acute and failure to obtain adequate financing could result in lost business
opportunities, the sale of the Cymedix business at a distressed price or may
lead to the financial failure of the Company. -
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 for the year ended December 31, 2000 are as follows:
Revenue ........................... $ 1,128,000
Direct costs of services .......... 927,000
-----------
Gross margin ...................... 201,000
-----------
Selling, general and administrative 219,000
Interest expense .................. 18,000
Litigation settlement ............. 137,000
-----------
Net loss .......................... $ (173,000)
===========
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
Gain 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,
----------------------------
2002 2001
------------- -------------
Software development costs $ - $ 929,000
Less accumulated amortization - (280,000)
------------- -------------
$ - $ 649,000
============= =============
Annual amortization expense, which is included in costs of services provided was
$216,000, $156,000, and $124,000 for the years ended December 31, 2002, 2001,
and 2000, respectively.
During the fourth quarter of 2002 the Company changed its business model, which
significantly impacted its projections of expected future operating results. Due
to the change in the business model the anticipated undiscounted cash flows from
the Company's capitalized software development costs did not support the
carrying value of those costs at December 31, 2002. In accordance with SFAS No.
144, the Company wrote-off the remaining $1,066,000 of previously capitalized
net costs during the fourth quarter of 2002. While the Company's business model
has changed impacting the expected future operating results, the Company
believes that the basis of its continued plan is embedded with the technology
business plan it acquired in the Cymedix transaction in 1998. Accordingly,
management does not believe an impairment of goodwill has occurred and it
continues to have a viable long-term strategy that is supported by its current
market capitalization at December 31, 2002 which supports the fair value of its
only reporting unit.
Property and equipment consist of the following:
December 31,
----------------------
2002 2001
--------- ---------
Furniture and fixtures ......................... $ 111,000 $ 103,000
Computer hardware and purchased software ....... 542,000 609,000
Leasehold improvements ......................... 20,000 29,000
--------- ---------
673,000 741,000
Less property, plant and equipment - accumulated
depreciation .................................. (408,000) (376,000)
--------- ---------
$ 265,000 $ 365,000
========= =========
Depreciation expense was $127,000, $123,000 and $97,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
The changes in the carrying amount of goodwill for the year ending December 31,
2002 are as follows:
Balance as of January 1, 2002 ....................... $ 2,369,000
Goodwill written off relating to liability assumed in
the acquisition .................................... (130,000)
-----------
Balance as of December 31, 2002 ..................... $ 2,239,000
===========
Goodwill relates to the Company's acquisition of Cymedix. Goodwill has an
accumulated amortization balance of $634,000 for the years ending December 31,
2002 and 2001. Amortization expense was $0, $209,000, and $205,000 for the years
ended December 31, 2002, 2001 and 2000, 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,
-------------------
2002 2001
-------- --------
Accrued payroll and benefits ................ $256,000 $294,000
Accrued lease abandonment costs ............. 374,000 --
Accrued professional fees ................... 36,000 57,000
Accrued license fees ........................ 36,000 53,000
Other accrued expenses ...................... 23,000 29,000
Accrued interest ............................ 11,000 17,000
Accrued payroll taxes, interest and penalties -- 131,000
-------- --------
$736,000 $581,000
======== ========
During the fourth quarter of 2002, the Company closed its California and Georgia
offices. In connection with these office closures the Company accrued the
balance of the remaining lease commitments totaling $374,000 at December 31,
2002, which are included in selling general and administrative expenses in the
accompanying financial statements.
At various times during 2001 and 2000, 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 recorded the write-offs as an adjustment to
previously recorded goodwill.
Note 6 - Long-Term Debt
Long-term debt consists of:
December 31,
---------------------------
2002 2001
------------- -------------
Notes payable - finance company, interest accrues at
7%, monthly payments of principal and interest of
$23,730 are payable through October 2003. $ 157,000 $ 140,000
Notes payable - finance company, interest accrues at
7%, monthly payments of principal and interest of
$1,417 are payable through October 2003. 18,000 18,000
------------- -------------
175,000 158,000
Less current portion (175,000) (158,000)
------------- -------------
$ - $ -
============= =============
Convertible Promissory Notes
The Company entered into a secured convertible loan agreement, dated February
19, 2002, pursuant to which the Company borrowed $1,000,000 from WellPoint
Health Networks Inc., in which a member of the Company's audit committee is a
related party. WellPoint converted the note into 2,405,216 common shares on
October 9, 2002, which includes approximately $48,000 of accrued interest. The
loan was secured by the grant of a security interest in all Medix's intellectual
property, including its patent, copyrights and trademarks. The conversion of the
loan eliminated the aforementioned security interest.
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. 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 54,168 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 financing 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, Georgia, Colorado
and California and various equipment under non-cancelable operating leases. We
have closed our California and Colorado offices, and we are actively pursuing an
exit to our leases in Georgia and California. Obligations for the New Jersey
lease ended July of 2002.
Rent expense for these leases was:
Year Ending December 31,
- ------------------------
2002 $ 610,000
2001 $ 396,000
2000 $ 315,000
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31,
- ------------------------
2003 $ 371,000
2004 325,000
2005 34,000
-------------
$ 730,000
=============
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.
In February of 2000, the Company reached a settlement on certain outstanding
litigation and 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%.
In November of 2000, a settlement agreement was reached between the Company and
a plaintiff on outstanding litigation 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%.
In June of 2001, the Company settled an outstanding claim 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.
In May of 2001, the Company agreed to settle another outstanding legal action 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 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.
In 2001, the Company also settled certain 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 two 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.
In August 2002, the Company reached an agreement in principal with a plantiff to
settle certain litigation by paying $25,000 with no admission of liability on
the Company's part. This settlement was signed and paid during September 2002.
In August 2002, the Company reached an agreement in principal with a company to
settle certain litigation by paying $55,000, to be paid over three months. This
settlement was signed and the balance paid as of December 31, 2002.
Tufts Associated Health Plans, Inc. has threatened to commence litigation
against us for allegedly breaching the Services and Support Agreement between
Tufts and the Company. Tufts has alleged that because of the termination of the
merger agreement between the Company and PocketScript, the Company is unable to
provide the products and services as contemplated by the Services and Support
Agreement and is in "material breach" thereunder. We disagree with Tufts'
allegations. At this time, litigation has not been commenced.
Note 8 - Stockholders' Equity
On March 20, 2000, the Company authorized 2,500,000 shares of preferred stock.
As of December 31, 2002, no additional shares of preferred stock have been
issued.
In October of 2002, the stockholders approved an increase of authorized common
stock to 125,000,000.
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, 2002 and 2001. 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 Placements
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
relating to 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. During 2002, 50 shares of Series B
preferred stock were converted into 100,000 common shares. The warrants are
callable by the Company for $.01 upon thirty days written notice. These warrants
expired in October 2002. Upon cancellation, the Company extended the expiration
date for 480,000 of these warrants to April 2003. Using a Black Scholes pricing
model, $58,000 of expense was charged to equity as the value of this repricing.
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. During 2002, 300 shares of Series C preferred stock were converted
into 600,000 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.
2002 Private Placement
During 2002, the Company initiated three private placement offerings each
consisting of one share of common stock and warrants to purchase common stock.
The exercise price of the offering was $.40 per share. The warrants, included
with each unit, entitled the holder to purchase common shares at $.50 per share,
expiring five years after offering date. Over the three offerings, $5,491,000
was raised in total proceeds, net of offering costs of $290,000, through the
issuance of 13,702,500 shares of common stock. At December 31, 2002 a $76,000
subscription receivable remained which was collected in January 2003.
Equity Line
The Company entered into an Equity Line of Credit Agreement dated as of June 12,
2001, which provided 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.
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 below, 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.
During the period January to April 2002, the Company received $972,000, net of
commissions and escrow fees from eight equity line advances, resulting in the
issuance of 1,954,719 shares of common stock. This agreement was terminated in
April 2002.
The principal conditions to any such advance were as follows:
o There must have been thirteen stock market trading days between any two
requests for advances made by the Company.
o The Company could 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 was equal to or greater than the volume weighted
average price as reported by Bloomberg L.P. for the 22 trading days before
a request was made.
o The Company was not be able to receive an advance amount that was 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 was be equal to 91% of the three lowest
daily volume weighted average prices during the 22 trading days before a request
was made.
The Company received 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 was exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) thereof. The Company 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 registered 9,500,000 shares. The related
Registration Statement was declared effective by the SEC on August 6, 2001. The
Company also agreed that its executive officers and directors would not sell any
shares of its common stock during the ten trading days following any advance
request by the Company.
The Company paid 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 paid legal fees in an aggregate amount of $15,000.
Accumulated Deficit
Of the $43,073,000 cumulative deficit at December 31, 2002 and $34,059,000 at
December 31, 2001, the approximate amount relating to the Company's technology
business from inception is $27,752,000 and $21,112,000, respectively. In
addition, a premium of $2,332,000 was paid upon the acquisition of Cymedix Lynx
in 1998, producing a total investment of $30,084,000 at December 31, 2002 and
$23,444,000 at December 31, 2001 in the technology to date.
Stock Options
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 reserved
10,000,000 shares of common stock for granting of options under the 1999 Plan.
At 2001 Annual Meeting the shareholders approved an increase of 3,000,000 shares
as the amount of total shares of our Common Stock reserved for issuance 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, 1999 7,517,877 633,000 $ 0.32
Granted 2,255,000 110,000 3.82
Granted (10,000) - 0.25
Forfeited/canceled (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
Granted 4,968,000 860,000 0.67
Forfeited/canceled (1,314,750) (266,167) 1.15
Exercised (200,000) (158,000) 0.40
------------ ------------ ------------
Outstanding - December 31, 2002 9,472,750 800,000 $ 1.06
============ ============ ============
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
----------------------- ----------- ----------------------
Range of Exercise Prices Number Price* Life* Number Price*
- ------------------------------------ ----------- ----------- ----------- ---------
$.25 - .55 2,417,000 $ 0.41 5.92 2,197,625 $ 0.41
$.59 - .99 6,619,750 0.69 4.72 3,689,750 0.69
$1.05 - 4.97 1,236,000 4.34 4.24 1,186,000 4.47
----------- ----------- ----------- ----------- -----------
Total - December 31,
2002 10,272,750 $ 1.06 4.95 7,073,375 $ 1.23
=========== =========== =========== =========== ===========
*Price and Life reflects the weighted average exercise price and weighted
average remaining contractual life, respectively.
In fiscal year 2002, the Company has issued 636,000 stock options to consultants
that have been valued at $260,000 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 $0.38 to $0.70, volatility of
95%, 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,
--------------------------------------
2002 2001 2000
-------------- -----------------------
Net loss - as reported $ (9,014,000) $(10,636,000) $ (5,415,000)
Net loss - pro forma (111,198,000) (12,035,000) (14,256,000)
Basic loss per common share - as reported (0.14) (0.21) (0.13)
Basic loss per common share - pro forma (0.18) (0.24) (0.34)
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,
--------------------------------------
2002 2001 2000
-------------- -----------------------
Approximate risk free rate 5.50% 5.50% 5.50%
Average expected life 5 years 5 years 10 years
Dividend yield 0% 0% 0%
Volatility 95% 132% 273%
Estimated fair value of total options
granted $2,184,000 $1,399,000 $8,841,000
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 right to exercise the warrants are earned in increments based on
certain performance criteria. At December 31, 2002 a total of 1,850,000 warrants
had been earned. 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%. 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%. The 850,000 warrants were issued in the first quarter of 2002.
The Company has the obligation to provide 5,150,000 warrants under the Amended
and Restated Common Stock Purchase Warrant in the future if the performance
criteria specified are met.
The agreement provides for a total of 5,150,000 remaining warrants under five
performance criteria categories which can be earned in any order or
concurrently. Had all of the remaining performance criteria been met at December
31, 2002, the fair value of the related warrants and resulting expense would
have been approximately $1,848,683, using the Black-Scholes option pricing
model, with assumptions of 95% volatility, no dividend yield and a risk-free
rate of 5.5%.
The Company also issued and modified warrant terms in the settlement of certain
litigation during 2001 (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, 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
Issued 17,493,016 0.51
Forfeited/canceled (826,000) 0.51
Exercised (1,388,975) 0.50
---------------------------
Outstanding - December 31, 2002 22,727,628 $ 0.58
===========================
All of the outstanding warrants are exercisable and have a weighted average
remaining contractual life of 3.45 years.
Note 9 - Income Taxes
- ---------------------
As of December 31, 2002, the Company has net operating loss (NOL) carryforwards
of approximately $29,105,000, which expire in the years 2002 through 2022. 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 $141,000 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
$9,900,000 and $7,400,000, respectively. The change in the valuation allowance
for 2002 and 2001 was approximately $2,500,000 and $2,413,000, respectively.
Note 10 - Employee Benefit Plan
Employees are eligible to participate in the company's 401(k) retirement.
Payroll deductions are taken out of every payroll check and are "pre-tax"
dollars. Employees may elect (in writing) at any time that their participation
be "suspended", however, they may only apply for re-enrollment quarterly.
Employees may elect up to a 15% contribution. There currently is no employer
match policy.
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.
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
$20,000, $0 and $52,000 for such consulting services in 2002, 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.
During 2002, the Company recorded $130,000 as a liability to a related party for
loans made to the Company during 2002. The liability emerged a part of a
severance package for compensation and expenses. The separation agreement calls
for monthly payments of $5,000 beginning January 2003 with the entire amount
being due in May 2003.
Note 12 - Subsequent Events
The Company entered into a definitive agreement to acquire substantially all of
the assets of PocketScripts LLC in December 2002. The acquisition was contingent
upon certain closing conditions including approval by the Company's
stockholders. Through December 31, 2002, the Company paid an initial deposit of
$100,000 in connection with the proposed merger, in addition to $209,000 in
advances for working capital purposes and expenses relating to the acquisition
which were incurred. On March 5, 2003, Medix announced the termination of the
proposed merger agreement with PocketScript, LLC. As a result of the acquisition
being terminated, the Company expensed the $309,000 incurred during the year
ended December 31, 2002.
On March 7, 2003, the Company purchased the assets of ePhysician, Inc. for
$300,000 and 100,000 shares of our common stock, from Comdisco Ventures, Inc.,
an ePhysician creditor. ePhysician point-of-care technologies enable physicians
to securely access and send information to pharmacies, billing services, and
practice management systems via the Palm OS(R)-based handheld device and the
Internet. The Company intends to integrate various aspects of ePhysician's
technologies with their existing products.
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.
Third Fourth
------ ------
First Quarter Second QuarterQuarter (2) Quarter(3)(4)
-------------- -------------------------- -------
Footnotes
December 31, 2001
Revenues $ 30,000 $ - $ - $ (1,000)
Operating expenses 2,195,000 1,455,000 3,058,000 1,437,000
Net loss (2,259,000) (1,635,000) (3,183,000) (3,559,000)
Basic loss per share (1) (0.05) (0.03) (0.06) (0.07)
Diluted loss per share (1) (0.05) (0.03) (0.06) (0.07)
December 31, 2002
Revenues $ - $ - $ - $ -
Operating expenses 1,475,000 1,265,000 1,678,000 3,140,000
Net loss (1,677,000) (1,309,000) (1,732,000) (4,296,000)
Basic loss per share (1) (0.03) (0.02) (0.03) (0.05)
Diluted loss per share(1) (0.03) (0.02) (0.03) (0.05)
(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 expenses 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) Included in the fourth quarter 2002 operating expenses is $1,066,000 of
expenses related to the write-off of capitalized software project costs,
$374,000 of accrued lease abandonment costs, and $309,000 of expenses
associated with an acquisition which was terminated.