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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 Sept