form-pre14a_021203
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
[Amendment No.__ ]
Filed by Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a- 11(c) or ss.240.14a-12
Medix Resources, Inc.
(Name of Registrant as Specified in Its Charter)
Medix Resources, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, par value $.001 per share.
2) Aggregate number of securities to which transaction applies:
12,000,000 shares (excludes shares issuable only in the event
that post-closing contingencies occur)
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. Set forth amount on which
filing fee is calculated and state how it was determined: $.60
per share, based on the average of the high ($.63) and low ($.57)
price per share on the American Stock Exchange on February 5,
2003, a date within five business days prior to the date of this
filing.
4) Proposed maximum aggregate value of transaction: $7,200,000.
5) Total fee paid: $1,440.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11 (a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
MEDIX RESOURCES, INC.
420 Lexington Ave., Suite 1830
New York, New York 10170
(212) 697-2509
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _________, 2003
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Medix
Resources, Inc., a Colorado corporation, will be held at ____________________,
on ________, _________, 2003 at 10:00 a.m., local time, for the following
purposes:
1. To vote on a proposal to approve a Merger Agreement, dated as of
December 19, 2002, by and among Medix Resources, its PS Purchase Corp.
subsidiary, PocketScript LLC and Stephen S. Burns pursuant to which
Medix Resources' subsidiary will be merged with and into PocketScript,
LLC, the latter will become a wholly-owned subsidiary of Medix
Resources and Medix Resources will issue to the equity holders of
PocketScript common stock of Medix Resources, par value $.001 per
share, pursuant to various formulas set forth in the Merger Agreement.
2. To vote on a proposal to amend Medix Resources' articles of
incorporation, increasing the number of authorized shares of common
stock from 125,000,000 to 185,000,000.
3. To vote on a proposal to reincorporate Medix Resources in Delaware.
4. To vote on a proposal to approve Medix Resources' 2003 Stock Incentive
Plan.
5. To transact such other business as may properly come before the
special meeting or any adjournments(s) thereof.
Medix Resources' board of directors has fixed the close of business on
February __, 2003, as the record date for determining the shareholders entitled
to receive notice of, and to vote at, the special meeting. A complete list of
shareholders entitled to vote at the special meeting will be available, upon
written demand, for inspection during normal business hours by any shareholder
of Medix Resources prior to the special meeting, for a proper purpose, at Medix
Resources' offices located at the address set forth above. Only shareholders of
record on the record date are entitled to notice of, and to vote at, the special
meeting and any and all adjournments or postponements thereof.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN
PERSON. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, YOU ARE
URGED TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS
POSSIBLE IN THE POSTAGE-PREPAID ENVELOPE ENCLOSED FOR THAT PURPOSE. ANY
SHAREHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF SUCH
SHAREHOLDER HAS PREVIOUSLY RETURNED A PROXY CARD.
By Order of the Board of Directors
Mark W. Lerner
Secretary
New York, New York
_______, 2003
TABLE OF CONTENTS
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
QUESTIONS AND ANSWERS ABOUT THE POCKETSCRIPT MERGER
SUMMARY
The Parties to the PocketScript Merger
The Parties to the Reincorporation Agreement
The Special Meeting
Vote Required
Share Ownership of Management and Others
Recommendations of the Board of Directors
Regulatory Approvals
The PocketScript Merger
General
Consideration to be Issued in the Merger
Reasons for the Merger
Conditions to the Merger
Termination of the Merger Agreement
Accounting Treatment
Escrow Agreement
Dissenters Rights
Market Price Data
Dividend Policy
Summary Historical and Unaudited Pro Forma Financial Information
Reincorporation Merger
General
Structure
Comparison of Shareholder Rights
RISK FACTORS APPLICABLE TO THE POCKETSCRIPT MERGER
THE SPECIAL MEETING
General
Record Date and Quorum
Revocability of Proxies
Voting and Solicitation
Matters to be Brought Before the special meeting
Principal Shareholders
THE POCKETSCRIPT MERGER
Background of the Merger
Reasons for the Merger
Recommendation of the Board of Directors with Respect to the Merger
Federal Securities Law Consequences
THE POCKETSCRIPT MERGER AGREEMENT
The Merger; Closing; Effective Time
Initial Merger Consideration
Qualifying Events
Exchange Procedures
Fractional Shares
Escrow Agreement; Indemnification
Representations and Warranties
Covenants
Conditions to closing
Termination of the Merger Agreement
Amendment
SUMMARY INFORMATION ABOUT MEDIX RESOURCES
INFORMATION ABOUT POCKETSCRIPT
PocketScript Business
PocketScript Selected Financial Data
PocketScript Management's Discussion and Analysis of PocketScript's
Results of Operations and Financial Condition
Information About PocketScript's Units
AMENDMENT OF OUR ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK FROM 125,000,000 SHARES TO 185,000,000 SHARES
REINCORPORATION IN THE STATE OF DELAWARE
General
Principal Reasons for Changing Our State of Incorporation
Comparison of the Rights of Holders of Medix-COL Common Stock And Medix-DEL Common Stock
Removal of Directors
Classified Board of Directors
Indemnification and Limitations of Liability of Directors, Officers And Other Agents
Inspection of Shareholder List
Consideration for Issuance of Shares
Dividends and Repurchase of Shares
Shareholder Voting on Mergers and Certain Other Transactions
Shareholder Approval of Certain Business Combinations Under Delaware Law
Interested Director Transactions
Loans to Directors and Officers
Shareholder Derivative Suits
Appraisal/Dissenters' Rights
Dissolution
Vote Required
THE 2003 STOCK INCENTIVE PLAN
Administration
Structure
Eligibility
Types of Options
Other Awards
Exercise Period
Exercise Price
Payment
Transferability
Termination of Employment
Amendment and Termination
Shares Subject to the Plan
Adjustments
Change in Control
Additional Limitation
Federal Income Tax Consequences
Other Medix Resources Option Plan
Vote Required
EXPERTS
OTHER MATTERS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO FINANCIAL STATEMENTS
Medix Historical Financial Statements
PocketScript Historical Financial Statements
Unaudited Pro Forma Financial Statements
ANNEXES
A. Merger Agreement, dated as of December 19, 2002, among PS Purchase
Corp., Medix Resources, Inc., PocketScript, LLC and Stephen S. Burns
B. Form of Escrow Agreement
C. Reincorporation Merger Agreement Between Medix Resources, Inc. and its
Subsidiary
D. Certification of Incorporation (Delaware subsidiary)
E. By-Laws (Delaware subsidiary)
F. 2003 Stock Incentive Plan
MEDIX RESOURCES, INC.
420 Lexington Ave., Suite 1830
New York, New York 10170
(212) 697-2509
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ___________, 2003
------------------------
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document regarding the
proposed PocketScript merger. These forward-looking statements are subject to
risks and uncertainties, and there can be no assurance that such statements will
prove to be correct. Forward-looking statements regarding the PocketScript
merger include:
o statements relating to synergies anticipated to result from the
proposed merger;
o statements relating to integration and other costs expected to be
incurred in connection with the proposed merger; and
o statements anticipating future performance.
Also, when we use words such as "believes," "expects," "anticipates,"
"estimates", "plans", "intends", "objectives", "goals", "aims" or "projects" or
similar words or expressions, we are making forward-looking statements.
Many possible events or factors could affect the future financial results
and performance of our combined companies after the proposed merger is
completed. This could cause actual results or performance to differ materially
from those expressed in our forward-looking statements. We have described the
risks and uncertainties that could materially impact our respective businesses
in the section entitled "Risk Factors Applicable to the PocketScript Merger"
beginning on page 19.
Medix shareholders are cautioned not to place undue reliance on our
forward-looking statements, which speak only as of the date of this proxy
statement. We do not undertake any obligation to update publicly any
forward-looking statements to reflect events, circumstances or new information
after the date of this proxy statement or to reflect the occurrence of
unanticipated events.
We have not authorized anyone to give you any information or to make any
representation about the proposed merger, our proposed amendment to our articles
of incorporation, our proposed reincorporation in the State of Delaware or the
2003 Stock Incentive Plan that differs from or adds to the information contained
in this proxy statement. Therefore, if anyone gives you any different or
additional information, you should not rely on it.
The information contained in this proxy statement speaks only as of the
date of our notice of special meeting unless the information specifically
indicates that another date applies. Information in this proxy statement
regarding Medix Resources has been supplied by Medix Resources and information
in this proxy statement regarding PocketScript has been supplied by
PocketScript.
This proxy statement serves solely as a proxy statement in connection with
the solicitation of proxies by Medix Resources for use at our upcoming special
meeting. This proxy statement gives you detailed information about the proposed
PocketScript merger, our proposed amendment to our articles of incorporation to
increase the number of shares of common stock that we are authorized to issue,
our proposed reincorporation in the State of Delaware and our 2003 Stock
Incentive Plan, and it includes, among our annexes, our merger agreement as
Annex A, our reincorporation merger agreement as Annex C and our 2003 Stock
Incentive Plan as Annex F. You can get more information about Medix Resources
from publicly available documents that we have filed with the Securities and
Exchange Commission. See "Where You Can Find More Information".
QUESTIONS AND ANSWERS ABOUT THE POCKETSCRIPT MERGER
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to approve a merger in which our wholly-owned
subsidiary will merge into PocketScript, PocketScript will become a
wholly-owned subsidiary of Medix Resources and Medix Resources will
issue shares of our common stock to the owners of PocketScript.
PocketScript is organized as a limited liability company and its
owners are referred to as unit holders. The proposed merger is
governed by a Merger Agreement, dated as of December 19, 2002, by and
among our PS Purchase Corp. subsidiary, Medix Resources, PocketScript
and PocketScript's principal equity holder, Stephen S. Burns. Whenever
we refer to the merger agreement in this proxy statement, we are
referring to that Merger Agreement.
Our shareholders are also being asked to vote upon a proposal to amend our
articles of incorporation to increase the number of shares of common stock that
we may issue from time to time. At present, we are authorized to issue a total
of 125,000,000 shares of common stock. We are proposing to increase that number
of authorized shares from 125,000,000 shares to 185,000,000 shares. We believe
that we will need a portion of such increase in order to have shares available
to consummate the PocketScript merger. If our shareholders approve the
PocketScript merger but do not approve the proposed increase in the authorized
shares of common stock, it may become necessary for us to restructure the
PocketScript merger, which may require further approval of our shareholders,
resulting in delay and additional expense for Medix Resources. Accordingly,
shareholders who approve the PocketScript merger are urged to also vote in favor
of the proposed amendment to our articles of incorporation.
In addition, you are being asked to approve the reincorporation of Medix
Resources in Delaware pursuant to an Agreement and Plan of Merger between Medix
Resources and a wholly-owned subsidiary that we have organized to effect the
reincorporation. Whenever we refer to the reincorporation agreement, we are
referring to that Agreement and Plan of Merger. You are also being asked to
approve the adoption of our 2003 Stock Incentive Plan. Under that plan, a total
of 10,000,000 shares of our common stock may be issued to our key employees,
officers, directors and consultants pursuant to stock options, stock
appreciation rights and other forms of equity awards.
Q: WHAT ARE THE BENEFITS OF THE POCKETSCRIPT MERGER?
A: We believe that the merger will benefit Medix Resources and our
shareholders. PocketScript's focus has been on the development of
software applications for wireless, handheld devices to improve
physician efficiency and workflow. After the merger, shareholders of
the combined company will own an equity interest in a more
technologically advanced company with substantial human and technical
resources. As a result, we believe, but cannot guarantee, that the
merger should increase shareholder value to you.
Q: WHAT DO I NEED TO DO NOW?
A: After you read and consider the information in this proxy statement,
just mail your signed proxy card in the enclosed return envelope as
soon as possible, so that your shares may be represented at our
shareholder meeting. You should return your proxy card whether or not
you plan to attend our shareholder meeting. If you attend our
shareholder meeting, you may revoke your proxy at any time before it
is voted and vote in person if you wish.
Q: IF MY SHARES ARE HELD IN STREET NAME BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares on the four proposals to be
presented at the special meeting only if you provide instructions on
how to vote. You should follow the directions provided by your broker
regarding how to instruct your broker to vote your shares.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED
PROXY CARD?
A. You can change your vote at any time before your proxy is voted at our
special meeting. You can do this in one of three ways. First, you can
send a written notice stating that you would like to revoke your
proxy. Second, you can complete and submit a new proxy card. If you
choose either of these methods, you must timely submit your notice of
revocation or your new proxy card to us so that we receive it before
votes are taken at the special meeting. Third, you can attend our
meeting and vote in person. Simply attending our meeting, however,
will not revoke your proxy. If you have instructed a broker to vote
your shares, you must follow directions received from your broker to
change your vote.
Q: WHEN DO YOU EXPECT TO COMPLETE THE POCKETSCRIPT MERGER?
A: We are working toward completing the PocketScript merger as promptly
as possible and expect to close the transaction promptly after the
special meeting is held. If both the PocketScript merger and the
reincorporation proposal are approved, we would expect to complete the
PocketScript merger before implementing the reincorporation proposal.
Q: HOW IS THE POCKETSCRIPT MERGER STRUCTURED?
A: Pursuant to the merger agreement, PS Purchase Corp., which we refer to
as our merger subsidiary, will merge into PocketScript. The unit
holders of PocketScript will give up their equity interests in
PocketScript, referred to as units, and will receive shares of our
common stock in exchange for their units. PocketScript will become a
wholly owned subsidiary of Medix Resources.
Q: PLEASE EXPLAIN WHAT POCKETSCRIPT UNIT HOLDERS WILL RECEIVE FOR THEIR
POCKETSCRIPT UNITS.
A: Subject to the adjustment provisions of the merger agreement, the unit
holders will receive a total of 12,000,000 shares of our common stock
as their initial consideration. This works out to 120,000 shares of
our common stock for each of the 100 units which will be outstanding
when the merger is consummated. We will be required to issue
additional shares of our common stock after the merger is consummated
if certain contingencies, referred to in the merger agreement as
"Qualifying Events", are satisfied. We will be required to issue
$1,000,000 of our common stock, valued pursuant to a formula described
below, for each Qualifying Event that occurs within the time periods
specified in the merger agreement. The following table names the
Qualifying Events and describes the period during which they must be
satisfied. The Qualifying Events are described under the caption
"Merger Agreement - Qualifying Events".
Qualifying Event Time Period
Telcom Contingent Payment Within six months after the merger
closes
Hardware Vendor Contingent Payment Within six months after the merger
closes
RXHub Contingent Payment Within twelve months after we
announce that PocketScript Express
has launched its RxHub System
Pharmaceutical Company Contingent Within six months after the merger
Payment closes
If a Qualifying Event occurs, we will be required to issue to the former unit
holders of PocketScript a number of shares of our common stock equal to
$1,000,000 divided by the average closing price of our common stock on the
American Stock Exchange during the period commencing on the closing date of our
merger and ending on the date that the Qualifying Event occurs.
Q: ARE THERE CIRCUMSTANCES UNDER WHICH MEDIX WOULD BE REQUIRED TO ISSUE LESS
THAN 12,000,000 SHARES OF OUR COMMON STOCK AS THE INITIAL CONSIDERATION?
A: Yes. Immediately after the merger is completed, we will perform a
financial review of PocketScript and prepare a balance sheet of
PocketScript as of the closing date. Once the parties agree upon the
closing balance sheet, there would be a reduction in the number of
shares issuable pursuant to the merger agreement if PocketScript's
current liabilities exceed PocketScript's current assets as of the
closing by more than $50,000.
Q: WILL POCKETSCRIPT UNIT HOLDERS RECEIVE ALL OF THEIR MEDIX RESOURCES SHARES
PROMPTLY AFTER THE CLOSING?
A: No. Most of the shares of common stock that we are required to issue
will be delivered to an escrow agent. Subject to our right to recover
some of these shares pursuant to the adjustment provisions described
above or pursuant to the indemnification provisions of the merger
agreement, the shares initially issued in the PocketScript merger will
be released from escrow as follows:
o 3,000,000 shares will be released three months after the merger
closes;
o 2,000,000 shares will be released six months after the merger closes;
and
o 1,000,000 shares will be released every three months thereafter,
until the two year anniversary of the closing, when all remaining
shares will be released.
If a Qualifying Event occurs, two thirds of the shares issuable with respect to
such Qualifying Event will be transferred to the escrow agent and one third of
such shares will be released to the former unit holders of PocketScript. Subject
to our right to recover some of these shares pursuant to the indemnification
provisions of the Merger agreement, these escrowed shares will be released from
escrow as follows:
o one half of the shares placed into escrow will be released three
months after the Qualifying Event occurs; and
o one half of the shares placed into escrow will be released six
months after the Qualifying Event occurs.
We plan to register the shares issuable pursuant to the merger in a registration
statement that we intend to file with the SEC after the merger closes. Once the
registration statement is declared effective, that registration statement will
be available to the former unit holders of PocketScript for resales of the
shares of our common stock that they receive pursuant to the PocketScript
merger.
Q: DO POCKETSCRIPT'S UNIT HOLDERS HAVE THE RIGHT TO DISSENT FROM THE MERGER?
A: Yes. They will have the right to dissent, provided that they follow
procedures applicable under Ohio law. If unit holders owning more than
5% of the outstanding units dissent, we will have the right to
terminate the Merger agreement.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have any questions about the PocketScript merger or any other
matter to be presented at the special meeting, please feel free to
call Mark Lerner at (212) 697-2509. .
SUMMARY
This brief summary highlights selected information regarding the
PocketScript merger and the reincorporation merger described more fully
elsewhere in this proxy statement. It does not contain all of the information
that is important to you. You should carefully read this entire proxy statement,
the annexes and the other documents to which this proxy statement refers in
order to fully understand the merger agreement, our proposed amendment to our
articles of incorporation, our reincorporation proposal and our 2003 Stock
Incentive Plan. See "Where You Can Find More Information" on page __.
The Parties to the PocketScript Merger
Medix Resources, Inc.
420 Lexington Ave., Suite 1830
New York, New York 10170
(212) 697-2509
We are an Internet-based communications and information management company
which currently focuses on the healthcare market. The information contained on
our website is not incorporated by reference in this document.
PocketScript, LLC
4770 Duke Drive, Suite 201
Mason, Ohio 45040
(513) 701-6001
PocketScript is a developer of software applications for wireless, handheld
devices intended to improve physician efficiency and workflow. The information
contained on PocketScript's website is not incorporated by reference in this
document.
Stephen P. Burns
Stephen P. Burns, the president and a principal unit holder of
PocketScript, is also a party to the merger agreement.
PS Purchase Corp.
420 Lexington Ave., Suite 1830
New York, New York 10170
(212) 697-2509
PS Purchase Corp. is a wholly-owned subsidiary of Medix Resources that was
organized solely for purposes of completing the PocketScript merger.
The Parties to the Reincorporation Agreement
Medix Resources, Inc. (see above).
Medix Resources is a Colorado corporation.
Medix Resources, Inc., a Delaware corporation.
420 Lexington Avenue, Suite 1830
New York, New York 10170
(212) 697-2509
We have formed a wholly owned subsidiary, named Medix Resources, Inc.,
which we have organized as a Delaware corporation. We formed this subsidiary
solely in order to enable us to reincorporate in Delaware.
The Special Meeting
The special meeting of our shareholders will be held at
____________________, on ________, _________, 2003 at 10:00 a.m., local time. At
our special meeting, we will ask our shareholders to approve the PocketScript
merger agreement, our proposed amendment to our articles of incorporation, our
reincorporation agreement and our 2003 Stock Incentive Plan.
The close of business on February __, 2003 is the record date for
determining which holders of our stock are entitled to vote at our special
meeting. At the record date, there were ________ shares of our common stock
entitled to vote at the special meeting. One third of the shares outstanding on
the record date will constitute a quorum.
Vote Required
The proposals to approve the PocketScript merger agreement and the
reincorporation agreement will require the affirmative vote of holders of a
majority of our outstanding common shares. The proposal to approve our 2003
Stock Incentive Plan will require the affirmative vote of a majority of the
votes cast at the special meeting, as long as a quorum is present at the special
meeting. The proposed amendment to our articles of incorporation will be deemed
approved by our shareholders if the number of votes cast for such proposal
exceeds the number of votes cast against such proposal, assuming that a quorum
is present.
Share Ownership of Management and Others
As of December 31, 2002, the current directors and executive officers of
Medix Resources beneficially owned 6,672,070 shares of our common stock,
representing approximately ___% of the voting stock outstanding on the record
date. Of such 6,672,070 shares, 1,750,000 shares are issuable upon the exercise
of warrants and 3,314,750 shares are issuable upon the exercise of stock
options.
Recommendations of the Board of Directors
Your board of directors believes that the PocketScript merger agreement,
the proposed amendment to our articles of incorporation, the proposed
reincorporation in the State of Delaware and the proposed 2003 Stock Incentive
Plan are in the best interests of Medix Resources and its shareholders and has
approved and declared advisable the PocketScript merger agreement, the proposed
amendment to the articles of incorporation, the reincorporation agreement and
the 2003 Stock Incentive Plan.
Your board of directors recommends that shareholders vote FOR the proposal
to approve the PocketScript merger agreement, FOR the proposed amendment to our
articles of incorporation, FOR the proposal to approve the reincorporation
agreement and FOR the proposal to adopt the 2003 Stock Incentive Plan.
Regulatory Approvals
In connection with the PocketScript merger, the reincorporation proposal
and the proposal to approve a new Stock Incentive Plan, we will file listing
applications with the American Stock Exchange, to assure that:
o the shares of our common stock issuable pursuant to the PocketScript
merger and the 2003 Stock Incentive Plan will be listed on the
American Stock Exchange, and
o there will be no substantive change in listing status when we
reincorporate in Delaware.
The listing of our shares on the American Stock Exchange is a condition to our
obligation to close the PocketScript merger. We will not effect the
reincorporation in Delaware unless and until we have arranged for all of our
outstanding shares to retain their listed status once we reincorporate in
Delaware.
The consummation of the PocketScript merger will require the filing of
merger certificates in Delaware and Ohio and consummation of the reincorporation
in Delaware will require the filing of merger certificates in Delaware and
Colorado. Similarly, if our stockholders approve the proposed amendment to our
articles of incorporation, such amendment must be filed with the Secretary of
State of the State of Colorado. Such filings must comply with detailed statutory
requirements that are routine in merger transactions.
The Merger
The PocketScript merger agreement provides for the acquisition of
PocketScript by Medix Resources. PocketScript will merge with PS Purchase Corp.
and become our wholly-owned subsidiary. The merger agreement is attached as
Annex A to this proxy statement. We encourage you to read the merger agreement
carefully because it is the legal document that governs the PocketScript merger.
Consideration to be Issued in the Merger
As a result of the PocketScript merger, each of the 100 PocketScript units
will be converted into the right to receive 120,000 shares of our common stock,
subject to the adjustment provisions in the merger agreement, and one hundredth
of the shares of common stock issuable in the event that one or more of the
Qualifying Events occur. The initial consideration will not exceed 12,000,000
shares of our common stock. If each of the Qualifying Events occur, we will be
required to issue an additional $4,000,000 of our common stock. The precise
number of shares to be issued in the event that a Qualifying Event occurs will
be determined on the basis of an average closing price formula set forth in the
merger agreement.
Reasons for the PocketScript Merger
We believe that the technology developed by PocketScript will expand our
ability to interconnect physicians and other providers of services and products
in the healthcare market. We do not have the cash resources necessary to develop
a comparable technology on our own. We concluded that the potential benefits to
Medix Resources far outweighed the risks inherent in the merger of two
under-capitalized companies.
Conditions to the Merger
The completion of the merger depends upon the satisfaction of a number of
conditions, including the following:
o approval of the merger agreement by our shareholders;
o approval of the merger agreement and related matters by the
PocketScript unit holders;
o the absence of any injunction or restraint that prohibits the merger;
o execution of the escrow agreement;
o the material accuracy as of the closing of each party's
representations and warranties contained in the merger agreement;
o the performance by each party of its material obligations under the
merger agreement;
o holders of no more than 5% of PocketScript's outstanding units shall
have exercised dissenters' rights; and
o the approval of the shares of our common stock issuable under the
merger agreement for listing on the American Stock Exchange.
The merger agreement provides that certain conditions are conditions to the
obligations of both Medix Resources and PocketScript, certain conditions are
conditions to the obligations of Medix Resources only and certain conditions are
conditions to the obligations of PocketScript only. We have provided a full list
of the material conditions, and identified which conditions may be relied upon
by which parties, under the caption "Merger Agreement - Conditions of Closing".
At the special meeting, our shareholders will be asked to vote upon a
proposal to amend our articles of incorporation to increase the number of shares
of common stock that we may issue from time to time. At present, we are
authorized to issue a total of 125,000,000 shares of common stock. We are
proposing to increase that number of authorized shares from 125,000,000 shares
to 185,000,000 shares. We believe that we will need a portion of such increase
in order to have shares available to consummate the PocketScript merger. If our
shareholders approve the PocketScript merger but do not approve the proposed
increase in the authorized shares of common stock, it may become necessary for
us to restructure the PocketScript merger, which may require further approval of
our shareholders, resulting in delay and additional expense for Medix Resources.
Accordingly, shareholders who approve the PocketScript merger are urged to also
vote in favor of the proposed amendment to our articles of incorporation.
Termination of the Merger Agreement
We may mutually agree to terminate the merger agreement at any time. In
addition, the merger agreement may be terminated:
o by either party, on or after April 1, 2003, if the conditions to such
party's obligations to consummate the merger are not satisfied;
o by us, if we have determined that the merger has become inadvisable or
impracticable by reason of the institution of legal proceedings which
restrain or prohibit the merger or which question the validity or
legality of the merger;
o by us, if any law is enacted which impairs the conduct or operation of
Medix Resources' business as presently conducted or as we plan to
conduct it; or
o by either party, if the closing price of our common stock on the
American Stock Exchange is less than $.50 per share for five
consecutive trading days.
Accounting Treatment
We will treat the merger as a purchase transaction for accounting and
financial reporting purposes. As a result, we will allocate our costs in
connection with the merger to the assets of PocketScript acquired and the
liabilities of PocketScript assumed according to their fair market values at the
merger's completion. PocketScript's results of operations will be included in
our consolidated results of operations only for periods after the merger closes.
Escrow Agreement
Before the merger is completed, Medix Resources, Stephen Burns, as
representative of the PocketScript unit holders, and an escrow agent will enter
into an escrow agreement providing for substantially all of the Medix Resources
common stock issued in the merger to be delivered to the escrow agent upon the
closing of the merger. These shares will be held in an escrow account
established as a source of indemnification to Medix Resources for, among other
things, any losses arising from any breach by PocketScript of its
representations and warranties in the merger agreement or any failure by
PocketScript to perform its obligations under the merger agreement. The escrow
agreement is an integral part of the merger agreement. The form of escrow
agreement is set forth in Annex B to this proxy statement. We encourage you to
read the form of escrow agreement carefully.
Dissenters' Rights
Under Ohio law, PocketScript's unit holders may dissent from the merger and
demand the fair value of their shares in cash. To exercise this right,
PocketScript's unit holders may not vote in favor of the merger and must take
certain other actions that Ohio law requires. PocketScript's unit holders have
been advised of their right to dissent and the procedures to follow if they
intend to exercise those rights.
Market Price Data
Our common stock has traded on the American Stock Exchange under the symbol
"MXR" since April 6, 2000. The following table sets forth the per share range of
high and low closing sales prices of our common stock for the periods indicated:
High ($) Low ($)
Year Ended December 31, 2001:
Quarter Ended March 31 ....... $ 1.56 $ 0.58
Quarter Ended June 30 ........ $ 1.40 $ 0.45
Quarter Ended September 30.... $ 1.20 $ 0.54
Quarter Ended December 31 .... $ 1.00 $ 0.53
Year Ended December 31, 2002:
Quarter Ended March 31 ....... $ 0.91 $ 0.47
Quarter Ended June 30 ........ $ 0.62 $ 0.27
Quarter Ended September 30.... $ 0.62 $ 0.31
Quarter Ended December 31 .... $ 0.94 $ 0.48
Year Ending December 31, 2003:
Quarter Ending March 31 (through ________,2003)
On December 18, 2002, the last full trading day prior to our signing and
announcing the merger agreement, the closing sales price of our common stock on
the American Stock Exchange was $0.80 per share. On _______, 2003, the most
recent practicable date prior to the mailing of this proxy statement to you, the
closing sales price of our common stock on the American Stock Exchange was $__
per share.
We encourage you to obtain current market quotations for our common stock.
The market price for our common stock is highly volatile and fluctuates in
response to a wide variety of factors.
We will file an application with the American Stock Exchange to list the
Medix Resources common stock that PocketScript unit holders will receive in the
merger.
Dividend Policy
We have never declared or paid any dividends on our common stock or
preferred stock and do not anticipate paying any cash dividends in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance operations and the expansion of our business. Any future determination
to pay cash dividends on our common stock will be subject to our prior payment
of all accrued and unpaid dividends on our outstanding preferred stock, will be
at the discretion of our board of directors and will depend upon our financial
condition, operating results, capital requirements, contractual restrictions and
other factors that the board of directors deems relevant.
Summary Historical and Unaudited Pro Forma Financial Information
Summary Historical Financial Information
Medix Resources' Summary Historical Financial Information. We have derived
the summary historical financial information of Medix Resources set forth
below from our year-end and unaudited interim financial statements filed with
the SEC. See "Where You Can Find More Information."
Statement of Operations Nine Months Ended For the Years Ended
September 30, December 31,
Data: ---------------------------- ----------------------------------------------------------------------------
2002 2001 2001 2000(1) 1999 1998(2) 1997
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating revenues ....... $ 10,000 $ 30,000 $ 29,000 $ 326,000 $ 24,000 $ 17,412,000 $ 24,875,000
Software research and
development costs ........ 533,000 947,000 1,075,000 685,000 596,000 780,000 --
(Loss) or profit from
continuing operations .... (4,718,000) (7,076,000) (10,636,000) (6,344,000) (5,422,000) (515,000) 610,000
(Loss) or profit from
continuing operations per
share .................... $ (0.08) $ (0.14) $ (0.21) $ (0.15) $ (0.29) $ (0.15) $ 0.06
Balance Sheet Data:
Total assets ............. 3,602,000 -- 3,101,000 5,089,000 4,629,000 5,175,000 10,140,000
Long-term obligations,
including current portion -- -- -- -- 400,000 -- --
Working Capital .......... (1,949,000) -- (1,404,000) 394,000 644,000 (2,612,000) (329,000)
Total shareholders' equity
(deficit) ................ 1,145,000 -- 1,345,000 4,202,000 2,376,000 (218,000) 4,504,000
The following is
supplementary information
relating to software
development costs:
Software research and
development costs ........ 533,000 947,000 1,075,000 685,000 596,000 780,000 --
Capitalized software
development costs ........ 522,000 366,000 434,000 495,000 -- -- --
Total software development
costs .................... 1,055,000 1,313,000 1,512,000 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
which are included in cost of services in the Company's Statement of
Operations.
PocketScript's Summary Historical Financial Information. We have derived
the summary historical financial information of PocketScript set forth below
from the PocketScript financial statements that are set forth elsewhere in this
proxy statement. The information for September 30, 2002 and 2001 was derived
from unaudited information contained in the PocketScript financial statements.
You should read this financial information in conjunction with these financial
statements.
For the Nine Months Ended For the Year Ended
September 30 December 31
-------------------------- --------------------------
Statement of 2002 2001 2001 2000
Operations ----------- ----------- ----------- -----------
Data:
Revenues .......... $ 135,159 $ 597,505 $ 597,505 $ 81,439
Operating expenses 531,923 4,554,309 4,965,484 7,612,307
Other income
(expense) ......... (38,791) (206,474) (206,449) (358,957)
Total gain from
reorganization .... 2,879,867 -- -- --
items
Net income (loss) . 2,444,312 (4,163,278) (4,574,428) (7,889,825)
Dividend on
preferred units ... -- (180,000) (240,000) (20,000)
Net income (loss)
applicable to LLC
members ........... $ 2,444,312 $(4,343,278) $(4,814,428) $(7,909,825)
Income (loss) per
unit .............. $ 24,443.12 $ (0.43) $ (0.48) $ (0.79)
Balance Sheet Data: September 30, December 31, December 31,
2002 2001 2000
-------------- ------------- -------------
Total assets ....... $ 359,135 $ 2,097,086 $ 2,879,996
Redeemable preferred
stock .............. -- (8,781,208) (6,400,658)
Working capital .... 780,816 5,356,242 3,685,296
deficit
Total stockholders'
(members') deficit . 1,814,844 12,040,364 7,375,936
Unaudited Pro Forma Condensed Consolidated Summary Financial Information
The following table summarizes, under the purchase method of accounting,
pro forma condensed consolidated statement of operations data for the year ended
December 31, 2001 and the nine months ended September 30, 2002 as if the
PocketScript merger had been completed on the first day of such periods and pro
forma condensed consolidated balance sheet data as of September 30, 2002 as if
the merger had been completed on that date. We have included this unaudited pro
forma condensed consolidated summary information only for the purposes of
illustration, and it does not necessarily indicate what the operating results or
financial position would have been if the merger between Medix Resources and
PocketScript had been completed at the dates indicated. Moreover, this
information does not necessarily indicate what the future operating results or
financial position of the combined company will be. You should read this
unaudited pro forma condensed consolidated summary financial information in
conjunction with the "Unaudited Pro Forma Condensed Consolidated Financial
Statements" presented elsewhere in this proxy statement. See "INDEX TO FINANCIAL
STATEMENTS". This unaudited pro forma condensed consolidated summary financial
information does not reflect any adjustments to conform accounting practices or
to reflect any cost savings or other synergies that may result from the merger
or any future merger-related expenses.
Nine Months Ended Year Ended
September 30, December 31,
2002 2001
----------------- -------------
Statement of Operations Data:
Revenues ....................... $ 145,159 $ 626,505
Loss from operations ........... 5,571,999 14,042,587
Net loss ....................... 5,920,740 16,142,531
Basic and diluted net (loss) per
share $ 0.08 $ 0.26
Balance Sheet Data (as of
September 30, 2002 only):
Total assets.................... $ 12,176,974
Long-term debt, including current
portion......................... 1,364,689
Working capital (deficit)....... (2,830,811)
Total stockholders' equity...... 7,545,000
Comparative Per Share Data
We have summarized below the per share or per unit information for Medix
Resources and PocketScript on an historical basis and consolidated per share
data on an unaudited pro forma basis. The consolidated data gives effect to the
merger on a purchase method basis of accounting as described in "Unaudited Pro
Forma Condensed Consolidated Financial Statements." Medix Resources and
PocketScript did not pay any dividends on their common stock during the periods
presented below.
This information is only a summary and you should read it in conjunction
with the selected historical financial information, the pro forma condensed
consolidated financial statements and the separate historical financial
statements of Medix Resources and PocketScript and related notes included in
this document. The table below assumes that no adjustments are made in the
initial merger consideration and that none of the Qualifying Events occur. Thus,
the table assumes that each PocketScript unit will convert into 120,000 shares
of our common stock.
At or For the At or For the
Year Ended Nine Months Ended
December 31, 2001 September 30, 2002
------------------ -------------------
Net income (loss) per share or unit:
Medix Resources - Historical....... $(0.21) $ (0.08)
PocketScript - Historical.......... $(0.48) $ 24,443.12(1)
Medix Resources/PocketScript Pro Forma $(0.26) $ (0.08)
Pro Forma Equivalent (2) .......... $(0.31) $ (9600.00)
Book value per share:
Medix Resources - Historical....... $ 0.02 $ .02
PocketScript - Historical.......... $ 1.20 $(18,148.44)
Medix Resources/PocketScript Pro Forma -- $ 0.10
Pro Forma Equivalent (2) .......... -- $ 12,000
(1) Reflects an aggregate gain resulting from PocketScript's bankruptcy
reorganization of $2,879,867.
(2) Calculated by multiplying the pro forma amount by 120,000 for 2002 and
by 1.2 for 2001.
The Reincorporation Merger
General
Your board of directors has concluded that it is in the best interests of
Medix Resources and its shareholders for our company to reincorporate in
Delaware. Our principal reason was to provide us with flexibility in attracting
the additional capital that is essential if our company is to succeed. Most
investors are comfortable investing in Delaware corporations and certain
investors will insist that their funds be invested in Delaware companies
whenever possible.
Structure
In order to reincorporate in Delaware, we have created a new wholly-owned
subsidiary that we have incorporated in Delaware. Under the terms of the
reincorporation merger, upon receipt of shareholder approval, Medix Resources
will merge into this subsidiary and each share of Medix Resources stock will
become one share of the stock of our Delaware subsidiary. Your ownership
interest in the Delaware subsidiary immediately after the reincorporation merger
will be identical to your ownership interest in Medix Resources immediately
prior to the merger.
Comparison of Shareholder Rights
As a shareholder of Medix Resources, your rights will be governed by the
Delaware statute governing corporations and by the certificate of incorporation
and by-laws of our Delaware subsidiary. We have summarized the material
differences between your rights as a shareholder of Medix Resources and the
rights you will have as a shareholder of our Delaware subsidiary under "Approval
of Reincorporation in the State of Delaware - Comparison of the Rights of
Holders of Medix-COL Common Stock and Medix-DEL Common Stock". You should also
review the following annexes for information about our proposed reincorporation:
Annex C - Reincorporation Agreement
Annex D - Certificate of Incorporation (Delaware subsidiary)
Annex E - By-Laws (Delaware subsidiary)
RISK FACTORS APPLICABLE TO THE POCKETSCRIPT MERGER
You should carefully consider the following factors and other information
contained in this proxy statement before approving the PocketScript merger.
Risks Relating to the PocketScript Merger and the Combination of Medix Resources
and PocketScript
There are several uncertainties that arise from integrating our two companies.
In deciding that the merger is in the best interests of our company, our
board of directors considered the potential complementary effects of combining
our companies. However, the process of integrating separate businesses,
especially when they are as geographically separated as Medix Resources,
headquartered in New York, and PocketScript, headquartered in Ohio, involves a
number of special risks, including:
o the possibility that the business cultures of our two companies may
not mesh;
o the possibility that management may be distracted from regular
business concerns by the need to integrate operations;
o unforeseen difficulties in integrating operations and systems;
o problems in retaining the employees of PocketScript;
o challenges in attracting customers; and
o potential adverse effects on operating results.
Medix Resources may incur substantial costs in integrating PocketScript.
We expect to incur restructuring and integration costs from combining
PocketScript's operations with Medix Resources' operations. These costs may be
substantial and may include costs for employee severance, relocation and
disposition of excess equipment and other merger-related costs. We have not yet
determined the total amount of these costs.
You will have a reduced ownership and voting interest after the merger.
After the merger is completed, you will own a smaller percentage of the
combined company and its voting stock than you currently own of Medix Resources.
Consequently, you may be able to exercise less influence over the management and
policies of the combined company than you currently exercise over Medix
Resources.
If Medix Resources and PocketScript do not integrate their technology and
operations quickly and effectively, the potential benefits of the merger may not
occur.
We cannot assure you that we will be able to integrate the two companies'
technology and operations quickly and smoothly. In order to obtain the benefits
of the merger, the companies must make PocketScript's technology and services
operate together with Medix Resources' technology. We may be required to spend
additional time or money on integration which would otherwise be spent on
developing our business. Our combined companies' business, financial condition
and prospects will be harmed if Medix Resources and PocketScript do not
integrate their operations and technology smoothly or if management spends too
much time on integration issues.
The merger may result in a loss of PocketScript employees.
The success of the combined company may depend upon the retention of
PocketScript executives and other key employees who are critical to the
continued design, development and support of PocketScript's products and
services. Despite our efforts to hire and retain quality employees, we might
lose some of PocketScript's key employees following the merger. Competition for
qualified management, engineering and technical employees in our industry is
intense. Medix Resources and PocketScript may have different corporate cultures.
PocketScript employees may be unwilling to work for a larger, publicly-traded
company instead of a smaller, start-up company. In addition, competitors may
recruit employees prior to the merger and during integration, as is common in
high technology mergers. As a result, employees of PocketScript or the combined
companies could leave with little or no prior notice. We cannot assure you that
the combined companies will be able to attract, retain and integrate employees
to develop and use the PocketScript technology following the merger.
We do not know how many shares of Medix Resources common stock will be
issuable in the merger.
If each of the Qualifying Events occurs, we will be required to issue $4
million of our common stock. The value of our common stock will depend on the
average closing price of our common stock during the period between the closing
date of the merger and the dates on which the Qualifying Events occur. If the
market price of our stock declines during this period, we will be required to
issue more shares of our common stock than if the market price of our common
stock remained even or appreciated during this period. The resulting dilution
could be substantial. While we have the right to terminate the merger agreement
if the closing price of our common stock falls below $.50 for five consecutive
days, we will have no right to terminate our obligation to issue shares after
the merger is consummated.
Risk Factors Generally Relating to Medix Resources and/or PocketScript
An investment in our common stock:
o has a high degree of risk;
o is highly speculative; and
o should only be considered by those persons or entities who can afford
to lose their entire investment.
In addition to the other information contained in this proxy statement, the
following risk factors should be carefully considered in evaluating the matters
described in this proxy statement.
Our continuing losses endanger our viability and have caused our accountants to
issue a "going concern" exception in their annual audit report.
We reported net losses of $10,636,000, $5,415,000 and $4,847,000 for the
years ended December 31, 2001, 2000 and 1999, respectively, and a net loss of
$4,718,000 for the nine months ended September 30, 2002. At September 30, 2002,
we had an accumulated deficit of $38,777,000 and negative working capital of
$1,949,000. Our Cymedix(R) products are in the development and early deployment
stage and have not generated any significant revenue to date. We are funding our
operations through the sale of our securities. Our independent accountants have
included a "going concern" explanatory paragraph in their audit reports on our
audited 2000 and 2001 financial statements. One of the reasons that PocketScript
agreed to enter into the merger agreement was that management of PocketScript
was concerned that if PocketScript continued to operate independently, its needs
for working capital and its failure to reach profitability were leading to
substantial liquidity problems. Thus, this merger is not expected to ease our
financial concerns, at least in the short term
Our need for additional financing is acute and failure to obtain it could lead
to the financial failure of our company.
We expect to continue to experience losses, in the near term, until such
time as our Cymedix(R) products and the PocketScript products can be
successfully deployed with physicians and produce revenue. The continuing
development, marketing and deployment of the Cymedix connectivity products and
the PocketScript products will depend upon our ability to obtain additional
financing. Our Cymedix(R) products and the PocketScript products are in the
development and early deployment stage and have not generated any significant
revenue to date. We are funding our operations now, and if we acquire
PocketScript, we will be funding the operations of our combined enterprise,
through the sale of our securities. There can be no assurance that additional
investments or financings will be available to us as needed to support the
development and deployment of Cymedix(R) products and PocketScript products.
Failure to obtain such capital on a timely basis could result in lost business
opportunities, the sale of the Cymedix business or PocketScript business at a
distressed price or the financial failure of our company.
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 tour
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 Medix to delay
payment of our obligations as they came due in the ordinary of its business. In
some cases, Medix was delinquent in making payments by the legally required due
dates. At its four office locations, Medix 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. Medix 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. Medix paid the resulting penalties as they were billed.
Medix had state withholding obligations in five states, Colorado, California,
Georgia, New Jersey and New York. Although Medix was not late in making
withholding payments in those five states during 2002, it has been late in prior
periods Similarly, although Medix was not late in making deposits of its
employees' 401(k) contributions during 2002, it has been late in making such
deposits in the past. During 2003, the Company may be delinquent from time to
time in meeting its obligations as they become due.
We discontinued active development of our Cymedix(R) products as an independent
product line in anticipation of the acquisition of the PocketScript products,
and the failure to consummate the merger with PocketScript could impair our
ability to compete.
In anticipation of the merger with PocketScript, we discontinued the
development of our Cymedix(R) products as an independent product line because we
plan to incorporate the Cymedix(R) product technology with the PocketScript
technology following its acquisition. We estimate approximately 800,000 of net
capitalized software development costs will be written off related to abandoned
projects. We believe that we can market and sell the combined technology more
effectively than the Cymedix(R) products alone. However, if the PocketScript
merger does not occur, the marketing and development of the Cymedix(R) products
for commercial purposes will have been delayed for several months and we may be
unable to then develop the Cymedix(R) products by themselves in a competitive
manner.
We are a development stage company, which means our products and services have
not yet proved themselves commercially viable and therefore our future is
uncertain.
o We develop products for Internet-based communications and information
management for medical service providers, through our wholly owned
subsidiary, Cymedix Lynx Corporation. Our Cymedix(R) products, as well
as PocketScript's products, are still in the development and early
deployment stage and have not generated any significant revenue to
date. We are funding our operations through the sale of our
securities. Our ability to continue to sell our securities can not be
assured.
o 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.
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 Medix Resource's
products and PocketScript's products is characterized by continued and
rapid technological advances in both hardware and software
development, requiring ongoing expenditures for research and
development, and timely introduction of new products and enhancements
to existing products. The establishment of standards is largely a
function of user acceptance. Therefore, such standards are subject to
change. Our future success, if any, will depend in part upon our
ability to enhance existing products, to respond effectively to
technology changes, and to introduce new products and technologies
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 significant 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 an aggressive strategy to develop alternate
distribution channels in multiple markets, there can be no assurance
of near term or long term success.
o We cannot assure you that we will successfully complete the
development of the Cymedix(R) products or PocketScript's products in a
timely fashion 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 impact
on our financial condition.
Certain of our products and PocketScript's 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, the Health Insurance Portability and Accountability Act
of 1996, and the regulations that are being promulgated thereunder, are causing
the healthcare industry to change its procedures and incur substantial cost in
doing so. Although we expect these regulations to have the beneficial effect of
spurring adoption of our software products, we cannot predict with any certainty
what impact, if any, these and future healthcare reforms might have on our
business.
We and PocketScript 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
impact 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 and such as PocketScript's
technology, 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 product ideas that we or
PocketScript have originated. Further, the laws of certain foreign
countries do not provide the protection to intellectual property that
is provided in the United States, and may limit our ability to market
our products overseas. 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 our Cymedix(R)software or
PocketScript's software 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. We and PocketScript have
received claim notices asserting that third parties believe that
certain of our products may infringe on their rights.
o We and PocketScript 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 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 our Cymedix(R) products and PocketScript products 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 our Cymedix(R) and PocketScript products is dependent to a
significant degree on our key management and technical personnel. We
believe that our and PocketScript's success will also depend upon our
ability to attract, motivate and retain highly skilled, managerial,
sales and marketing, and technical personnel, including software
programmers and systems architects skilled in the computer languages
in which our Cymedix(R) products and PocketScript operate. Competition
for such personnel in the software and information services industries
is intense. The loss of key personnel, or the inability to hire or
retain qualified personnel, could have a material adverse effect on
our results of operations, financial condition or business and on the
success of our proposed acquisition of PocketScript.
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, Medix Resources
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 and 76 shares of preferred stock outstanding. As of that date,
approximately 33,177,353 shares were issuable upon the exercise of outstanding
options, warrants or other rights, and the conversion of preferred stock. Most
of these shares will be immediately saleable upon exercise or conversion under
registration statements we have filed with the SEC. The exercise prices of
options, warrants or other rights to acquire common stock presently outstanding
range from $0.25 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 our common stock, and the exercise of any options,
warrants or other rights may dilute the book value per share of the common stock
and put downward pressure on the price of the common stock. The existence of the
options, conversion rights, or any outstanding warrants may adversely affect the
terms on which we may obtain additional equity financing. Moreover, the holders
of such securities are likely to exercise their rights to acquire common stock
at a time when we would otherwise be able to obtain capital on terms more
favorable than could be obtained through the exercise or conversion of such
securities.
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 current sales, as well as 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 fluctuation:
o unfavorable announcements or press releases relating to the technology
sector;
o regulatory, legislative or other developments affecting our company or
the health care 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 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
health care 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 health care 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
result in fewer market makers making a market in our common stock and may
further restrict the liquidity of our common stock.
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future.
We have not had earnings, but if earnings were available, it is our general
policy to retain any earnings for use in our operation. Therefore, we do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Any payment of cash dividends on our common stock in the future will be
dependent upon our financial condition, results of operations, current and
anticipated cash requirements, preferred rights of holders of preferred stock
plans for expansion, as well as other factors that the Board of Directors deems
relevant. We anticipate that our future financing agreements will prohibit the
payment of common stock dividends without the prior written consent of those
providers.
THE SPECIAL MEETING
General
The Medix Resources' Board of Directors is soliciting your signature on the
enclosed proxy card for use at the Medix Resources special meeting of
shareholders to be held on _________, 2003, at 10:00 a.m., local time, or at any
adjournment(s) thereof, for the purposes that we have described in this proxy
statement and in the notice of special meeting of shareholders that we have
provided to you. The special meeting will be held at
_____________________________________. We first mailed these proxy solicitation
materials on or about _____ __, 2003 to all shareholders listed in our
shareholder records as of the record date for the special meeting. We will bear
the cost of this solicitation.
Record Date and Quorum
Shareholders of record at the close of business on February __, 2003 are
entitled to vote at the special meeting. We refer to that date as the record
date. On the record date, _______ shares of our common stock, $0.001 par value
per share, were outstanding. Shareholders holding at least one-third of all
shares of our common stock, represented in person or by proxy, will constitute a
quorum for the special meeting. If we have a quorum, we will be able to transact
business at the special meeting.
Revocability of Proxies
Any proxy card signed and submitted pursuant to this solicitation may be
revoked by the person or entity signing it at any time before its use. To revoke
a proxy, a shareholder must either:
o deliver to us a written notice of revocation prior to the time that
the submitted proxy is voted;
o deliver a duly executed proxy card bearing a later date than the other
proxy card; or
o attend the special meeting and vote in person.
An appointment of proxy will be revoked upon the death or incapacity of the
shareholder appointing the proxy if our Secretary or other officer or agent who
is authorized to tabulate votes receives notice of such death or incapacity
before the proxy exercises his or her authority under the appointment.
Voting and Solicitation
Each outstanding share of our common stock will be entitled to one vote on
each matter submitted to a vote at the special meeting. The proposed amendment
to our articles of incorporation will be deemed approved by our shareholders if
the number of votes cast for such proposal exceeds the number of votes cast
against such proposal, assuming that a quorum is present. Our proposed 2003
Stock Incentive Plan will be deemed approved if a majority of the votes cast are
cast for such proposal, assuming a quorum is present. The PocketScript merger
agreement, and the reincorporation of Medix Resources in Delaware through the
proposed reincorporation merger require approval of our shareholders by the
affirmative vote of the holders of a majority of the outstanding shares of our
common stock. Where brokers have not received any instructions from their
clients on how to vote on a particular proposal, brokers are permitted to vote
on routine proposals but not on non-routine matters. We refer to the absence of
votes on non-routine matters as "broker non-votes." Abstentions and broker
non-votes will be counted towards the presence of a quorum, but will not be
counted and will have no effect on the outcome of the vote on the proposed
amendment to our articles of incorporation. In voting on the 2003 Stock
Incentive Plan, abstentions will have the effect of "no" votes, and broker
non-votes will not be counted as votes cast. Since the PocketScript merger and
the reincorporation merger require the approval of a majority of our outstanding
shares of common stock, abstentions and broker non-votes will have the same
effect as a vote against these transactions."
Our principal executive offices are located at 420 Lexington Ave., Suite
1830, New York, New York 10170. In addition to the use of the mails, we may
solicit proxies personally, by telephone or by facsimile, and we may reimburse
brokerage firms and other persons holding shares of our common stock in their
names or in the names of their nominees, for their reasonable expenses in
forwarding proxy solicitation materials to the beneficial owners. We may retain
the services of a professional proxy solicitation firm, in which case we will
pay such firm its standard fees for such services and reimburse such firm for
its out-of-pocket expenses.
Matters to be Brought Before the Special Meeting
We expect that four matters will be presented at the special meeting.
Management will propose that our shareholders approve the PocketScript merger
agreement, that our shareholders approve the proposal to amend our articles of
incorporation to increase the number of authorized shares of common stock, that
our shareholders approve the proposal to reincorporate Medix Resources in the
State of Delaware and that our shareholders approve the adoption of our 2003
Stock Incentive Plan. We have provided detailed information regarding each of
these proposals in this proxy statement.
IN THE EVENT THAT OUR SHAREHOLDERS DO NOT APPROVE THE POCKETSCRIPT MERGER
AGREEMENT, MEDIX RESOURCES WILL NOT BE ABLE TO CONSUMMATE THE POCKETSCRIPT
MERGER. IF OUR SHAREHOLDERS APPROVE THE POCKETSCRIPT MERGER AGREEMENT BUT DO NOT
APPROVE THE PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION, WE MAY BE
PRECLUDED FROM CONSUMMATING THE POCKETSCRIPT MERGER OR MAY BE REQUIRED TO
RESTRUCTURE THE POCKETSCRIPT MERGER IN A MANNER THAT WOULD REQUIRE A FURTHER
VOTE OF OUR SHAREHOLDERS.
Principal Shareholders
The following table sets forth certain information, as of December 31,
2002, regarding the shares of our common stock beneficially owned by each of the
members of our board of directors, each of our executive officers and by each
other person known by us to beneficially own more than five percent of our
common stock.
Name Number of Shares Percentage of Number of Shares
Outstanding Included in the
Shares (1) Second Column
Representing
Shares Issuable
upon Exercise or
Conversion of
Warrants,
Options or
Convertible
Securities
Directors
Darryl Cohen 2,688,320 (2) 3.4 1,855,000
Patrick Jeffries 1,635,000 2.1 1,197,500
John Lane 775,000 1.0 562,500
Samuel Havens 290,000 * 265,000
Guy Scalzi 240,000 * 240,000
Joan Herman (3) 0 0 0
Other Executive Officers
Louis Hyman 412,500 * 362,500
Brian Ellacott 400,000 * 375,000
Mark Lerner 156,250 * 132,250
James Gamble 75,000 * 75,000
All Directors and 6,672,070 8.1 5,064,750
Executive Officers
as a Group (10
persons)
* Represents less than one percent.
(1) As of December 31, 2002, there were 77,320,815 shares of common stock
outstanding, including 160,000 shares issuable upon conversion of our
outstanding preferred stock.
(2) Mr. Cohen disclaims beneficial ownership of 67,950 shares held in
trust for his minor children.
(3) Ms. Herman has declined the grant of any options based on WellPoint
company policy.
THE POCKETSCRIPT MERGER
Background of the Merger
As a result of the competitive environment in which Medix Resources
operates, and the fact that many of our competitors have larger operations, are
better capitalized and have stronger distribution channels for their products
than we do, during the second half of 2002, our management decided to evaluate
possible acquisition targets for Medix Resources. In October 2002, our Chief
Executive Officer, Darryl Cohen, contacted Steven Burns, the President and Chief
Executive Officer of PocketScript, to discuss the possibility of Medix
Resources' acquiring PocketScript. Messrs. Cohen and Burns spoke by telephone
several times regarding a possible acquisition. On or about October 18, 2002,
Mr. Cohen met with Mr. Burns in Las Vegas to discuss the possible acquisition
and to negotiate its terms. No finder or broker participated in the negotiations
nor played any role in the proposed transaction.
From October 18, 2002 through October 29, 2002, Mr. Cohen, a representative
of Medix' acquisition counsel, Moses & Singer LLP, and Mr. Burns and a
representative of PocketScript's general counsel, Cummins & Hession PC,
negotiated the terms of the acquisition as contained in the letter of intent
signed by the parties on October 29, 2002.
Prior to the execution of the letter of intent, the board of directors of
Medix conducted a telephone meeting to discuss the terms of the proposed
acquisition. The board reviewed the text of the letter of intent. After
discussion, the board concluded that the acquisition of PocketScript on the
terms contained in the letter of intent was in the best interests of Medix and
its stockholders.
On October 30, 2002, Medix released a press release announcing that it had
entered into a letter of intent with PocketScript.
On November 11, 2002, Mr. Cohen, together with Andrew Brown, a consultant
retained by Medix, and Brian Ellacot, our Executive Vice President of Business
Development, met with Mr. Burns, Mick Kowitz and PocketScript's other management
members, certain of its principal equity holders, a representative of Cummins &
Hession PC and a representative of PocketScript's acquisition counsel, Katz,
Teller, Brant & Hild, to discuss the acquisition, the terms of the merger
agreement, PocketScript's business, Medix's business and the integration of
PocketScript into Medix.
From November 20 through November 22, 2002, Gary Wilson, a consultant
retained by Medix, conducted due diligence of PocketScript at its offices in
Mason, Ohio.
The terms of the merger agreement were negotiated by Mr. Cohen and Medix's
counsel primarily with Mr. Burns and PocketScript's general and acquisition
counsel by means of multiple telephone conferences. Several drafts of the merger
agreement were exchanged and reviewed by the parties. These negotiations took
place for several weeks after the letter of intent was signed.
On December 18, 2002, in a telephone meeting, the board of directors of
Medix approved the merger agreement. Subsequent to the board's approval of the
merger agreement, such agreement was executed by the parties.
On the morning of December 19, 2002, Medix issued a press release
announcing the signing of the merger agreement.
Reasons for the Merger
Our board of directors, in the course of reaching the decision to approve
the merger agreement, consulted with management and our advisors, and considered
a number of factors, including the following material factors, the order of
which does not necessarily reflect their relative significance:
o The opportunity to deploy PocketScript's technology in connection with
our business model;
o the opportunity to add PocketScript's technical team to Medix
Resources' technical team;
o the opportunity to add certain members of PocketScript's management
team, including PocketScript chief executive officer Stephen Burns;
o the belief that the terms of the merger agreement, including the
parties' representations, warranties and covenants, and the conditions
to their respective obligations, are reasonable; and
o reports from management and from legal and financial advisors as to
the results of their preliminary due diligence investigation of
PocketScript.
Our board of directors has determined that the merger is fair, is in the
best interests of Medix Resources and is in the best interests of our
shareholders. However, all business combinations, including the PocketScript
merger, also include certain risks and disadvantages. The material potential
risks and disadvantages to Medix Resources' shareholders identified by the Medix
Resources' board and management include the following material matters, the
order of which does not necessarily reflect their relative significance:
o the difficulties and expenses associated with integrating our two
companies;
o the risk that the potential benefits sought in the merger might not be
realized;
o the risk that existing shareholders may be concerned by the number of
shares of Medix Resources common stock to be issued under the merger
agreement;
o the risk that the combined company may not be able to retain the
existing employees of Medix Resources and PocketScript or attract the
professional expertise necessary for the combined company to prosper;
o the extent to which Medix Resources' limited capital resources must be
devoted to the development of PocketScript;
o the fact that there is no real upside limit on the number of shares of
our common stock that are issuable in the event that the Qualifying
Events occur;
o the risk that management will be required to spend a disproportionate
amount of its time and attention on issues pertaining to the
integration of our two companies; and
o other applicable risks described in this proxy statement.
Other than these disadvantages, our board did not identify any other
particular material risks to or material adverse effects on our corporation or
shareholders. Our board of directors believes, and continues to believe, that
these potential risks and disadvantages are outweighed by the potential benefits
anticipated from the merger.
The foregoing discussion of the material factors considered by our board of
directors is not intended to be exhaustive. In view of the wide variety of
factors, risks and disadvantages considered in connection with our board's
evaluation of the merger, our board did not find it practicable to, and did not,
quantify or assign any relative or specific weights to the foregoing matters,
and individual directors may have deemed different matters more significant than
others.
Recommendation of the Board of Directors with Respect to the Merger
For the reasons discussed above, our board of directors has determined that
the terms of the merger agreement and the transactions contemplated thereby are
fair to, and in the best interests of, Medix Resources and our shareholders.
Accordingly, our board recommends that our shareholders vote for the proposal to
approve the PocketScript merger agreement and merger.
Federal Securities Law Consequences
We have not registered, under the Securities Act of 1933 or otherwise, the
shares of Medix Resources common stock that we will issue to PocketScript unit
holders in the merger. However, we have agreed to execute a registration rights
agreement which will obligate us to file registration statements, and to use our
best efforts to have such registration statements declared effective by the SEC,
covering the resale of the shares of our common stock issued pursuant to the
merger agreement. Once these shares have been registered for resale, these
shares may be traded freely without restrictions other than restrictions imposed
pursuant to the merger agreement and the escrow agreement.
THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement. This
summary is qualified in its entirety by reference to the merger agreement, which
is incorporated herein by reference. You may read the actual provisions of the
merger agreement by referring to Annex A; you are urged to read the merger
agreement in its entirety for a more complete description of the terms and
conditions of the merger.
The Merger; Closing; Effective Time
Before execution of the merger agreement, Medix Resources formed PS
Purchase Corp. as a Delaware corporation and a wholly-owned subsidiary of Medix
Resources to effectuate the merger. The closing of the merger will take place on
the closing date, which will be a date determined by Medix Resources and
PocketScript after satisfaction or waiver of the substantive conditions set
forth in the merger agreement. We expect to conduct the closing shortly after
the special meeting is held, since we anticipate that all other conditions to
the merger will be satisfied or waived by that time. Subject to the provisions
of the merger agreement, Medix Resources and PocketScript will file on the
closing date a certificate of merger with the Secretary of State of the State of
Ohio in accordance with the relevant provisions of Ohio law and a comparable
document with the Secretary of State of the State of Delaware. As a result, PS
Purchase Corp. will merge with and into PocketScript, and PocketScript will
become a wholly-owned subsidiary of Medix Resources. We refer in this proxy
statement to the "effective time" as the time when the merger becomes effective
under Ohio and Delaware law.
Initial Merger Consideration
At the effective time, by virtue of the merger and without any action on
the part of any PocketScript unit holder, each issued and outstanding unit will
be exchanged into the right to receive a pro rata portion of the initial merger
consideration and a pro rata portion of the shares that we may be required to
issue upon the occurrence of the Qualifying Events.
The initial merger consideration will be 12,000,000 shares of our common
stock, subject to the following adjustments:
o Prior to the closing, the initial consideration will be reduced to the
extent that PocketScript's scheduled indebtedness, PocketScript's
estimated working capital deficit (if any), excluding certain
liability items, and the amounts, if any, paid to PocketScript's
dissenting unitholders exceeds $50,000. The 12,000,000 share figure
will be reduced by a number equal to the amount of such excess divided
by $0.50.
o The merger agreement requires us to prepare an audited balance sheet
of PocketScript as of the closing date. PocketScript's representative
will then have an opportunity to review the balance sheet that we
prepare. If that representative disputes any aspect of the balance
sheet and we are unable to amicably resolve any such disputes, we and
the PocketScript representative will select an independent accounting
firm to resolve all of these disputes. Once the closing balance sheet
disputes have been resolved, we will determine whether PocketScript's
current liabilities as of the closing date exceed PocketScript's
current liabilities as of the closing date by more than $50,000. The
escrow agreement to be executed by the parties will provide that if
there is any such excess, Medix resources will receive back from the
escrow agent a number of shares of our common stock equal to the
amount of such excess divided by an average closing price figure
described in the merger agreement.
Qualifying Events
We will be required to issue additional shares of our common stock after
the merger is consummated if certain specified Qualifying Events occur. We will
be required to issue $1,000,000 of our common stock, valued pursuant to a
formula described below, for each Qualifying Event that occurs within the time
periods specified in the merger agreement. The following table names the
Qualifying Events, describes the Qualifying Events and sets forth the period
during which they must be satisfied.
Qualifying Event Description of Qualifying Event Time Period
Telcom Contingent Our combined company must enter Within six months
Payment into a marketing or strategic after the merger
alliance agreement with one of closes
several national
telecommunications companies
identified in the merger
agreement. The agreement must
be for a term of at least one
year and must present the
potential of generating material
revenues for our combined
company.
Hardware Vendor Our combined company must enter Within six months
Contingent Payment into a strategic development, after the merger
marketing or distribution closes
agreement with one of several
national handheld vendors
identified in the merger
agreement. The agreement must
be for a term of at least one
year, must include material
performance obligations for the
vendor and must present the
potential of generating material
revenues for our combined
company.
RXHub Contingent At least 5,000 physicians must Within twelve
Payment execute an average of at least months after the
250 electronic prescriptions announcement that
utilizing the RxHub System PocketScript
through the "PocketScript Express launched
Express" browser-based product.. its RxHub System
Pharmaceutical Our combined company must enter Within six months
Company Contingent into a marketing agreement or after the merger
Payment strategic alliance agreement closes
with one of several
pharmaceutical companies
identified in the merger
agreement. The agreement must
be for a term of at least one
year, must include material
performance obligations for the
pharmaceutical company and must
present the potential of
generating material revenues for
our combined company.
If a Qualifying Event occurs, we will be required to issue to the former
unit holders of PocketScript a number of shares of our common stock equal to
$1,000,000 divided by the average closing price of our common stock on the
American Stock Exchange during the period commencing on the closing date of our
merger and ending on the date that such Qualifying Event occurs.
Exchange Procedures
As soon as reasonably practicable after the effective time of the merger,
the parties will send a letter of transmittal, which is to be used to exchange
PocketScript units for stock certificates of Medix Resources common stock, to
each former PocketScript shareholder. The letter of transmittal will contain
instructions explaining the procedures for assigning such units. Initially,
shares of our common stock will be delivered to the escrow agent on behalf of
the PocketScript unit holders, rather than to the PocketScript unit holders
directly. See "Escrow Agreement; Indemnification."
After the merger is consummated, each unit will only represent the right to
receive the shares of Medix Resources common stock into which those units have
been converted. We will not pay dividends to holders of any PocketScript units
until the units are surrendered. However, once those units are surrendered, we
will pay to the holder, without interest, any dividends that have been declared
after the effective time of the merger on the shares into which those
PocketScript units have been converted. No such dividends are anticipated.
After the effective time of the merger, PocketScript will not register any
transfers of units.
Neither Medix Resources, PocketScript nor any other person will be liable
to any former holder of PocketScript units for any property properly delivered
to a public official according to applicable abandoned property, escheat or
similar laws.
Fractional Shares
No fractional shares of our common stock will be issued in the merger.
Instead, the number of shares that we will deliver to a unit holder will be
rounded to the nearest whole number of shares.
Escrow Agreement; Indemnification
Substantially all of the shares issuable to each PocketScript shareholder
in the merger will initially be delivered to an escrow agent to be held in
escrow under the terms of the escrow agreement. A copy of the form of escrow
agreement is annexed to this proxy statement as Annex B. Shareholders of Medix
Resources are urged to read the form of escrow agreement for a more complete
description of the terms and conditions of the escrow arrangements. It is
expected that ___________, a bank headquartered in _________, will serve as the
escrow agent.
The shares of common stock issuable pursuant to the merger agreement will
be deposited in escrow and withdrawn from escrow as follows:
o the 12,000,000 shares of our common stock initially issuable pursuant
to the merger agreement will be deposited directly into escrow;
o if, pursuant to the merger agreement, there is a reduction in the
initial merger consideration, shares (valued as of the closing date)
will be delivered back to Medix Resources from the escrow agent;
o if shares of our common stock are issued as a result of the occurrence
of a Qualifying Event, two thirds of such shares will be deposited in
escrow and then released from escrow (subject to the indemnification
provisions described below) in two tranches, one three months after
the Qualifying Event occurs and one six months after the Qualifying
Event occurs; and
o subject to the indemnification provisions described below, the other
shares deposited in escrow will be released from escrow in accordance
with the following schedule:
3,000,000 shares will be released three months after the closing;
2,000,000 additional shares will be released six months after the closing;
and
1,000,000 additional shares will be released every three months thereafter,
with all remaining shares being released (other than shares subject to
indemnification claims) two years after the closing.
The escrowed shares will be subject to the following indemnification
claims:
o PocketScript and Stephen Burns made numerous representations and
warranties in the merger agreement. In the event that any such
representations and warranties turn out to be inaccurate and Medix
Resources suffers damages as a result of this inaccuracy, Medix
Resources will be entitled, subject to the limitations described
below, to a return of a number of shares equal to the dollar amount of
such damages divided by the closing sale price of Medix Resources'
common stock on the American Stock Exchange on a date or over a period
to be set forth in the escrow agreement.
o Similarly, should PocketScript or Stephen Burns fail to perform any
covenants described in the merger agreement required to be performed
prior to the closing and should Medix Resources suffer damages as a
result of such non-performance, Medix Resources will be entitled,
subject to the limitations described below, to a return of shares
equal to the dollar amount of such damages divided by the closing sale
price of Medix Resources' common stock on the American Stock Exchange
on a date or over a period to be set forth in the escrow agreement..
o In the event that Medix Resources is required to pay any amounts for
taxes of PocketScript relating to periods prior to the closing or
relating to the consummation of the PocketScript merger, Medix
Resources will be entitled, subject to the limitations described
below, to a return of shares equal to the dollar amount of such
payment divided by the closing sale price of Medix Resources' common
stock on the American Stock Exchange on a date or over a period to be
set forth in the escrow agreement.
o In the event that Medix Resources is not protected by the purchase
price adjustment provisions for cash paid to dissenting shareholders,
Medix Resources will be entitled, subject to the limitations described
below, to a return of shares equal to the dollar amount of such cash
payments divided by the closing sale price of Medix Resources' common
stock on the American Stock Exchange on a date or over a period to be
set forth in the escrow agreement.
o In the event that Medix Resources incurs damages relating to any
claims or obligations of any kind or nature relating to PocketScript,
the business, operations or affairs of PocketScript or any of the
assets, properties, interests in assets or properties or rights of
PocketScript which were existing at or as of the closing date or
arising in whole or in part out of any acts, transactions, conditions,
circumstances or facts which occurred or existed on or prior to the
closing date, Medix Resources will be entitled, subject to the
limitations described below, to a return of shares equal to the dollar
amount of such damages divided by the closing sale price of Medix
Resources' common stock on the American Stock Exchange on a date or
over a period to be set forth in the escrow agreement.
The merger agreement provides for certain limitations on the
indemnification obligations of PocketScript and Stephen Burns. In the absence of
fraud, Medix Resources will have no indemnification rights beyond the shares
held in escrow and will not be entitled to recover more than a total of
3,000,000 shares of our common stock. Moreover, no indemnification claims may be
made unless the aggregate amount of such claims exceeds $100,000, in which case
recovery may be made for all indemnifiable damages in excess of $50,000.
Representations and Warranties
PocketScript. The merger agreement contains representations and warranties
by PocketScript relating to, among other things:
o ownership of the units by the PocketScript unit holders;
o organization, structure and power, authority relating to the merger
agreement and enforceability of the merger agreement;
o absence of conflicts with organizational documents, agreements, laws
and other requirements;
o capitalization;
o subsidiaries and other investments;
o financial statements;
o absence of undisclosed liabilities;
o changes since November 30, 2002;
o material contracts, performance under such contracts and defaults
under such contracts;
o labor and employee benefit matters and issues arising under the
Employee Retirement Income Security Act of 1974;
o compliance with laws and governmental consents;
o insurance;
o litigation;
o related party transactions;
o real property leases;
o PocketScript's tax returns and related tax matters;
o intellectual property rights and obligations;
o accounts receivable;
o clients and vendors; and
o environmental matters.
Medix Resources. The merger agreement contains representations and
warranties by us relating to, among other things:
o organization, structure and power, authority relating to the merger
agreement and enforceability of the merger agreement;
o absence of conflicts with organizational documents, agreements, laws
and other requirements;
o capitalization;
o consents and approvals required in order to complete the merger; and
o accuracy of documents and financial statements filed by Medix
Resources with the SEC.
Covenants
We have each undertaken certain covenants in the merger agreement,
including the following:
PocketScript has made covenants that place restrictions on the conduct of
its business until either the effective time of the merger or the termination of
the merger agreement. In general, PocketScript is required to carry on its
business in the ordinary course of business consistent with past practice and
use its best efforts to preserve and maintain PocketScript's business, assets,
properties, rights and relationships with suppliers, customers, clients,
employees, agents and others.
PocketScript has also agreed to certain specific restrictions;
specifically, PostScript has agreed not to
o create any liability other than in the ordinary course of business and
consistent with past practice, but in no event greater than $5,000;
o guarantee the obligations of, or make any loans or advances to, any
other person, other than in the ordinary course of business and
consistent with past practice, but in no event greater than $5,000;
o transfer any assets, other than in the ordinary course of business and
consistent with past practice, but in no event greater than $5,000;
o mortgage any assets, other than in the ordinary course of business and
consistent with past practice, but in no event greater than $5,000;
o with respect to PocketScript's managers, directors, officers or
employees:
increase the rate or terms of compensation payable or to become payable to
any of them;
pay or agree to pay any employee benefit not required or permitted by any
existing plan, agreement or arrangement to any of them;
commit to any additional pension, profit sharing, bonus, incentive,
deferred compensation, stock purchase, stock option, stock appreciation right,
group insurance, severance pay, retirement or other employee benefit plan,
agreement or arrangement, or increase the rate or terms of any such plan,
agreement or arrangement which now exists, to the extent applicable to any of
them; or
enter into any employment or severance agreement with or for the benefit of
them;
o enter into or terminate any lease or make any change in any lease,
other than in the ordinary course of business and consistent with past
practice, but in no event greater than $5,000;
o make any capital expenditures, other than in the ordinary course of
business and consistent with past practice, but in no event greater
than $5,000;
o change or amend its articles of organization or operating agreement;
issue any units, or issue or sell any securities convertible into or
exchangeable for or carrying the right to, or options with respect to,
or warrants to purchase or rights to subscribe to, any units or pay
any dividends or distributions with respect to any membership or other
equity interests;
o negotiate an acquisition with any other party;
o take any action that would cause any representation or warranty in the
merger agreement to be untrue; or
o commit or agree to take any of the foregoing actions.
PocketScript has also agreed to:
o grant access to us so that our representatives can review
PocketScript's business, assets, properties, books and records; and
o notify us of certain developments adversely affecting PocketScript's
business or ability to consummate the merger.
Stephen Burns, PocketSript's chief executive officer, has agreed not to
compete with us in the United States or Canada for a period of either one or two
years after termination of employment, depending upon the circumstances relating
to such termination. He has also agreed that, during that period, he will not
solicit any of our employees, customers or other clients.
Conditions to Closing
Conditions to the Obligations of PocketScript and Medix Resources.
PocketScript's and Medix Resources' obligations to complete the merger are
subject to the satisfaction or waiver, on or before the closing, of various
conditions, including the following:
o no temporary restraining order, preliminary injunction, or permanent
injunction or other order preventing the consummation of the merger
shall have been issued;
o no law shall have been enacted which prohibits, restricts or delays
the consummation of the merger;
o the parties and the escrow agent shall have executed the escrow
agreement contemplated by the merger agreement;
o we shall have executed and delivered a registration rights agreement
providing for the registration of the shares issuable pursuant to the
merger agreement; and
o PocketScript, Medix Resources and each of Stephen Burns and Mick
Kowitz (a key employee of PocketScript) shall have executed and
delivered employment agreements referenced in the merger agreement.
Conditions to the Obligations of Medix Resources.
MedixResources' obligation to complete the merger is further subject to the
satisfaction or waiver on or before the effective time of various additional
conditions, including the following:
o PocketScript's unit holders shall have approved the merger;
o PocketScript's key employees shall have executed and delivered
employment agreements in form and substance satisfactory to us;
o we shall have completed, and been satisfied with, our due diligence
review of PocketScript;
o on the closing date, the representations and warranties made by
PocketScript and Stephen Burns pursuant to the merger agreement shall
be true and correct with the same effect as though made on and as of
the closing date;
o PocketScript and Stephen Burns shall have performed all of their
covenants in the merger agreement required to be performed by them on
or before the closing date;
o we shall have received a satisfactory opinion letter from
PocketScript's counsel;
o PocketScript shall have given all notices and obtained all
governmental or other third party consents, approvals and waivers
necessary or desirable for the consummation of the merger;
o no event, occurrence, fact, condition, change, development or effect
shall have occurred or been threatened that has had or resulted in or
could be expected to become or result in a material adverse effect on
the business, assets, operations, results, financial condition or
prospects of PocketScript;
o we shall have obtained all necessary approvals, consents and waivers,
made all filings and received the approval of our shareholders
necessary in order for us to perform our obligations under the merger
agreement;
o PocketScript and Way Over the Line, LLC, a limited liability company,
shall have merged or otherwise combined or consolidated their
respective businesses, operations and assets;
o each of the PocketScript unit holders shall have appointed Stephen
Burns as their representative to act as their representative for all
purposes under the merger agreement;
o each of the unit holders shall have executed and delivered an
investment letter in form and substance satisfactory to us;
o Mick Kowitz shall have executed and delivered a non-competition
agreement satisfactory to us;
o unit holders owning at least 95% of PocketScript's outstanding units
shall have voted in favor of the merger and waived any and all
dissenters' rights;
o we shall have received, at our own cost and expense, an opinion dated
as of the closing date from a firm selected by us to the effect that,
as of such date, the merger is fair to our shareholders from a
financial point of view (we have not yet decided whether we will seek
such an opinion or waive this requirement; we are not required by law
to obtain such an opinion, typically referred to as a fairness
letter); and
o we shall have obtained, at our expense, certain audited financial
statements of PocketScript; Conditions to the Obligations of
PocketScript.
PocketScript's obligation to complete the merger is further subject to the
satisfaction or waiver on or before the effective time of various additional
conditions, including the following:
o on the closing date, the representations and warranties made by us
pursuant to the merger agreement shall be true and correct with the
same effect as though made on and as of the closing date;
o we shall have performed all of our covenants in the merger agreement
required to be performed by us on or before the closing date;
o we shall have raised not less than $1 million in additional financing
since October 25, 2002;
o we shall have made all filings, given all notices and obtained all
governmental, administrative, regulatory or other third party
consents, approvals and waivers necessary to consummate the merger;
o we shall have delivered a satisfactory opinion from our counsel with
respect to the merger agreement; and
o no event shall exist or have occurred or come to exist or been
threatened that, individually or in the aggregate, has had or resulted
in or could be expected to become or result in a material adverse
effect on the business, assets, operations, results, financial
condition or prospects of Medix Resources.
Termination of the Merger Agreement
The merger agreement may be terminated before the merger's completion:
o by the mutual written consent of Medix Resources on the one hand, and
PocketScript and Stephen Burns on the other hand;
o on or after April 1, 2003 by either PocketScript and Burns or by Medix
Resources, as the case may be, if the conditions set forth in the
merger agreement have not been met by the applicable party;
o by us if we determine that the transactions contemplated by the merger
agreement have become inadvisable or impracticable by reason of any
legal proceeding which seeks to restrain or prohibit the consummation
of the merger or which questions the validity or legality of the
transactions contemplated by the merger agreement;
o by us, if any law shall have been enacted which impairs the conduct or
operation of PocketScript as presently conducted and as contemplated
to be conducted; or
o by PocketScript and Stephen Burns or by us, if the closing price of
our common stock on the American Stock Exchange is less than $0.50 per
share for five consecutive trading days.
If any such termination results from the breach of any representation,
warranty, covenant or agreement by a party to the merger agreement, that party
will be liable for damages sustained or incurred by any other party as a result
of such breach.
Amendment
The parties may amend the merger agreement before approval by Medix
Resources' shareholders and PocketScript's unit holders. The parties may not
do so after such approval if the amendment or waiver requires further
shareholder or unit holder approval under law, without first obtaining
approval from the affected shareholders or unit holders. Any amendment to
the merger agreement must be in writing and signed by the parties.
SUMMARY INFORMATION ABOUT MEDIX RESOURCES
The following description summarizes our current business and describes
certain recent developments impacting Medix Resources. For additional
information regarding Medix Resources, see "Where You Can Find More
Information".
In 2002, we introduced our next generation of proprietary, point-of-care
products, Cymedix(R)III. This suite of connectivity products is based upon a
device-neutral architecture that leverages proven workstation, handheld and
wireless technologies. The marketing and development of the combined
PocketScript-Cymedix(R)suite of products is our sole business at this time, and
a substantial portion of our net operating loss is due to marketing and
development efforts. We are funding such expenses as well as our administrative
expenses through the sale of our securities. We have no significant long-term
debt financing available to us.
We acquired the Cymedix business in January of 1998. Cymedix has developed
Internet-based communications and information management products, which we have
begun marketing to medical professionals in selected regional markets. Growth of
the medical information management marketplace is being driven by the need to
share significant amounts of clinical and patient information among physicians,
their outpatient service providers, hospitals, insurance companies and managed
care organizations. We believe that this market is one of the fastest-growing
sectors in healthcare today. The Cymedix(R) connectivity products contain
elements that can be used to develop secure medical communications products that
make use of the Internet. Using the Cymedix(R)tools, medical professionals can
order, prescribe and access medical information from participating insurance
companies and managed care organizations, as well as from any participating
outpatient service provider, such as a laboratory or pharmacy. Currently we
provide our products to physician users at no charge, and collect transaction
fees from sponsoring payors whenever our products are used to provide services.
The products' relational database technologies provide user physicians with
a permanent, ongoing record of each patient's name, address, insurance or
managed care affiliation, referral status, medical history and an audit trail of
past encounters. Physicians are able to electronically check patient
eligibility, order medical laboratory procedures, receive and store test
results, issue new and renewal drug prescriptions, make medical referrals and
request authorizations.
Our principal executive office is located at The Graybar Building, 420
Lexington Ave., Suite 1830 New York, NY 10170, and our telephone number at that
location is (212) 697-2509. We also have offices in Georgia.
Recent Developments
In May 2002, we announced the formal launch of physician marketing
activities in the state of Georgia. Georgia is our inaugural regional market,
and it provides an important initial testing ground for physician user
distribution and deployment methodologies. The regional operation has
responsibility to secure locally based health plan, pharmacy benefit manager and
lab sponsor agreements to complement national account sponsor sales and optimize
local market density. As of December 31, 2002, market restrictions that are
local to Georgia has led to new marketing and distribution initiatives.
Specifically, assuming satisfactory funding, we plan to implement and test a
variety of complementary pathways to expedite distribution and deployment of our
technologies to physician communities in multiple markets, including: (i)
nationally-oriented brand building; (ii) potential franchising and outsource
arrangements; and (iii) licensing and co-branding opportunities.
We have announced several market initiatives with large regional physician
networks. In January 2003, we announced the launch of an e-prescribing pilot
program with Blue Cross Blue Shield of Massachusetts and PocketScript. The pilot
program will include 100 Massachusetts doctors and nurses across the State. Also
in January a physician connectivity program was launched through which a
Mid-Atlantic health plan will provide its physicians with Medix Resources'
PocketScript electronic prescribing technologies. This was followed by our
recent announcement with Tufts Health Plan (Tufts HP) on an agreement to
implement a substantial e-prescribing initiative, initially giving 2,000
physicians access to the PocketScript e-prescribing technology through
BlackBerry Wireless Handhelds (TM) from Research In Motion (RIM).
During the period from April 1, 2002 through December 31, 2002, we
completed private placements of our securities in which we raised $5,481,000. In
connection with those private placements, we have issued 13,702,500 shares of
common stock and warrants to purchase an equal number of shares of common stock
at the exercise price of $0.50 per share.
At a Board of Directors meeting held on September 24, 2002, our previous
President and CEO stepped down and was replaced by Darryl R. Cohen, who is fifty
years old. Mr. Cohen was elected to the Board of Directors at a Board meeting
held on October 8, 2002. Mr. Cohen directly or indirectly owns approximately 1
million shares of our common stock and warrants to purchase approximately 1
million additional shares. An investor in private and public companies, Mr.
Cohen frequently works with the management of the companies in which he's
invested, assisting them in the areas of marketing strategy and financing
efforts. He is also co-owner of a financial services advisory firm, Omni
Financial, providing financial restructuring services for individuals. From 1994
to 1998, Mr.Cohen was President of DCNL Incorporated, formerly the Sterling
Brush Company. DCNL was a privately held beauty supply manufacturer and
distributor he founded in 1988 and sold to Helen of Troy in 1998. From 1986 to
1999, during his tenure as President of DCNL, Mr.Cohen was also co-owner and
president of Basics Beauty Supply Stores. He is a member of the board of
directors of Access Marketing and consults to a major media company in the cable
television market. Mr.Cohen holds a BA in Political Science from the University
of California at Berkeley.
At the September 24, 2002 Board meeting, the previous Chairman of the Board
stepped down and Patrick W. Jeffries was elected Chairman of our Board of
Directors.
In July 2002, Loyola University Health System, a wholly owned subsidiary of
Loyola University Chicago, announced the initial findings of a live, field test
of our Cymedix(R)laboratory technology. Early results indicate that the median
laboratory processing time was reduced from an average of ten minutes per
transaction to less than one minute, validating expectations for substantive,
long-range productivity savings. We and Loyola University Medical Center (LUMC)
have worked together to create lab-focused connectivity tools for Loyola Medical
Laboratory's outreach clients. Participating physician practices utilize the
Cymedix(R)laboratory technology to select and requisition laboratory tests;
provide bar-coded identification for specimens; orchestrate patient specimen
packing lists; electronically link with LUMC's internal laboratory system; and
report full and partial test results on a real-time, 24 by 7 basis.
During the nine months ended September 30, 2002, net cash used in operating
activities was approximately $3.5 million. During that period, we raised
approximately $4.8 million from the exercise of options and warrants, and the
issuance of common stock, net of offering expenses, and debt. We had
approximately $8,000 in cash as of December 31, 2001, with a net working capital
deficit of approximately $1,949,000. We have been delinquent, from time to time,
in the payment of our current obligations, including payments of withholding and
other tax obligations. We continue in discussions and negotiations with
institutional sources regarding debt and equity financings to fund our
operations. There can be no assurance that additional investments or financings
will be available to us as needed. Failure to obtain such capital on a timely
basis could result in lost business opportunities, the sale of the Cymedix
business or PocketScript business at a distressed price or our financial
failure. See "Risk Factors Regarding the PocketScript Merger."
We entered into a secured convertible loan agreement with WellPoint, dated
February 19, 2002, pursuant to which we borrowed $1,000,000 from WellPoint
Health Networks Inc. The loan was secured by the grant of a security interest in
all of our intellectual property, including our patent, copyrights and
trademarks. On October 7, 2002, the loan, including all accrued interest, was
converted into 2,405,216 shares of our common stock. Upon the conversion of the
loan, the security interest was terminated.
We executed an Amended and Restated Common Stock Purchase Warrant with
WellPoint Pharmacy Management, dated February 18, 2002, to restructure our
obligations to issue warrants to WellPoint. Under that Warrant, we are obligated
to issue up to 7,000,000 shares of our common stock at exercise prices of $0.30
per share for 3,000,000 shares, $0.50 per share for 3,000,000 shares and $1.75
per share for 1,000,000 shares, if various performance related vesting
requirements are satisfied by WellPoint. Currently, WellPoint has satisfied
certain of these requirements. WellPoint's rights to purchase our shares under
the Warrant expire on September 8, 2004. The Warrant grants to WellPoint certain
registration rights to require us to register with the SEC the shares issued to
WellPoint for resale to the public. In the Warrant, WellPoint has agreed to
restrict sales to the public of these shares during the first year after they
have been issued to 200,000 shares per month and 100,000 shares in any five
trading days. The Warrant contains anti-dilution provisions providing that the
number of shares that may be purchased by WellPoint under the Warrant my be
adjusted in certain circumstances.
INFORMATION ABOUT POCKETSCRIPT
PocketScript's Business
PocketScript develops software applications for wireless, handheld devices
to improve physician efficiency and workflow. Using its flagship product,
PocketScript, physicians can electronically write and transmit prescriptions;
receive formulary and drug interaction information; access education and
compliance services; and connect wirelessly to the Internet.
PocketScript has created a method of writing electronic prescriptions with
only a few touches of the screen that has now been enhanced by the use of
speech-driven technology. The compression technology enables large packets of
information to be sent securely over a wireless connection. For example, in less
than one second, a speech command can be compressed and sent via high-speed
wireless transmission to an on-site computer server. There, the speech command
is decompressed, recognized, re-compressed and instantly returned wirelessly to
the handheld computer for visual confirmation by the physician.
By using PocketScript's technology, doctors can obtain patient information,
insurance coverage information, formulary listings and potential drug
interactions, and then use the technology to send prescriptions via secure fax
or encrypted Internet transmissions. Physicians can access more than 60,000
patient records and instantly select the specific information necessary to
generate a prescription for a patient. Additionally, the compression technology
allows physicians to write 350 prescriptions a day without recharging the
battery.
The PocketScript wireless system uses a radio frequency signal from an
antenna inserted into a Windows CE-based PDA (or Personal Digital Assistant) to
transmit data to a secure server. The PDA wirelessly connects to the server to
obtain current patient, insurance and drug information, enabling physicians to
make informed decisions at the point of care. PocketScript operates on the
Microsoft CE or Pocket PC operating system and currently is being offered on
most commercially available Pocket PC PDA's, including the Hewlett-Packard
Jornada and Ipaq Pocket. All of the handheld PDA's will fit into the physician's
pocket.
PocketScript's technologies maximize the available battery life at the
point-of-care for electronic prescribing. PocketScript employs 128-bit
encryption, firewalls and a number of additional security measures to ensure
patient confidentiality. Most important, patient records reside on the
physician's office server, not on the device itself.
We believe that the PocketScript system provides the following potential
benefits:
For Physicians
The PocketScript system:
o streamlines the process of prescribing medications, while providing
the physician access to information about potential adverse drug
interactions, patient drug history and formulary guidelines for
managed care plans;
o was designed by a physician to be integrated into the doctor's
workflow
o can access approximately 60,000 patient records in a single second,
allowing almost instant access to information necessary to generate a
prescription;
o sends prescriptions via the Internet through a 128-bit encrypted,
secure application directly to the pharmacy of the patient's choice;
o assures patient confidentiality since most information resides on the
physician's office server and via other safeguards; and
o can create a prescription with a few touches of the screen.
For Pharmacies
Electronic prescriptions are more decipherable than handwritten or
telephone orders, thus potentially reducing medication errors due to
transcription difficulties. Similarly, electronic prescriptions can decrease the
time spent by pharmacy staff reworking prescriptions generated by traditional
means.
For the Pharmaceutical Industry
Pharmaceutical companies can partner with PocketScript to deliver
electronic product details directly to the prescribing physician. In addition,
it will be possible to track physician compliance with managed care formularies,
thus reducing the number of off-formulary prescriptions.
PocketScript Selected Financial Data
We have derived the summary historical financial information of
PocketScript set forth below from the PocketScript financial statements that are
set forth elsewhere in this proxy statement. You should read this financial
information in conjunction with these financial statements. See "INDEX TO
FINANCIAL STATEMENTS".
PocketScript was originally incorporated as an Ohio corporation and was
reincorporated as a Delaware corporation in 2000. In February 2002, PocketScript
filed a voluntary petition for Chapter 11 reorganization with the bankruptcy
court. At that time, PocketScript filed a motion to sell substantially all of
its assets free and clear of liens to an entity represented by a group of
secured creditors and certain members of the former management team for an
amount, $1,600,000, which approximated the balances owed to the secured
creditors plus certain fees associated with the Chapter 11 proceedings. No
competing bids were received and, in March 2002, the bankruptcy court entered an
order to sell the assets to an entity established by the secured creditors. That
entity was PocketScript, LLC, the entity which we are acquiring pursuant to the
PocketScript merger agreement.
In connection with the bankruptcy proceedings, assets that were not
recovered from off-site locations were written-off in the amount of $564,610,
professional fees and other related costs of $470,847 were incurred and
unsecured liabilities of $3,460,324 and secured liabilities of $455,000
belonging to creditors other than the secured creditors that established
PocketScript, LLC were discharged.
For the Nine Months Ended For the Year Ended
September 30 December 31
---------------------------- ----------------------------
Statement of 2002 2001 2001 2000
Operations ------------ ------------ ------------ ------------
Data: (in thousands)
Revenues .......... $ 135,159 $ 597,505 $ 597,505 $ 81,439
Operating expenses:
Selling, general
and administrative
expenses .......... 485,998 3,522,095 3,933,270 6,467,412
Software
development
research and
development costs . 45,925 1,032,214 1,032,214 1,144,895
Total operating
expenses .......... 531,923 4,554,309 4,965,484 7,612,307
Other income
(expense) ......... (38,791) (206,449) (206,449) (358,957)
Reorganization
items:
Discharge of
liabilities ....... 3,915,324 -- -- --
Reorganization
expenses .......... (470,847) -- -- --
Write-off of ...... (564,610) -- -- --
assets ............
Total gain from
reorganization .... 2,879,867 -- -- --
items
Net income (loss) . 2,444,312 (4,163,278) (4,574,428) (7,889,825)
Dividend on
preferred stock ... -- (180,000) (240,000) (20,000)
Net income (loss)
applicable to
common
stockholders (LLC
members) .......... $ 2,444,312 $ (4,343,278) $(4,814,428) $(7,909,825)
Income (loss) per
unit .............. $ 24,443.12 $ (0.43) $ (0.48) $ (0.79)
Weighted average
shares (units)
outstanding ....... 10,000,000 10,000,000 10,000,000 100
Balance Sheet Data: September 30, December 31, December 31,
2002 2001 2000
------------- ------------- ---------------
Total assets ....... $ 359,135 $ 2,097,086 $ 2,879,996
Redeemable preferred
stock .............. -- (8,781,208) (6,400,658)
Working capital .... 780,816 5,356,242 3,685,296
deficit
Total stockholders'
(members') deficit . 1,814,844 12,040,364 7,375,936
PocketScript Management's Discussion and Analysis of PocketScript's Results of
Operations and Financial Condition
Overview
PocketScript, LLC is an information technology company headquartered in
Mason, Ohio which specializes in the development and management of connectivity
solutions for clinical and business transactions within the healthcare industry.
Specifically, PocketScript has developed technology that allows physicians to
create prescriptions which are transmitted wirelessly from the physician at the
point of care and routed to pharmacies and pharmacy benefit managers.
PocketScript, LLC is a successor to PocketScript, Inc. PocketScript, Inc.
was originally founded in November of 1999. PocketScript, Inc. ultimately
invested over $13 million in developing and implementing its leading product,
also called PocketScript. PocketScript, Inc. aggressively tried to spur adoption
of its products in various geographic markets across the country by building its
own sales force and installation team. While recognizing that widespread
adoption would require consistent sales and support efforts and continued
investment in the technology over a period of years, PocketScript, Inc. was
dependent on external capital for realization of its business model.
After the collapse of the capital markets in 2000 and 2001, PocketScript,
Inc. was ultimately forced to file for bankruptcy in February of 2002. The
assets of PocktScript, Inc. were purchased by an affiliate of PocketScript, LLC.
PocketScript, LLC was founded by the principal secured creditors and key former
management of the former PocketScript, Inc. This purchase was effected at the
end of April, 2002.
Since the purchase of the PocketScript assets, PocketScript, LLC has
operated with greatly reduced personnel and overhead costs. Principal changes in
its operations have included:
Primary focus on continued development of the technology. Over half of
PocketScript, LLC's employees are directed towards the development and
support of the technology.
Developing Lower Cost Installation Systems. Between the advent of better
wireless technologies and continued improvements to the PocketScript
system, PocketScript, LLC has eliminated many of the hours necessary to
install and support the system, thus reducing personnel costs.
Aligning Sales Efforts with HealthCare Payors. Originally, PocketScript,
Inc. did not have any contact with health care payors except through their
agents, pharmaceutical benefit managers ("PBMs"). Now, PocketScript, LLC
coordinates its marketing and sales efforts in tandem with health care
payors and PBMs on concentrated regional marketing/sales campaigns.
PocketScript's goal is for the health care payor to endorse PocketScript as
a preferred product and financially support the initial roll out costs.
Liquidty on Capital Resources
The Company's capital requirements in connection with its operations,
technology development and marketing activities have been and will continue to
be significant. As of September 30, 2002, the Company had a working capital
deficit of approximately $780,816. The Company's independent certified public
accounts stated in their report on the financial statements that due to losses
from operations and a working capital deficit, there is substantial doubt about
the Company's ability to continue as a going concern.
PocketScript, LLC has continued to be dependent on financial and services
support from its key stakeholders and has not established itself as cash flow
positive on operations. Moreover, management acknowledges that PocketScript,
LLC's inability to access certain financial markets has significantly slowed its
attempts to establish PocketScript as the leading national technology for the
writing and transmission of prescriptions. Accordingly, PocketScript, LLC sought
a partner that would allow it access to capital markets and to bring in
additional management. As a result of these efforts, it ultimately agreed to the
merger with Medix Resources.
Results of Operations
Comparison of Twelve Months Ended December 31, 2001 and December 31, 2000
For the 12 months of 2001, revenue amounted to $598,000 compared to $81,000
in 2000. The increase in revenue is ascribed to certain transactions with PBM's
for the development of the PocketScript system and its implementation in key
markets, including with Tufts Healthcare. Some of this revenue reflects
non-recurring transactions.
Operating expenses of $4,965,000 reflect a decrease of $2,600,000 from
$7,612,000 in 2000. The decrease in expenses is primarily due to a decrease in
Selling General Administrative of $2,534,000 reflecting the decrease of
PocketScript's workforce from approximately 65 full-time employees in May of
2001 to approximately 12 by the end of 2001 and a decrease in related expenses.
Software and research and development costs of $1,032,000 reflect a
decrease of approximately $113,000 or 10% for the twelve-month period compared
to the prior year. This decrease represents a moderate decrease in personnel
over the same period.
Net other income and expenses reflect a net expense of $206,000 as compared
with a $359,000 net expense during 2000. Finance and interest expenses were
reduced by almost 50% or $202,000 as a result of PocketScript, Inc.'s inability
to consummate any capital raising transactions from June of 2001 onward until
its bankruptcy.
Net loss from operations decreased approximately $3,163,000 from $4,368,000
for the twelve months ended December 30, 2001 to $7,531,000 for the year ended
December 31, 2000, due to all of the reasons discussed above.
Comparison of The Nine Months Ended September 30, 2002 and September 30,
2001.
Total revenues for the nine months ended September 30, 2002, were $135,000
compared with $598,000 for the nine months ended September 30, 2001. Revenues
decreased due to the bankruptcy of PocketScript, Inc. and transition to
PocketScript, LLC.
Direct costs decreased more than $4 million from $4.6 million to $0.5
million. The decrease reflects the company's reduction in sales, marketing and
business development costs due to the PocketScript, Inc. bankruptcy and
subsequent changes to operations to reduce operating costs as discussed above.
Other income/expense reflected a decrease in net expenses of approximately
$167,500. PocketScript recognized a net gain from its bankruptcy reorganization
in the amount of $2.9 million, which was a one time gain and is not indicative
of future operating results, resulting in net income for the nine months ended
September 30, 2002 of $2.4 million.
Information About PocketScript's Units
PocketScript is organized as an Ohio limited liability company. The equity
in PocketScript is represented by units, rather than by shares of capital stock.
PocketScript is a private company. Its 100 outstanding units are presently
held by 48 investors. Such units are not publicly traded and there is no market
for such units. PocketScript has not made any distributions in respect of its
units.
The following table sets forth, for each holder of units who beneficially
owned more than 5 units as of December 31, 2002, and for each manager of
PocketScript, the number and percentage of shares of common stock that they will
beneficially own by virtue of the merger agreement, assuming that we ultimately
issue a total of 16,000,000 shares of common stock pursuant to the merger
agreement.
Shares of Percentage
Units Medix Common Ownership of
Name Beneficially Stock to be Medix Resources
Owned (1) Issued (2) (3)
-------------------- --------------- ----------------- ------------------
Steve Burns ........ 25.054 4,023,280 3.19%
Lawrence B. Waldman 13.052 2,151,360 1.70%
David Wolf ......... 12.201 1,920,840 1.52%
Mick Kowitz ........ 10.341 1,651,360 1.31%
John Kane .......... 5.702 869,720 0.69%
(1) The members of PocketScript are anticipated to approve an amendment to
its Operating Agreement prior to the effective date of the merger
which will provide for the following modified percentage distributions
for shares (if any) received upon satisfaction of any Qualifying
Event: Stephen Burns - 25.42%; Lawrence B. Waldman - 14.634%; David
Wolf - 11.400%; Mick Kowitz - 10.243%; and John Kane - 4.637%.
(2) Assumes a total of 12,000,000 shares are issued as part of the initial
merger consideration and an additional 4,000,000 shares are issued
pursuant to satisfaction of Qualifying Events.
(3) As of December 31, 2002, there were 77,320,815 shares of Medix
Resources common shares outstanding for purposes of this calculation.
Such amount assumes conversion of all outstanding preferred shares,
but does not assume exercise of outstanding stock options or warrants.
As of December 31, 2002, 33,017,353 shares of our common stock were
issuable upon the exercise of all outstanding stock options and
warrants.
The approval by holders of a majority of the outstanding shares of our
common stock is required to approve the merger agreement and the transactions
contemplated thereby. Your board of directors recommends a vote FOR the approval
of the proposal to authorize such issuance, which is designated as Proposal One
on the enclosed proxy card.
PROPOSAL TWO
AMENDMENT OF OUR ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK FROM 125,000,000 SHARES TO 185,000,000
SHARES
General
Our Board of Directors has declared advisable an amendment to the Medix
Resources articles of incorporation to increase the aggregate number of
authorized shares of common stock from 125,000,000 shares to 185,000,000 shares
(the "Amendment") and has directed that the Amendment be submitted to the
stockholders at the special meeting. The articles of incorporation presently
authorize the issuance of 125,000,000 shares of common stock and 2,500,000
shares of preferred stock. No change is proposed in the number of authorized
shares of preferred stock.
Proposed Amendment
If the Amendment is approved, the text of Section 1 of Article IV of our
articles of incorporation would read in its entirety as follows:
"Section 1. Classes and Shares Authorized. The total number of shares of
Common Stock that the Corporation shall have authority to issue is One
Hundred Seventy-Five Million (185,000,000) shares of Common Stock, $0.001
par value per share. The total number of shares of Preferred Stock that the
Corporation shall have authority to issue is Two Million Five Hundred
Thousand (2,500,000) shares of Preferred Stock, $1.00 par value per share."
General Effect of the Proposed Amendment and Reasons for Approval
Of our 125,000,000 authorized shares of common stock, 77,160,815 shares
were issued and outstanding as of December 31, 2002. At that date, we had also
reserved for issuance a total of 33,177,353 additional shares of common stock
for issuance as follows:
o 10,272,750 shares are issuable upon the exercise of vested and
unvested stock options;
o 22,720,978 shares are issuable upon the exercise of outstanding
warrants; and
o 160,000 shares are issuable upon conversion of outstanding shares of
preferred stock.
In addition, we are currently proposing to adopt a new Stock Incentive Plan
which, if approved by our stockholders, will require us to reserve an additional
10,000,000 shares of common stock. Furthermore, under the PocketScript merger
agreement, upon consummation of the PocketScript merger we will be obligated to
issue 12,000,000 shares of common stock, subject to certain adjustments. If
certain Qualifying Events described elsewhere in this proxy statement occur
within the time periods specified in the merger agreement, we will be obligated
to issue up to $4,000,000 dollars worth of additional common shares, valued at
the average market price during a period occurring after the closing of the
PocketScript merger. Thus, as of the date hereof and as of the closing, we will
not know how many shares we will be required to issue with respect to the
Qualifying Events.
In addition to satisfying our current commitments as described above, we
will be required to raise additional capital to finance our operations and to
finance the development of our software products. The purpose of the proposed
Amendment includes providing us with greater flexibility in financing these cash
requirements, by providing us with adequate authorized common stock to commit in
future financings. Your Board of Directors has determined that we soon will be
restricted in its financing options due to the limited amount of authorized but
unissued shares of common stock provided for in our articles of incorporation.
We currently funding operations principally by issuing common stock and warrants
from time to time in private transactions at a discount to market. Failure to
authorize this amendment could limit our ability to raise capital to fund its
operations. We believe that we will require at least 12,500,000 common shares
for such private placements during 2003.
We are proposing to increase that number of authorized shares from
125,000,000 shares to 185,000,000 shares. We believe that we will need a portion
of such increase in order to have shares available to consummate the
PocketScript merger. If our shareholders approve the PocketScript merger but do
not approve the proposed increase in the authorized shares of common stock, it
may become necessary for us to restructure the PocketScript merger, which may
require further approval of our shareholders, resulting in delay and additional
expense for Medix Resources. Accordingly, shareholders who approve the
PocketScript merger are urged to also vote in favor of the proposed amendment to
our articles of incorporation.
On February 7, 2003, the last trading date prior to the day on which your
board approved the Amendment (subject to shareholder approval), the closing sale
price of the common stock on the American Stock Exchange was $0.69 per share.
Adoption of the Amendment would enable your board from time to time to
issue additional shares of common stock for such purposes and such consideration
as the Board may approve without further approval of our stockholders, except as
may be required by law or the rules of the American Stock Exchange. As is true
for shares presently authorized but unissued, common stock authorized by the
Amendment may, among other things, have a dilutive effect on earnings per share
and on the equity and voting power of existing holders of common stock.
Our shareholders will have no appraisal rights under Colorado law with
respect to the Amendment or any equity financing that Medix Resources may
undertake after its adoption. In addition, shareholders do not have any
preemptive rights to participate in any future issuance of common stock, and
therefore will suffer dilution of ownership upon such issuance. The issuance of
additional shares could also have the effect of diluting the earnings per share
and book value of existing shares of our common stock. Although the
authorization of the additional shares is not intended as an anti-takeover
device, the additional shares could be used to dilute the stock ownership of
persons seeking to gain control of the Company, which could preclude existing
shareholders from taking advantage of such a situation.
Vote Required
The proposed Amendment to our articles of incorporation will be deemed
approved by our shareholders if the number of votes cast for such proposal
exceeds the number of votes cast against such proposal, assuming that a quorum
is present. Your board of directors recommends a vote FOR the approval of the
proposed Amendment, which is designated as Proposal Two on the enclosed proxy
card.
PROPOSAL THREE
REINCORPORATION IN THE STATE OF DELAWARE
General
Your board has recommended, and at the special meeting the shareholders
will be asked to authorize, the change of Medix Resources' state of
incorporation from Colorado to Delaware. This transaction will not result in any
change in the business, management, assets, liabilities or net worth of Medix
Resources. Reincorporation in Delaware will allow us to take advantage of
certain provisions of the corporate laws of Delaware. The purposes and effects
of the proposed change are summarized below.
In order to effect our reincorporation in Delaware, Medix Resources will be
merged into a newly formed, wholly-owned subsidiary incorporated in Delaware. To
distinguish between this merger and the PocketScript's merger, we refer to this
merger as the reincorporation merger and the agreement and plan of merger
governing the reincorporation as the reincorporation agreement. Prior to the
reincorporation merger, the Delaware subsidiary will not have engaged in any
activities except in connection with the proposed reincorporation transaction.
The mailing address of the Delaware subsidiary's principal executive offices and
its telephone number are the same as Medix Resources' mailing address and
telephone number. As part of its approval and recommendations of our
reincorporation in Delaware, your board has approved, and recommends to the
shareholders for their adoption and approval, a reincorporation agreement
pursuant to which Medix Resources will be merged with and into the Delaware
subsidiary. The full texts of the reincorporation agreement and the certificate
of incorporation and by-laws of the successor Delaware corporation under which
our business would be conducted after the reincorporation merger are set forth
in this proxy statement as Annex C, Annex D and Annex E, respectively. The
discussion contained in this proxy statement is qualified in its entirety by
reference to such Annexes. The provisions of the Certificate of Incorporation
will be substantially identical to those of our current articles of
incorporation, as amended, except that the Certificate of Incorporation will (i)
be governed by Delaware law, and (ii) include additional provisions regarding
the indemnification of directors, officers and other agents.
In the following discussion of the proposed reincorporation, the term
"Medix-COL" refers to Medix Resources as currently organized as a Colorado
corporation; the term "Medix-DEL" refers to the new wholly-owned Delaware
subsidiary of Medix-COL that will be the surviving corporation after the
completion of the reincorporation transaction; and the term "Medix Resources"
includes either or both, as the context may require, without regard to the state
of incorporation.
Upon shareholder approval of the proposed reincorporation, and upon
acceptance for filing of appropriate certificates of merger by the Secretary of
State of Delaware and the Secretary of State of Colorado, Medix-COL will be
merged with and into Medix-DEL pursuant to the reincorporation agreement,
resulting in a change in Medix Resources' state of incorporation. Medix
Resources will then be subject to the Delaware General Corporation Law and the
Certificate of Incorporation and Bylaws set forth in Annex D and Annex E,
respectively. Upon the effective time of the reincorporation, each outstanding
share of each class of stock of Medix-COL automatically will be converted into
one share of the corresponding class of stock of Medix-DEL. Outstanding options
and warrants to purchase shares of common stock of Medix-COL will be converted
into options and warrants to purchase the same number of shares of common stock
of Medix-DEL.
IT WILL NOT BE NECESSARY FOR OUR SHAREHOLDERS TO EXCHANGE THEIR EXISTING STOCK
CERTIFICATES FOR CERTIFICATES OF MEDIX-DEL. OUTSTANDING STOCK CERTIFICATES OF
MEDIX-COL SHOULD NOT BE DESTROYED OR SENT TO MEDIX RESOURCES.
Principal Reasons for Changing Our State of Incorporation
Your board of directors believes that the proposed reincorporation will
provide flexibility for both the management and business of the Company.
Delaware is a favorable legal and regulatory environment in which to
operate. For many years, Delaware has followed a policy of encouraging
incorporation in that state and, in furtherance of that policy, has adopted
comprehensive, modern and flexible corporate laws which are periodically updated
and revised to meet changing business needs. As a result, many major
corporations have initially chosen Delaware for their domicile or have
subsequently reincorporated in Delaware. The Delaware courts have developed
considerable expertise in dealing with corporate issues, and a substantial body
of case law has developed construing Delaware law and establishing public
policies with respect to Delaware corporations, thereby providing greater
predictability with respect to corporate legal affairs. In addition, many
investors and securities professionals are more familiar and comfortable with
Delaware corporations than corporations governed by the laws of other
jurisdictions, even where the laws are similar. This latter factor was
considered especially important to your board, since it is anticipated that it
will be necessary for Medix Resources to continue to access the private and
public capital markets in order for management to execute its business plans.
Comparison of the Rights of Holders of Medix-COL Common Stock and Medix-DEL
Common Stock
Medix-COL is a Colorado corporation; the Colorado Business Corporation Act
and the articles of incorporation and Bylaws of Medix-COL govern the rights of
its shareholders. Medix-DEL is a Delaware corporation; the rights of its
shareholders are governed by the Delaware General Corporation Law and the
Certificate of Incorporation and Bylaws of Medix-DEL.
The corporation laws of Colorado and Delaware differ in many respects.
Although we have not described all of the differences in this proxy statement,
we have described below certain provisions which could materially impact the
rights of shareholders of Medix-COL as compared to the rights of shareholders in
Medix-DEL.
Removal of Directors
Directors may generally be removed with or without cause under the laws of
both Colorado and Delaware, with the approval of a majority of the outstanding
shares entitled to vote in an election of directors. However, no director may be
removed if the number of votes cast against such removal would be sufficient to
elect the director.
Colorado
A director of a corporation that does not have a staggered or classified
board of directors or cumulative voting may be removed with or without cause
with the approval of a majority of the outstanding shares entitled to vote at an
election of directors. In the case of a Colorado corporation having cumulative
voting, if less than the entire board is to be removed, a director may not be
removed without cause if the number of shares voted against such removal would
be sufficient to elect the director under cumulative voting. The articles of
incorporation of Medix-COL provide for a staggered or classified board of
directors if the Board consists of six or more persons, but do not provide for
cumulative voting.
Delaware
A director of a corporation that does not have a staggered or classified
board of directors or cumulative voting may be removed with or without cause
with the approval of a majority of the outstanding shares entitled to vote at an
election of directors. In the case of a Delaware corporation having cumulative
voting, if less than the entire board is to be removed, a director may not be
removed without cause if the number of shares voted against such removal would
be sufficient to elect the director under cumulative voting. A director of a
corporation with a staggered or classified board of directors may be removed
only for cause, unless the certificate of incorporation otherwise provides. The
Certificate of Incorporation of Medix-DEL provides for a staggered or classified
board of directors, but not for cumulative voting. The Certificate of
Incorporation of Medix-DEL provides that the staggered board provisions will
apply regardless of the size of the Board.
Staggered or Classified Board of Directors
A classified or staggered (the term used in the Colorado Business
Corporations Act) board is one on which a certain number, but not all, of the
directors are elected on a rotating basis each year. This method of electing
directors makes changes in the composition of the board of directors more
difficult, and thus makes a potential change in control of a corporation a
lengthier and more difficult process.
Colorado
The Medix-COL articles of incorporation provides for a staggered board if
the Board consists of six or more persons, dividing the Board into three
classes. Colorado law permits, but does not require, a staggered board of
directors, pursuant to which the directors can be divided into as many as three
classes with staggered terms of office, with only one class of directors
standing for election each year.
Delaware
Delaware law permits, but does not require, a staggered board of directors,
pursuant to which the directors can be divided into as many as three classes
with staggered terms of office, with only one class of directors standing for
election each year. The Medix-DEL Certificate of Incorporation provides for a
staggered board, dividing the board into three classes if the Board consists of
six or more persons.
Indemnification and Limitation of Liability of Directors, Officers and
Other Agents
Delaware and Colorado have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt
provisions in its articles or certificate of incorporation, as the case may be,
eliminating the liability of a director to the corporation or its shareholders
for monetary damages for breach of the director's fiduciary duty in certain
cases. There are nonetheless certain differences between the laws of the two
states respecting indemnification and limitation of liability of directors,
officers, employees and other agents.
Colorado
The articles of incorporation of Medix-COL eliminate the liability of
directors to the corporation, subject to exceptions that generally reflect
statutory exceptions. Colorado law does not permit the elimination of a
director's monetary liability where such liability is based on: (a) a breach of
the director's duty of loyalty to the corporation or its shareholders, (b) acts
or omissions not in good faith, (c) acts or omissions which involve intentional
misconduct or knowing violations of law, (d) unlawful distributions to
shareholders or (e) any transaction from which the director directly or
indirectly derived an improper personal benefit.
Colorado law generally permits indemnification of director liability,
including expenses actually and reasonably incurred in the defense or settlement
of a derivative or third-party action, provided there is a determination by a
majority vote of a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the shareholders that the person
seeking indemnification acted in good faith and, in the case of conduct in an
official capacity, in a manner he or she reasonably believed was in the best
interests of the corporation or a benefit plan (if acting in a capacity with
respect to such a plan). In other cases, the director is entitled to
indemnification if his or her conduct was at least not opposed to the
corporation's best interests. In a criminal proceeding, the director is entitled
to indemnification if he or she had no reasonable cause to believe the conduct
was unlawful.
Without court approval, however, no indemnification is available in any
action by or on behalf of the Corporation (i.e., a derivative action) in which
such person is adjudged liable to the corporation or in any other proceeding
where the director is adjudged liable on the basis that he or she received an
improper personal benefit. Colorado law requires indemnification of director
expenses when the individual being indemnified has successfully defended any
action, claim, issue, or matter therein, on the merits or otherwise.
A director may also apply for and obtain indemnification as ordered by a
court under circumstances where the court deems the director is entitled to
mandatory indemnification under Colorado law or when, under all the facts and
circumstances, it deems it fair and reasonable to award indemnification even
though the director has not strictly met the statutory standards. An officer is
also entitled to apply for and receive court awarded indemnification to the same
extent as a director.
A corporation cannot indemnify its directors by any means (other than under
a third party insurance contract) if to do so would be inconsistent with the
limitations on indemnification set forth in the Colorado Business Corporations
Act.
A Colorado corporation may indemnify officers, employees, fiduciaries and
agents to the same extent as directors, and may indemnify those persons to a
greater extent than is available to directors if to do so does not violate
public policy and is provided for in a by-law, a general or specific action of
the board of directors or shareholders or in a contract.
The Bylaws of Medix-COL provide that Medix-COL will indemnify any person
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that such person is or was
a director, officer, employee, fiduciary or agent of Medix-COL or, while serving
in such capacity, is or was also serving at the request of Medix-COL as a
director, officer, partner, trustee, employee, fiduciary or agent of another
entity or employee benefit plan, against all liability and loss suffered and
expenses, including attorneys' fees, reasonably incurred by such person. An
indemnified person will be indemnified against reasonably incurred expenses,
judgments, penalties, fines and settlement amounts if the indemnified person is
determined to have conducted themselves in good faith and reasonably believed
that:
o in the case of conduct in the indemnified person's official capacity
with Medix-COL, that the conduct was in Medix-COL's best interests,
o in all other cases, except for criminal conduct, that the conduct was
not opposed to Medix-COL's best interests, or
o in the case of a criminal proceeding, that the indemnified person had
no reasonable cause to believe that the conduct was unlawful.
Medix-COL will not indemnify a person with respect to any claim to the extent
that the claim is brought by Medix-COL and in which the person was held liable
to Medix-COL for deriving an improper personal benefit. In addition, in
proceedings brought by or in Medix-COL's name, indemnification will be limited
to reasonable expenses incurred in connection with the proceeding.
Delaware
The Certificate of Incorporation of Medix-DEL also eliminates the liability
of directors to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director to the fullest extent permissible under
Delaware law, as such law exists currently or as it may be amended in the
future. Under Delaware law, such provision may not eliminate or limit director
monetary liability for: (a) breaches of the director's duty of loyalty to the
corporation or its stockholders; (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (c) the payment
of unlawful dividends or unlawful stock repurchases or redemptions; or (d)
transactions in which the director received an improper personal benefit. Such
limitation of liability provisions also may not limit a director's liability for
violation of or otherwise relieve its directors from the necessity of complying
with federal or state securities laws, or affect the availability of
non-monetary remedies such as injunctive relief or rescission.
Delaware law generally permits indemnification of expenses, including
attorney's fees, actually and reasonably incurred in the defense or settlement
of a derivative or third-party action, provided there is a determination by a
majority vote of a disinterested quorum of the directors, by independent legal
counsel or by a majority vote of a quorum of the stockholders that the person
seeking indemnification acted in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interests of the corporation. Without
court approval, however, no indemnification may be made in respect of any
derivative action in which such person is adjudged liable for negligence or
misconduct in the performance of his or her duty to the corporation.
Delaware law also permits a Delaware corporation to provide indemnification
in excess of that provided by statute. In contrast to Colorado law, Delaware law
does not require authorizing provisions in the certificate of incorporation and
does not contain express prohibitions on indemnification in certain
circumstances. A court may impose limitations on indemnification, however, based
on principles of public policy.
Delaware law provides that the indemnification provided by statute shall
not be deemed exclusive of any other rights under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
The Certificate of Incorporation of Medix-DEL provides that Medix-DEL will
indemnify any person who was or is made or is threatened to be made a party or
is otherwise involved in any Proceeding, by reason of the fact that such person
is or was a director, officer, employee, fiduciary or agent of Medix-DEL or,
while serving in such capacity, is or was also serving at the request of
Medix-DEL as a director, officer, partner, trustee, employee, fiduciary or agent
of another entity or employee benefit plan, against all liability and loss
suffered and expenses, including attorneys' fees, reasonably incurred by such
person. An indemnified person will be indemnified against reasonably incurred
expenses, judgments, penalties, fines and settlement amounts if the indemnified
person is determined to have conducted themselves in good faith and reasonably
believed that:
o in the case of conduct in the indemnified person's official capacity
with Medix-DEL, that the conduct was in Medix-DEL's best interests,
o in all other cases, except for criminal conduct, that the conduct was
not opposed to Medix-DEL's best interests, or
o in the case of a criminal proceeding, that the indemnified person had
no reasonable cause to believe that the conduct was unlawful.
Medix-DEL will not indemnify a person with respect to any claim to the
extent that the claim is brought by Medix-DEL and in which the person was held
liable to Medix-DEL for deriving an improper personal benefit. In addition, in
proceedings brought by or in Medix-DEL's name, indemnification will be limited
to reasonable expenses incurred in connection with the proceeding.
Both Colorado and Delaware law require indemnification when a director or
officer has successfully defended an action on the merits or otherwise.
Expenses incurred by an officer or director in defending an action may be
paid in advance under Colorado and Delaware law if the director or officer
undertakes to repay the advances if it is ultimately determined that he or she
is not entitled to indemnification. Certain commentators have suggested that the
provision in the Sarbanes-Oxley Act of 2002 prohibiting loans to directors and
executive officers may prohibit such advances to directors and officers of
public corporations, although this issue has not yet been resolved.
The laws of both Colorado and Delaware authorize a corporation's purchase
of indemnity insurance for the benefit of its officers, directors, employees and
agents whether or not the corporation would have the power to indemnify against
the liability covered by the policy.
Inspection of Shareholder List
Both Delaware and Colorado law allow any shareholder to inspect the
shareholder list for a purpose reasonably related to such person's interests
as a shareholder.
Consideration for Issuance of Shares
Colorado
Shares may be issued for consideration consisting of tangible or intangible
property or benefit to the corporation, including cash, promissory notes,
services performed and other securities of the corporation. In the absence of
fraud in the transaction, the determination of the board is conclusive insofar
as the adequacy of consideration relates to whether the shares are validly
issued, fully paid, and nonassessable.
Shares may not be issued for consideration consisting of a promissory note
of the subscriber or an affiliate of the subscriber unless the note is
negotiable and is secured by collateral, other than the shares, having a fair
market value at least equal to the principal amount of the note. The note must
reflect a promise to pay independent of the collateral and cannot be a
"nonrecourse" note.
Shares with a par value may be issued for consideration less than such par
value.
Delaware
Shares may be issued for consideration consisting of tangible or intangible
property or benefit to the corporation, including cash, promissory notes,
services performed and other securities of the corporation.
In the absence of "actual fraud" in the transaction, the judgment of the
board as to the value of the consideration is conclusive.
No provisions restrict the ability of the board to authorize the issuance
of stock for a promissory note of any type, including an unsecured or
nonrecourse note or a note secured only by the shares.
Shares with par value cannot be issued for consideration with a value that
is less than the par value. Shares without par value can be issued for any
consideration determined to be valid by the board.
Dividends and Repurchases of Shares
Colorado
Colorado law dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like. Colorado law permits a
corporation to declare and pay cash or in-kind property dividends or to
repurchase shares unless, after giving effect to the transaction: (a) the
corporation would not be able to pay its debts as they become due in the usual
course of business; or (b) the corporation's total assets would be less than the
sum of its total liabilities plus (unless the articles of incorporation permit
otherwise) the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to those
receiving the distribution.
Delaware
The concepts of par value, capital and surplus are retained under Delaware
law. Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if the capital of the
corporation is not impaired and such redemption or repurchase would not impair
the capital of the corporation.
Amendments to the Charter
Both Colorado law and Delaware law generally provide that amendments to the
charter -- the articles of incorporation for Colorado corporations and the
certificate of incorporation for Delaware corporations -- require the approval
of the board of directors and the shareholders.
Colorado
Under Colorado law, an amendment to a corporation's articles of
incorporation will be deemed approved by its shareholders if the number of votes
cast for such proposal exceeds the number of votes cast against such proposal,
assuming that a quorum is present. Since Medix-COL has a 33-1/3% quorum
requirement, conceivably holders of as few as 17% of the corporation's shares
could approve an amendment to the Medix-COL articles of incorporation.
Delaware
Under Delaware law, an amendment to a corporation's certificate of
incorporation generally will require the approval of the holders of a majority
of the outstanding voting shares. Shares which are not voted thus would have the
same effect as a "no vote".
Shareholder Voting on Mergers and Certain Other Transactions
Both Delaware and Colorado law generally require that holders owning a
majority of the shares of both acquiring and target corporations approve
statutory mergers.
Colorado
Colorado law does not require a shareholder vote of the surviving
corporation in a merger (unless the corporation provides otherwise in its
articles of incorporation) if (a) the merger agreement does not amend the
existing articles of incorporation, with certain limited exceptions (b) each
shareholder of the surviving corporation whose shares were outstanding
immediately before the merger will hold the same number of shares, with
identical designations, preferences, limitations and relative rights immediately
after the merger, and (c) the number of shares outstanding immediately after the
merger, plus the number of shares issued as a result of the merger, will not
exceed more than twenty per cent (20%) of the total number of voting shares of
the surviving corporation outstanding immediately before the merger.
Unless one of these exceptions are available, Colorado law requires that
holders of a majority of the outstanding voting shares of both acquiring and
target corporations approve statutory mergers, unless the articles of
incorporation, bylaws adopted by the shareholders, or the board of directors
require a supermajority (greater than a simple majority) voting requirement in
connection with mergers.
The articles of incorporation of Medix-COL provide that if Medix-COL sells
all or substantially all of its assets to, merges or consolidates with, or
exchanges all of its shares with, an unaffiliated third-party that is a
benefical owner of more than 10% of Medix-COL's outstanding shares of capital
stock, the holders of at least two-thirds of Medix-COL's outstanding capital
stock would need to approve the transaction, unless the transaction were
approved by a majority of Medix-COL's directors who were (a) directors prior to
the transaction in which the unaffiliated third-party became a benefical owner
of more than 10% of Medix-COL's outstanding shares of capital stock or (b)
elected by a majority of Medix-COL's directors who were in office at the time
that the unaffiliated third-party became a benefical owner of more than 10% of
Medix-COL's outstanding shares of capital stock.
Delaware
Delaware law contains a similar exception to its voting requirements for
reorganizations where shareholders of the corporation immediately prior to the
reorganization will own immediately after the reorganization equity securities
constituting more than 80 percent of the voting power of the surviving or
acquiring corporation or its parent entity.
Both Delaware law and Colorado law also require that a sale of all or
substantially all of the assets of a corporation otherwise than in the ordinary
course of business be approved by a majority of the outstanding voting shares of
the corporation transferring such assets.
The certificate of incorporation of Medix-DEL provide that if Medix-DEL
sells all or substantially all of its assets to, merges or consolidates with, or
exchanges all of its shares with, an unaffiliated third-party that is a
benefical owner of more than 10% of Medix-DEL's outstanding shares of capital
stock, the holders of at least two-thirds of Medix-DEL's outstanding capital
stock would need to approve the transaction. Medix-DEL did not include in its
certificate of incorporation a provision comparable to the provision in
Medix-COL's articles of incorporation permitting approval of such a transaction
by the holders of a majority of the outstanding capital stock if a majority of
directors who were so-called "continuing directors" (that is, directors prior to
the transaction in which the unaffiliated third-party became a benefical owner
of more than 10% of Medix-DEL's outstanding shares of capital stock or directors
elected by a majority of Medix-DEL's directors who were in office at the time
that the unaffiliated third-party became a benefical owner of more than 10% of
Medix-DEL's outstanding shares of capital stock) approved the transaction
because of case law in Delaware with respect to the lack of enforceability of
continuing director provisions in a related context. Instead, the certificate of
incorporation of Medix-DEL permits approval of such a transaction by the holders
of a majority of the outstanding capital stock if a majority of the entire board
approves the transaction.
Shareholder Approval of Certain Business Combinations under Delaware Law
In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant shareholders, more
difficult. Under Section 203 of the Delaware General Corporations Law, certain
"business combinations" with "interested stockholders" of Delaware corporations
are subject to a three-year moratorium unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, 15% or more
of the corporation's outstanding voting stock (including any rights to acquire
stock pursuant to an option, warrant, agreement, arrangement or understanding,
or upon the exercise of conversion or exchange rights, and stock with respect to
which the person has voting rights only), or is an affiliate or associate of the
corporation and was the owner, individually or with or through certain other
persons or entities, of 15% or more of such voting stock at any time within the
previous three years, or is an affiliate or associate of any of the foregoing.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately with
the corporation's other stockholders) of assets of the corporation or a direct
or indirect majority-owned subsidiary equal in aggregate market value to ten
percent or more of the aggregate market value of either the corporation's
consolidated assets or all of its outstanding stock; the issuance or transfer by
the corporation or a direct or indirect majority-owned subsidiary of stock of
the corporation or such subsidiary to the interested stockholder (except for
certain transfers in a conversion or exchange or a pro rata distribution or
certain other transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock or of the corporation's voting stock); or receipt by the
interested stockholder (except proportionately as a stockholder), directly or
indirectly, of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if:
o prior to the date on which such stockholder becomes an interested
stockholder, the board of directors approves either the business
combination or the transaction that resulted in the person or entity
becoming an interested stockholder;
o upon consummation of the transaction that made him or her an
interested stockholder, the interested stockholder owns at least 85%
of the corporation's voting stock outstanding at the time the
transaction commenced (excluding from the 85% calculation shares owned
by directors who are also officers of the target corporation and
shares held by employee stock plans that do not give employee
participants the right to decide confidentially whether to accept a
tender or exchange offer); or
o on or after the date such person or entity becomes an interested
stockholder, the board approves the business combination and it is
also approved at a stockholder meeting by 66-2/3 % of the outstanding
voting stock not owned by the interested stockholder.
Section 203 only applies to publicly held corporations that have a class of
voting stock that is
o listed on a national securities exchange,
o quoted on an interdealer quotation system of a registered national
securities association or
o held of record by more than 2,000 stockholders.
Although a Delaware corporation to which Section 203 applies may elect not
to be governed by Section 203, Medix-DEL does not intend to so elect.
Section 203 will encourage any potential acquirer to negotiate with
Medix-DEL's board of directors. Section 203 also might have the effect of
limiting the ability of a potential acquirer to make a two-tiered bid for
Medix-DEL in which all stockholders would not be treated equally. Shareholders
should note, however, that the application of Section 203 to Medix-DEL will
confer upon our board the power to reject a proposed business combination in
certain circumstances, even though a potential acquirer may be offering a
substantial premium for Medix-DEL's shares over the then-current market price.
Section 203 would also discourage certain potential acquirers unwilling to
comply with its provisions.
Interested Director Transactions
Under both Delaware and Colorado law, contracts or transactions in which
one or more of a corporation's directors has an interest are generally not void
or voidable because of such interest, provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under Delaware and Colorado law. To authorize or ratify the transaction,
under Colorado law (a) either the shareholders or the disinterested members of
the board of directors must approve any such contract or transaction in good
faith after full disclosure of the material facts, or (b) the contract or
transaction must have been fair as to the corporation. The same requirements
apply under Delaware law, except that the fairness requirement is tested as of
the time the transaction is authorized, ratified or approved by the board, the
shareholders or a committee of the board. If board approval is sought, the
contract or transaction must be approved by a majority vote of the disinterested
directors, though less than a majority of a quorum, except that interested
directors may be counted for purposes of establishing a quorum.
Loans to Directors and Officers
The Sarbanes-Oxley Act of 2002 prohibits the extension of credit to
directors and executive officers of public corporations, subject to certain
limited exceptions. The discussion below does not give effect to such
prohibition, which is perceived to supercede state law.
Colorado
The board of directors cannot make a loan to a director (or any entity in
which such person has an interest), or guaranty any obligation of such person or
entity, until at least ten days after notice has been given to the shareholders
who would be entitled to vote on the transaction if it were being submitted for
shareholder approval. The board of directors may make loans to, or guarantees
for, officers on such terms as they deem appropriate whenever, in the board's
judgment, the loan can reasonably be expected to benefit the corporation.
Delaware
The board of directors may make loans to, or guarantees for, directors and
officers on such terms as they deem appropriate whenever, in the board's
judgment, the loan can reasonably be expected to benefit the corporation.
Shareholder Derivative Suits
Under both Delaware and Colorado law, a stockholder may bring a derivative
action on behalf of the corporation only if the stockholder was a stockholder of
the corporation at the time of the transaction in question or if his or her
stock thereafter devolved upon him or her by operation of law.
Colorado
Colorado law provides that the corporation or the defendant in a derivative
suit may make a motion to the court for an order requiring the plaintiff
shareholder to furnish a security bond.
Delaware
Delaware does not have a similar bonding requirement.
Appraisal/Dissenters' Rights
Under both Delaware and Colorado law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights pursuant to which
such shareholder may receive cash in the amount of the fair market value of his
or her shares in lieu of the consideration he or she would otherwise receive in
the transaction. Under both Delaware and Colorado law, such fair market value is
determined exclusive of any element of value arising from the accomplishment or
expectation of the transaction.
Colorado
Under Colorado law, the major corporate transactions that may entitle
shareholders to appraisal/dissenters' rights are mergers, share exchanges, and
the sale, lease, exchange or other disposition of all, or substantially all, of
the property of the corporation. A shareholder, whether or not entitled to vote,
is entitled to dissent and obtain payment of the fair market value of the
shareholder's shares in the event of such major corporate transactions.
Dissenters rights are not available to shareholders of the parent in certain
mergers of subsidiaries that are at least ninety percent (90%) owned by the
parent, into such parent. Dissenters rights also are not available to
shareholders of a Colorado corporation with respect to such major corporate
transactions by a corporation the shares of which are either listed on a
national securities exchange, or on the national market system of the national
association of securities dealers automated quotation system, or are held of
record by more than 2,000 holders, if such stockholders receive only shares of
the surviving corporation, shares of any other corporation that are either
listed on a national securities exchange or on the national market system of the
national association of securities dealers automated quotation system or held of
record by more than 2,000 holders, cash in lieu of fractional shares, or any
combination of the foregoing.
Delaware
Appraisal rights are not available (a) with respect to the sale, lease or
exchange of all or substantially all of the assets of a corporation, (b) with
respect to a merger or consolidation by a corporation the shares of which are
either listed on a national securities exchange or are held of record by more
than 2,000 holders if such stockholders receive only shares of the surviving
corporation or shares of any other corporation that are either listed on a
national securities exchange or held of record by more than 2,000 holders, plus
cash in lieu of fractional shares of such corporations, or (c) to stockholders
of a corporation surviving a merger if no vote of the stockholders of the
surviving corporation is required to approve the merger under certain provisions
of Delaware law.
Dissolution
Colorado
If the board of directors initially approves the dissolution, it may
be approved by a simple majority of the outstanding shares of the
corporation's stock entitled to vote, unless the articles of incorporation,
bylaws adopted by the shareholders, or the board of directors require a
supermajority (greater than a simple majority) voting requirement in
connection with dissolutions. Under Colorado law, shareholders may only
initiate dissolution by way of a judicial proceeding.
Delaware
Unless the board of directors approves the proposal to dissolve, the
dissolution must be approved by all the stockholders entitled to vote thereon.
Only if the board of directors initially approves the dissolution may it be
approved by a simple majority of the outstanding shares of the corporation's
stock entitled to vote. With respect to such a board-initiated dissolution,
Delaware law allows a Delaware corporation to include in its certificate of
incorporation a supermajority (greater than a simple majority) voting
requirement in connection with dissolutions. Medix-DEL's Certificate of
Incorporation contains no such supermajority requirement, however, and a
majority of the outstanding shares entitled to vote, voting at a meeting at
which a quorum is present, would be sufficient to approve a dissolution of
Medix-DEL that had previously been approved by the board of directors.
Vote Required
The approval of a majority of the outstanding shares of our common stock is
required to reincorporate in Delaware. Your board of directors recommends a vote
FOR the approval of the Company's reincorporation in Delaware, which is
designated as Proposal Three on the enclosed proxy card.
PROPOSAL FOUR
THE 2003 STOCK INCENTIVE PLAN
On February 10, 2003, our board of directors adopted, subject to
shareholder approval, the Medix Resources, Inc. 2003 Stock Incentive Plan (the
"Stock Incentive Plan"). The purpose of the Stock Incentive Plan is to enable us
to attract and retain qualified directors, officers, employees and consultants,
and to provide these persons with an additional incentive to contribute to our
success. The material aspects of the Stock Incentive Plan are summarized below.
We have attached a copy of the Stock Incentive Plan to this proxy statement as
Annex F. Shareholders are urged to read the plan in its entirety.
Administration
The Stock Incentive Plan provides that it will be administered by our board
of directors or any duly created committee appointed by our board and charged
with the administration of the Stock Incentive Plan. To the extent required in
order to satisfy the requirements of Section 162(m) of the Internal Revenue
Code, any committee will consist solely of "outside directors", within the
meaning of Section 162(m). We will refer to the Board or any committee which
administers the Stock Incentive Plan as the "Program Administrator". It is
currently anticipated that the Stock Incentive Plan will be administered by a
committee consisting of three board members to be designated by the board,
except as otherwise required by Section 162(m) of the Code or as required by SEC
or American Stock Exchange rule-making. The board may also designate a special
committee to administer the Stock Incentive Plan to the extent necessary to
satisfy the requirements of Section 162(m) of the Code.
Structure
The Stock Incentive Plan actually consists of four different plans - a plan
which contemplates the grant of incentive stock options, a plan which
contemplates the grant of non-statutory stock options (which we refer to as
"supplemental stock options"), a plan which contemplates the grant of stock
appreciation rights and a plan which permits the grant of performance shares.
Eligibility
All directors, officers, employees and consultants of Medix Resources and
our subsidiaries are eligible to receive benefits under the Stock Incentive
Plan. As a matter of law, only employees are eligible to receive incentive stock
options. Grants under the Stock Incentive Plan are discretionary, and we are
unable, at the present time, to determine the identity or number of directors,
officers, other employees and consultants who may be granted benefits under the
Stock Incentive Plan in the future.
Types of Options
The Program Administrator may designate any option granted under the Stock
Incentive Plan as either an incentive stock option or a supplemental stock
option, or the Program Administrator may designate a portion of the option as an
incentive stock option and the remaining portion as a supplemental stock option.
Any portion of an option that is not expressly designated as an incentive stock
option will be a supplemental stock option. To the extent that an option
intended to be granted as an incentive stock option fails to satisfy one or more
requirements applicable to incentive stock options, it will be deemed to be a
supplemental stock option.
Other Awards
In addition to stock options, the Stock Incentive Plan authorizes the grant
of stock appreciation rights and performance shares. Stock appreciation rights
may be granted in tandem with existing stock options or separately from such
options. Performance shares enable the Company to condition the grant of shares
upon the satisfaction of certain specified milestones.
Exercise Period
Subject to modification by the Program Administrator, options granted to
participants are generally exercisable in 25% annual installments beginning on
the first anniversary of the date of grant and continuing for each of the next
three anniversaries thereafter. Unless previously terminated by our board of
directors, the Stock Incentive Plan will terminate on February , 2013. Such
termination will have no impact upon options granted prior to the termination
date. The maximum term of all options granted under the Stock Incentive Plan is
10 years, provided, however, that any incentive stock option granted to a person
who is the beneficial owner of more than 10% of the combined voting power of the
Company's capital stock will cease to be exercisable five years after the date
such option is granted.
Exercise Price
Options granted under the Stock Incentive Plan will have an exercise or
payment price as established by the Program Administrator, provided that the
exercise price of incentive stock options may not be less than the fair market
value of the underlying shares on the date of grant. If incentive stock options
are granted to a person who is the beneficial owner of more than 10% of the
combined voting power of the Company's capital stock, such options shall be
granted at a price of not less than 110% of the fair market value of the shares
covered by the option. If on the date of grant the Common Stock is listed on a
stock exchange (including the American Stock Exchange) or is quoted on the
automated quotation system of Nasdaq, the fair market value will be the closing
sale price (or if such price is unavailable, the average of the high bid price
and the low asked price) on such date. If no such prices are available, the fair
market value shall be determined in good faith by the Program Administrator in
accordance with generally accepted valuation principles and such other factors
as the Program Administrator deems relevant. On _______, 2003, the closing sale
price of a share of our common stock on the American Stock Exchange was $___.
Payment
Upon exercise of an option granted under the Stock Incentive Plan, the
participant will be required to provide the payment price in full by certified
or bank cashier's check or, if permitted by the Program Administrator, in shares
of our common stock valued at fair market value on the date of exercise, or by a
combination of a check and shares. The Program Administrator may, in its sole
discretion, permit an optionee to make "cashless exercise" arrangements. In
connection with any exercise of options, we will have the right to collect or
withhold from any payments under the Stock Incentive Plan all taxes required to
be withheld under applicable law.
Transferability
Options granted under the Stock Incentive Plan generally will be
nontransferable, except by will or by the laws of descent and distribution.
During the lifetime of a participant, an option generally may be exercised only
by the participant and after the participant's death only by the participant's
executor, administrator or personal representative. Notwithstanding the
foregoing, the Program Administrator may permit the recipient of a supplemental
option to transfer such option to a family member or a trust, limited liability
company or partnership created for the benefit of a family member.
Termination of Employment
If a participant ceases to be employed by Medix Resources or any subsidiary
for cause, then all options shall terminate immediately. If employment is
terminated by Medix Resources or a subsidiary without cause, the options may be
exercised, to the extent exercisable on the date of termination, until 90 days
after the date of termination. If an optionee voluntarily terminates his or her
employment, the options may be exercised, to the extent exercisable on the date
of termination, until 30 days after the date of termination.
If a participant dies or becomes disabled while employed by us or any
subsidiary, then all options may be exercised, to the extent exercisable on the
date of death or termination due to disability, at any time within twelve months
after the date of death or such termination.
Amendment and Termination
The Stock Incentive Plan may be amended or terminated at any time by our
board of directors, except that no amendment may be made without shareholder
approval if such approval is required by applicable laws or regulations, and no
amendment or revision may alter or impair an outstanding option without the
consent of the holder thereof. The Stock Incentive Plan will terminate on
February , 2013, unless earlier terminated by our board of directors. No
options may be granted after termination, although such termination will not
affect the status of any option outstanding on the date of termination.
Shares Subject to the Plan
A total of 10,000,000 shares of Common Stock (subject to adjustment as
described below) may be issued under the Stock Incentive Plan. Any shares
delivered pursuant to the Stock Incentive Plan may be authorized and unissued
shares or treasury shares.
Adjustments
The number of shares available for option grants and the shares covered by
options will be adjusted equitably for stock splits, stock dividends,
recapitalizations, mergers and other changes in our capital stock. Comparable
changes will be made to the exercise price of outstanding options. If any option
should terminate for any reason without having been exercised in full, the
unpurchased shares will again become available for option grants.
Change In Control
The Stock Incentive Plan provides that all outstanding stock options will
become immediately exercisable upon the occurrence of a "change in control
event". The Stock Incentive Plan provides in general that a "change in control
event" shall be deemed to have occurred if any of the following events occur:
o the consummation of any merger of Medix Resources in which Medix
Resources is not the surviving corporation (expressly excluding from
the definition of a change in control a merger in which shareholders
of Medix Resources before the transaction continue to own at least one
half of the outstanding voting common stock);
o the consummation of any sale, lease, exchange or other transfer of all
or substantially all of the assets of the Company;
o approval by our shareholders of a plan of liquidation or dissolution
of Medix Resources; and
o any action pursuant to which any person (as defined in Section 13(d)
of the Securities Exchange Act of 1934) shall become the beneficial
owner of more than 50% of our outstanding voting securities.
Additional Limitation
No participant may receive incentive stock options that first become
exercisable in any calendar year in an amount exceeding $100,000. In addition,
no one person may receive options for more than 4,000,000 shares of our common
stock in any calendar year.
Federal Income Tax Consequences
BECAUSE OF THE COMPLEXITY OF THE FEDERAL INCOME TAX LAWS AND THE VARIED
APPLICABILITY OF STATE, LOCAL AND FOREIGN INCOME TAX LAWS, THE FOLLOWING
DISCUSSION OF TAX CONSEQUENCES IS GENERAL IN NATURE AND RELATES SOLELY TO
FEDERAL INCOME AND EMPLOYMENT TAX MATTERS. PARTICIPANTS ARE ADVISED TO CONSULT
THEIR PERSONAL TAX ADVISORS BEFORE EXERCISING AN OPTION OR DISPOSING OF ANY
STOCK RECEIVED PURSUANT TO THE EXERCISE OF ANY SUCH OPTION. IN ADDITION, THE
FOLLOWING SUMMARY IS BASED UPON AN ANALYSIS OF THE INTERNAL REVENUE CODE OF
1986, AS CURRENTLY IN EFFECT, JUDICIAL DECISIONS, ADMINISTRATIVE RULINGS,
REGULATIONS AND PROPOSED REGULATIONS, ALL OF WHICH ARE SUBJECT TO CHANGE.
The Internal Revenue Code distinguishes between incentive stock options and
supplemental stock options (the latter also known as non-qualified stock
options). A participant's individual tax consequences will depend upon which
type of option the participant receives. However, as to both types of options,
no income will be recognized to the optionee at the time of the grant of an
option, nor will Medix Resources be entitled to a tax deduction at that time.
Upon the exercise of a supplemental stock option, the optionee will
recognize compensation income, which is subject to Federal income tax (as well
as certain employment taxes and withholding rules) at ordinary income rates,
which generally are higher than the tax rates imposed on long-term capital
gains. The amount of income recognized will equal the excess of the fair market
value of the stock on the exercise date over the exercise price, if any. We
generally will be entitled to a tax deduction in an amount equal to the
compensation income then recognized by the optionee. If the shares acquired upon
such exercise are held for more than one year before disposition, any gain on
disposition of such shares will be treated as long-term capital gain.
For regular income tax purposes, an optionee will not recognize any income
upon the exercise of incentive stock options. However, as noted below, the
excess of the fair market value of the stock on the date of exercise over the
exercise price will be taken into account in determining whether the
"alternative minimum tax" will apply for the year of exercise. Moreover, under
recently proposed regulations, certain Federal employment taxes may apply upon
the exercise of incentive stock options after January 1, 2003. If the shares
acquired upon exercise of incentive stock options are held for at least two
years from the date of the option grant and for at least one year after the
shares are acquired, any gain or loss upon the sale of such shares will be
treated as long-term capital gain or loss, generally measured by the difference
between the sales price of the stock and the exercise price. In general, any
disposition of the shares during either of those two-year and one-year holding
periods is considered a "disqualifying disposition". In the event of a
disqualifying disposition, an optionee will recognize compensation income in the
year of disposition in an amount equal to the lesser of (i) the fair market
value of the stock on the date of exercise minus the exercise price or (ii) the
amount realized on disposition minus the exercise price. The remainder of the
gain will be treated as long-term or short-term capital gain, depending upon
whether the stock has been held for more than one year. If an optionee makes a
disqualifying disposition, we will generally be entitled to a tax deduction
equal to the amount of ordinary income recognized by the optionee.
In general, if an optionee in exercising an option tenders shares of our
common stock in partial or full payment of the option price, no gain or loss
will be recognized on the tender. However, if the tendered shares were
previously acquired upon the exercise of an incentive stock option and the
tender is within two years from the date the option was granted or one year
after the date of exercise of the other option, the tender will be a
disqualifying disposition of the tendered shares.
As referred to above, the exercise of an incentive stock option could
subject the optionee to the alternative minimum tax. The application of the
alternative minimum tax to any particular optionee depends upon the particular
facts and circumstances which exist with respect to the optionee in the year of
exercise. However, as a general rule, the amount by which the fair market value
of our common stock on the date of exercise of an option exceeds the exercise
price of the option will constitute an item of "adjustment" for purposes of
determining the alternative minimum tax that may be imposed. As such, this item
will enter into the tax base on which the alternative minimum tax is computed,
and may therefore cause the alternative minimum tax to apply in a given year.
Other Medix Resources Option Plans
In 1994, we adopted our Incentive Stock Option Plan (the "1994 Plan"). A
total of 500,000 shares of our common stock initially were reserved for issuance
under the 1994 Plan. The purpose of the 1994 Plan was to encourage ownership of
our common stock by our employees and to provide additional incentives for our
employees to promote the success of our business. The 1994 plan provided solely
for the grant of qualified, or incentive, stock options ("ISOs), to employees of
Medix Resources and its subsidiaries, including employees who are officers
and/or directors. The maximum term of options granted under the 1994 Plan is ten
years. All options granted under the 1994 Plan must be granted at a price of at
least 100% of fair market value (or 110% of fair market value in the case of 10%
shareholders). Options granted to officers and directors are immediately
exercisable. Options granted to all other employees are subject to vesting
schedules determined at the time of grant. Optionees under the 1994 Plan are
prohibited from disposing of shares acquired upon option exercises until two
years after the date of option grant and one year after the date of option
exercise.
In 1996, we adopted our 1996 Stock Incentive Plan (the " 1996 Plan"). A
total of 4,000,000 shares of our common stock initially were reserved for
issuance under the 1996 Plan. The 1996 plan provided for the grant of
non-qualified options ("NQOs"), stock awards and rights to purchase stock to
employees, officers, directors and consultants of Medix Resources and its
subsidiaries. The maximum term of options granted under the 1994 Plan is ten
years and one day. The minimum price for stock options granted under the 1996
Plan is the lesser of our book value per share as of the last day of the
preceding fiscal year or 50% fair market value of a share of our common stock on
the grant date. Awards and purchases are to be made at the fair market value of
a share of our common stock on the grant date. Vesting of stock options is
determined by the committee administering the 1996 Plan at the time of grant.
In August 1999, your board approved and authorized our 1999 Stock Option
Plan (the "1999 Plan"), which provides for the grant of ISOs and NQOs. The
purpose of the 1996 Plan and the 1999 Plan was 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.
Under the terms of the 1999 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 certain 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 our
common stock, by delivery of options or a combination of any of these methods.
At our 2001 Annual Meeting, our shareholders approved an increase of 3,000,000
shares to 13,000,000 as the amount of total shares of our common stock reserved
for issuance under the 1999 Plan.
As of December 31, 2002, we had issued 6,094,560 shares of our common stock
upon exercise of options to current or former employees and directors, and had
10,272,750 shares 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 1994 Plan, the 1996 Plan, the 1999 Plan and
under options granted outside of our stock option plans.
The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under our 1994 Plan,
1996 Plan and1999 Plan and under stock options granted outside of these plans.
These plans were our only equity compensation plans in existence as of December
31, 2002.
(c)
Number Of
(a) Securities
Number Of (b) Remaining Available
Securities To Be Weighted-Average For Future Issuance
Issued Upon Exercise Price Of Under Equity
Exercise Of Outstanding Compensation Plans
Plan Category Outstanding Options, Warrants (Excluding
Options, and Rights Securities
Warrants and Reflected in
Rights Column (a))
------------------- --------------- --------------------- -------------------
Equity
Compensation Plans
Approved by
Shareholders............ 8,937,250 $1.13 862,750
Equity
Compensation Plans 1,772,666 $0.63 0
Not Approved by
Shareholders........
TOTAL 10,709,916 $1.05 862,750
Vote Required
Our proposed 2003 Stock Incentive Plan will be deemed approved if a
majority of the votes cast at the special meeting are cast for such proposal,
assuming a quorum is present. Your board of directors recommends a vote FOR the
approval of the 2003 Stock Incentive Plan, which is designated as Proposal Four
on the enclosed proxy card.
EXPERTS
The consolidated financial statements of Medix Resources as of December 31,
2001 and 2000, and for each of the three years in the period ended December 31,
2001 appearing in our Annual report on Form 10-K for the year ended December 31,
2001 have been audited by Ehrhardt Keefe Steiner & Hottman P.C., independent
auditors, as stated in their report appearing therein, and have been
incorporated herein by reference in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements of PocketScript, LLC as of December
31, 2001, and for each of the two years in the period ended December 31, 2001
presented herein have been audited by Ehrhardt Keefe Steiner & Hottman P.C.,
independent auditors, as stated in their report appearing therein, and have been
presented herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
OTHER MATTERS
Representatives of Ehrhardt Keefe Steiner & Hottman P.C. are expected to be
present at our special meeting with the opportunity to make statements if they
so desire.
We know of no matters to be presented at the special meeting other than the
matters described in this proxy statement. However, if any other matters do come
before the meetings, it is intended that the holders of the proxies will vote on
such matters in their discretion.
WHERE YOU CAN FIND MORE INFORMATION
Medix Resources files reports, proxy statements and other information with
the SEC under the Securities Exchange Act of 1934. Please call the SEC at l-
800-SEC-0330 for further information on the public reference rooms. You may read
and copy such information at the following locations of the SEC:
Public Reference Room Midwest Regional Office
450 Fifth Street, N.W. Citicorp Center
Room 1024 500 West Madison Street
Washington, D.C. Suite 1400
20539 Chicago, Illinois
60661-2511
Northeast Regional Office
233 Broadway
Woolworth Building
New York, New York 10279
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. The SEC also maintains an Internet world wide
web site that contains reports, proxy statements and other information about
issuers, like Medix Resources, who file electronically with the SEC. The address
of that site is http://www.sec.gov.
You may also inspect copies of this information at the public reference
facilities of the American Stock Exchange, located at 86 Trinity Place, New
York, New York 10006.
By Order of the Board of Directors
Mark Lerner, Secretary
________, 2003
INDEX TO FINANCIAL STATEMENTS
The following index sets forth the consolidated financial statements of Medix
Resources and the financial statements of PocketScript LLC included in this
prospectus. The consolidated financial statements of Medix Resources are
incorporated in this prospectus by reference. See "Incorporation of Certain
Information by Reference". PocketScript's historical financial statements are
presented in this prospectus on the pages identified in this index.
Medix Resources, Inc. Audited Year-End Consolidated Financial Statements:
(a) Independent Auditors' Report
(b) Consolidated Balance Sheets as of December 31, 2001 and 2000
(c) Consolidated Statements of Operations for the Years Ended December 31,
2001, 2000 and 1999
(d) Consolidated Statement of Changes in Stockholders' Equity for the Years
Ended December 31, 2001, 2000 and 1999
(e) Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999
(f) Notes to Consolidated Financial Statements
Medix Resources, Inc. Unaudited Interim Consolidated Financial Statements:
(g) Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
(h) Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001
(i) Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2002 and 2001
(j) Notes to Interim Consolidated Financial Statements
PocketScript LLC Interim Financial Statements:
(k) Independent Auditors' Report
(l) Balance Sheets as of December 31, 2001 and 2000 and September 30, 2002
(unaudited)
(m) Statements of Operations for the Years Ended December 31, 2001 and 2000 and
for the Nine Months Ended September 30, 2002 and 2001 (unaudited)
(n) Statement of Changes in Redeemable Preferred Stock and Stockholders' Equity
(Deficit) for the Years Ended December 31, 2001 and 2000 and Nine Months
Ended September 30, 2002 (unaudited)
(o) Statements of Cash Flows for the Years Ended December 31, 2001 and 2000
Nine Months Ended September 30, 2002 and 2001 (unaudited)
(p) Notes to Financial Statements
Unaudited Pro Forma Condensed Consolidated Financial Statements
(q) Introduction
(r) Combined Balance Sheet as of September 30, 2002
(s) Combined Statement of Operations for the Nine Months Ended September 30,
2002
(t) Combined Statement of Operations for the Year Ended December 31, 2001
(u) Notes to Unaudited Pro Forma Balance Sheet and Statements of Operations
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Medix Resources, Inc.
Englewood, CO
We have audited the accompanying consolidated balance sheets of Medix Resources,
Inc. as of December 31, 2001 and 2000, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Medix Resources,
Inc. as of December 31, 2001 and 2000, and the results of their operations and
their cash flows for each of the years in the three year period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has experienced recurring losses
and has a working capital deficit, which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Ehrhardt Keefe Steiner & Hottman PC
--------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
March 19, 2002
Denver, Colorado
MEDIX RESOURCES, INC.
Consolidated Balance Sheets
December 31,
---------------------------
2001 2000
------------- --------------
Assets
Current assets
Cash $ 8,000 $ 1,007,000
Accounts receivable, net - 49,000
Prepaid expenses and other 344,000 225,000
------------- --------------
Total current assets 352,000 1,281,000
------------- --------------
Non-current assets
Software development costs, net 649,000 371,000
Property and equipment, net 365,000 418,000
Intangible assets, net 1,735,000 3,019,000
------------- --------------
Total non-current assets 2,749,000 3,808,000
------------- --------------
Total assets $ 3,101,000 $ 5,089,000
============= ==============
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 158,000 $ 137,000
Accounts payable 851,000 159,000
Accounts payable - related parties 166,000 -
Accrued expenses 450,000 391,000
Accrued payroll taxes, interest and penalties 131,000 200,000
------------- --------------
Total current liabilities 1,756,000 887,000
------------- --------------
Commitments and contingencies
Stockholders' equity
1996 Preferred stock, 10% cumulative convertible, $1
par value 488 shares authorized, 155 issued, 1
share outstanding, liquidation preference $17,000 - -
1997 convertible preferred stock, $1 par value 300
shares authorized 167.15 shares issued, zero shares
outstanding - -
1999 Series A convertible preferred stock, $1 par
value, 300 shares authorized, 300 shares issued,
zero shares outstanding - -
1999 Series B convertible preferred stock, $1 par
value, 2,000 shares authorized, 1,832 shares
issued, 50 shares outstanding, liquidation
preference $50,000 - -
1999 Series C convertible stock, $1 par value, 2,000
shares authorized, 1,995 shares issued, 375 and 875
shares outstanding as of December 31, 2001 and
2000, respectively, liquidation preference $375,000
and $875,000 - 1,000
Common stock, $.001 par value, 100,000,000 shares
authorized, 56,651,409 and 46,317,022 issued and
outstanding, respectively 56,000 46,000
Dividends payable with common stock 7,000 5,000
Additional paid-in capital 35,341,000 27,573,000
Accumulated deficit (34,059,000) (23,423,000)
------------- --------------
Total stockholders' equity 1,345,000 4,202,000
------------- --------------
Total liabilities and stockholders' equity $ 3,101,000 $ 5,089,000
============= ==============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Operations
For the Years Ended
December 31,
-------------------------------------------
2001 2000 1999
-------------- ------------- --------------
Sales
Revenues $ 29,000 $ 326,000 $ 24,000
-------------- ------------- --------------
29,000 326,000 24,000
-------------- ------------- --------------
Cost of goods sold
Direct costs of services 213,000 180,000 2,000
-------------- ------------- --------------
Total cost of goods sold 213,000 180,000 2,000
-------------- ------------- --------------
Gross (loss) profit (184,000) 146,000 22,000
-------------- ------------- --------------
Operating expenses
Software research and development
costs 1,075,000 685,000 596,000
Selling, general and administrative
expenses 5,746,000 5,925,000 3,777,000
Impairment of intangible assets 1,111,000 - -
-------------- ------------- -------------
Total operating expenses 7,932,000 6,610,000 4,373,000
-------------- ------------- --------------
Other income (expense)
Other income 12,000 163,000 7,000
Interest expense (104,000) (43,000) (204,000)
Financing costs (2,428,000) - -
-------------- ------------- -------------
(2,520,000) 120,000 (197,000)
-------------- ------------- --------------
Loss from continuing operations (10,636,000) (6,344,000) (4,548,000)
-------------- ------------- --------------
Discontinued operations
Discontinued operations - 929,000 (299,000)
-------------- ------------- --------------
- 929,000 (299,000)
-------------- ------------- --------------
Net loss (10,636,000) (5,415,000) (4,847,000)
Preferred stock dividends - (1,000) (2,212,000)
-------------- ------------- --------------
Net loss available to common Stockholders $(10,636,000) $ (5,416,000) $ (7,059,000)
============== ============= ==============
Basic and diluted weighted average
common shares outstanding 50,740,356 41,445,345 23,384,737
============== ============= ==============
Basic and diluted (loss) per common share
- continuing operations $ (0.21) $ (0.15) $ (0.29)
Basic and diluted income (loss) per
common share - discontinued operations - 0.02 (0.01)
-------------- ------------- --------------
Basic and diluted loss per common share $ (0.21) $ (0.13) $ (0.30)
============== ============= ==============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2001, 2000 and 1999
1999 Series A 1999 Series B 1999 Series C Dividend Total
1996 Preferred Stock 1997 Preferred Stock Preferred Stock Preferred Stock Preferred Stock Common Stock Additional Payable Stockholders'
-------------------- -------------------- ------------------ ------------------- ----------------- --------------------- Paid-in with Common Accumulated Equity
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Stock Deficit (Deficit)
--------- --------- -------- --------- -------- --------- --------- --------- -------- --------- ----------- --------- ------------ ----------- ------------ --------------
Balance - December 31,
1998 8.00 $ - 19.50 $ - - $ - $ - $ - $ - $ - 21,500,724 $ 22,000 $ 12,882,000$ 39,000 $(13,161,000) $ (218,000)
Issuance of warrants
with convertible note
payable - - - - - - - - - - - - 238,000 - - 238,000
1999 preferred stock
issuances (net of
$15,500 of offering
costs) - - - - 300 - 1,832 2,000 1,995 2,000 - - 4,108,000 - - 4,112,000
Preferred stock
conversions (4.50) - (14.50) - (115) - (1,015) (1,000) - - 3,161,342 3,000 10,000 (12,000) - -
Repurchase of 1996
preferred stock (2.50) - - - - - - - - - - - (17,000) (8,000) - (25,000)
Conversion of note
payable into common
stock - - - - - - - - - - 200,000 - 100,000 - - 100,000
Conversion of
redemption payable
into common stock - - - - - - - - - - 2,115,241 2,000 633,000 - - 635,000
Exercise of warrants - - - - - - - - - - 400,000 - 123,000 - - 123,000
Exercise of stock
options - - - - - - - - - - 256,384 - 27,000 - - 27,000
Stock issued for
services - - - - - - - - - - 9,000 - 5,000 - - 5,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 2,226,000 - - 2,226,000
Net loss - - - - - - - - - - - - - - (4,847,000) (4,847,000)
Dividends declared - - - - - - - - - - - - (6,000) 6,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ----------- ---------- ----------- -------------
Balance - December 31,
1999 1.00 - 5.00 - 185 - 817 1,000 1,995 2,000 27,642,691 27,000 20,329,000 25,000 (18,008,000) 2,376,000
Conversion of note
payable into common
stock - - - - - - - - - - 800,000 1,000 399,000 - - 400,000
Warrants issued in
settlement - - - - - - - - - - - - 238,000 - - 238,000
Common stock issued in
connection with ADC
merger - - - - - - - - - - 60,400 - 374,000 - - 374,000
Preferred stock
conversions - - (5.00) - (185) - (767) (1,000) (1,120) (1,000) 4,564,000 5,000 18,000 (21,000) - -
Exercise of warrants - - - - - - - - - - 9,352,620 9,000 4,585,000 - - 4,594,000
Exercise of stock
options - - - - - - - - - - 4,039,734 4,000 1,493,000 - - 1,497,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 138,000 - - 138,000
Cancellation of shares
issued in error - - - - - - - - - - (142,423) - - - - -
Net loss - - - - - - - - - - - - - - (5,415,000) (5,415,000)
Dividends declared - - - - - - - - - - - - (1,000) 1,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ------------ ---------- ----------- -------------
Balance - December 31,
2000 1.00 - - - - - 50 - 875 $ 1,000 46,317,022 $ 46,000 $ 27,573,000$ 5,000 $(23,423,000) $ 4,202,000
Exercise of options and
warrants - - - - - - - - - - 1,462,642 1,000 368,000 - - 369,000
Warrants and in the
money conversion
feature issued with
convertible note
payable - - - - - - - - - - - - 581,000 - - 581,000
Stock issued on
conversion of note
payable - - - - - - - - - - 2,618,066 3,000 2,823,000 - - 2,826,000
Stock and warrants
issued in private
placement - - - - - - - - - - 1,872,308 2,000 2,061,000 - - 2,063,000
Preferred stock
conversions - - - - - - - - (500) (1,000) 1,000,000 1,000 - - - -
Stock issued with
equity line - - - - - - - - - - 3,291,369 3,000 1,507,000 - - 1,510,000
Stock issued in legal
settlements - - - - - - - - - - 90,000 - 285,000 - - 285,000
Stock options and
warrants issued for
services - - - - - - - - - - - - 145,000 - - 145,000
Net loss - - - - - - - - - - - - - - (10,636,000) (10,636,000)
Dividends declared - - - - - - - - - - - - (2,000) 2,000 - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- -------- ----------- --------- ------------ ---------- ----------- -------------
Balance - December 31,
2001 1.00 $ - - $ - - $ - 50 $ - 375 $ - 56,651,407 $ 56,000 $ 35,341,000 $ 7,000 $(34,059,000) $ 1,345,000
========= ========= ========= ========= ========= ========= ========= ========= ========= ======== =========== ========= ============ ========== ============ =============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
-------------------------------------------
2001 2000 1999
------------- ------------ -------------
Cash flows from operating activities
Net loss $ (10,636,000) $ (5,415,000) $ (4,847,000)
------------- ------------ -------------
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 488,000 426,000 243,000
Impairment of intangible assets 1,111,000 - -
Financing costs 2,428,000 - 238,000
Common stock, options and warrants
issued for settlements 149,000 - -
Common stock, options and warrants
issued for services 145,000 376,000 2,231,000
Discontinued operations - - 299,000
Gain on sale of staffing business - (1,102,000) -
Change in net assets of discontinued
operations - 857,000 (1,243,000)
Changes in assets and liabilities
Accounts receivable, net 49,000 (29,000) 2,046,000
Prepaid expenses and other (119,000) (49,000) 5,000
Accounts payable and accrued
liabilities 988,000 (237,000) (2,141,000)
Checks written in excess of bank
balance - - (72,000)
------------- ------------ ------------
5,239,000 242,000 1,606,000
------------- ------------ ------------
Net cash used in operating
activities (5,397,000) (5,173,000) (3,241,000)
------------- ------------ ------------
Cash flows from investing activities
Proceeds from sale of divisions - 500,000 -
Software development costs incurred (434,000) (495,000) -
Purchase of property and equipment (70,000) (400,000) (72,000)
Purchase of software license - (720,000) -
Proceeds from notes receivable - 500,000 563,000
Business acquisition costs, net of
cash acquired - (94,000) -
------------- ------------ ------------
Net cash (used in) provided by
investing activities (504,000) (709,000) 491,000
------------- ------------ ------------
Cash flows from financing activities
Proceeds from issuance of debt and
notes payable 1,824,000 178,000 500,000
Advances under financing agreement - - 11,272,000
Payments under financing agreement - (484,000) (11,781,000)
Principal payments on debt and notes
payable (303,000) (125,000) (289,000)
Issuance of preferred and common
stock, net of offering costs 3,012,000 - 4,112,000
Proceeds from the exercise of options
and warrants 369,000 6,091,000 150,000
Repurchase of preferred stock - - (25,000)
------------- ------------ ------------
Net cash provided by financing
activities 4,902,000 5,660,000 3,939,000
------------- ------------ ------------
Net (decrease) increase in cash (999,000) (222,000) 1,189,000
Cash - beginning of year 1,007,000 1,229,000 40,000
------------- ------------ ------------
Cash - end of year $ 8,000 $ 1,007,000 $ 1,229,000
============= ============ ============
Supplemental disclosure of cash flow information:
Cash paid for: Interest
------------
2001 $ 42,000
2000 $ 21,000
1999 $ 324,000
Supplemental disclosure of non-cash activity:
Dividends declared payable in common stock were $2,000, $1,000 and $6,000
for December 31, 2001, 2000 and 1999, respectively.
During 2001, 500 shares of the series C preferred stock was converted into
1,000,000 shares of common stock.
During 2001, $1,500,000 note payable advances under a credit facility and
$40,000 of accrued interest were converted and redeemed into 2,618,066
shares of common stock.
During 2001, the Company issued 90,000 shares of common stock and warrants
valued at $285,000 in connection with settlement of certain legal claims,
of which $137,000 was an adjustment to goodwill related to the Cymedix
acquisition.
During 2001, the Company issued options and warrants valued at $145,000 for
services provided.
During 2001, the Company issued 829,168 warrants valued at $506,000 in
connection with a convertible note payable credit facility. The Company
also recorded $75,000 for the value of the in-the-money conversion feature
on the debt.
During 2001, shares issued in private placements in connection with its note
payable credit facility at below market prices resulted in financing costs of
$448,000.
During 2001, shares issued for conversions and redemptions under the
convertible notes payable credit facility at below market prices resulted
in financing costs of $1,286,000.
During 2001, the Company issued warrants in connection with private
placements of common stock in connection with its note payable credit facility
valued at $415,000.
During 2001, the Company wrote off old payroll tax liabilities of $100,000
assumed in the Cymedix acquisition which reduced goodwill.
During 2000, 5.0 units of the 1997 preferred stock, 185 shares of the 1999
Series A preferred stock, 767 shares of the Series B preferred stock, and
1,120 shares of the series C preferred stock were converted into 3,161,342
shares of common stock.
During 2000, the Company acquired the assets and assumed certain
liabilities of a business from a related party (Note 4).
During 2000, the Company disposed of the remainder of its staffing business
(Note 2).
During 2000, the Company converted a $400,000 note payable into 800,000
shares of common stock.
During 1999, the Company issued a $500,000 convertible note payable with
warrants to purchase common stock, of which $100,000 of principal was
converted into 200,000 shares of common stock. The warrant was valued at
$238,000 and recorded as additional interest expense.
During 1999, the Company converted $635,000 of preferred stock redemption
payable into 2,115,241 shares of common stock.
During 1999, 4.50 units of the 1996 preferred stock, 14.50 units of the
1997 preferred stock, 1,015 shares of the 1999 series A preferred stock, and
1,015 shares of the series B preferred stock were converted into 3,161,342
shares of common stock.
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
Medix Resources, Inc. and subsidiary (the Company), main business focus is a
suite of fully secure, patented Internet communication software for the
healthcare industry. The Company divested its remaining healthcare related
staffing businesses in February of 2000 (Note 3).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Medix
Resources, Inc. and its subsidiary, Cymedix Lynx Corporation (Cymedix). All
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company grants credit in the normal course of business to customers in the
United States. The Company periodically performs credit analysis and monitors the
financial condition of its customers to reduce credit risk.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including accounts receivable,
notes receivable, accounts payable and accrued expenses approximate their fair
value as of December 31, 2001 and 2000 due to the relatively short maturity of
these instruments.
The carrying amounts of notes payable and debt issued approximate their fair
value as of December 31, 2001 and 2000 because interest rates on these instruments
approximate market interest rates.
Revenue Recognition
We earn revenue as transaction services are provided to our customers throught
the use of our suite of communication software, and currently do not generate
any revenue from the licensing, slae or installation of our suite of
communication software.
We recognize revenue is earned when the communication transaction has bee
completed by the customner, persuasive evidence of the terms of the arrangement
exist, our fee is fixed and determinable, and collectibility is reasonably
assured. Delivery takes place electronically when the customer has completed the
exchange (transmission or receipt) of data. Revenue is charged to the customer
on a per transaction basis as each transaction is completed and is billed
monthly.
Income Taxes
The Company recognizes deferred tax liabilities and assets based on the
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements that will result in taxable or deductible
amounts in future years. The Company's temporary differences result primarily
from capitalized software development costs, depreciation and amortization, and
net operating loss carryforwards.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets, ranging
from 3 to 7 years.
Software Development Costs
The Company applies the provisions of Statement of Position 98-1, "Accounting for
Costs of Computer Software Developed for Internal Use". The Company accounts for
costs incurred in the development of computer software as software research and
development costs until the preliminary project stage is completed. Direct costs
incurred in the development of software are capitalized once the preliminary
project stage is completed, management has committed to funding the project and
completion and use of the software for its intended purpose are probable. The
Company ceases capitalization of development costs once the software has been
substantially completed and is ready for its intended use. Software development
costs are amortized over their estimated useful lives of five years. Costs
associated with upgrades and enhancements that result in additional functionality
are capitalized.
Financing Costs
The company records as financing costs in its statement of operations
amortization of in-the-money conversion features on convertible debt accounted
for in accordance with EITF 98-5 and 00-27, amortization of discounts from
warrants issued with debt securities in accordance with APB No. 14 and
amortization of discounts resulting from other securities issued in connection
with debt based on their relative fair values, and any value associated with
inducements to convert debt in accordance with FASB 84.
Intangible assets
Intangible assets are stated at cost, and consist of goodwill, which is being
amortized using the straight-line method over fifteen years.
The Company reviews its long-lived asset for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company looks primarily to the undiscounted future cash flows
of its acquisition in its assessment of whether or not goodwill has been
impaired.
Reclassifications
Certain amounts in the 2000 and 1999 consolidated financial statements have been
reclassified to conform to the 2001 presentation.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising expenses were $23,000, $36,000 and $45,000 for the years ended December
31, 2001, 2000 and 1999.
Basic Loss Per Share
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" (FAS 128). All dilutive potential common shares
have an antidilutive effect on diluted per share amounts and therefore have been
excluded in determining net loss per share. The Company's basic and diluted loss
per share are equivalent and accordingly only basic loss per share has been
presented.
For the years ended December 31, 2001, 2000 and 1999 total stock options,
warrants and convertible debt and preferred stock of 14,693,254, 13,767,143 and
23,109,003, were not included in the computation of diluted loss per share
because their effect was antidilutive, however, if the company were to achieve
profitable operations in the future, they could potentially dilute such earnings.
Recently Issued Accounting Pronouncements
In July 2001, the FASB issued SFAS Nos. 141 and 142 " Business Combinations " and
" Goodwill and other Intangible Assets ". Statement 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the purchase
method. Under the guidance of Statement 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill will be subject to
at least an annual assessment for impairment by applying a fair value base test.
Statement 142 is effective for financial statement dates beginning after January
1, 2001. Goodwill will be tested for impairment at the time of adoption and on
an annual basis. As allowed under Statement 142, the Company will complete its
goodwill impairment test within the first six months of the fiscal year. As a
result of Statement 142, the Company will no longer be recognizing approximately
$155,000 in annual amortization expense related to goodwill.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for the Company for fiscal years beginning after June
15, 2002. The Company believes the adoption of this statement will have no
material impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value, less cost to
sell, whether reported in continuing operations or discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively.
Note 2 - Going Concern
The accompanying financial statements have been prepared on a going concern basis
which contemplates the realization of assets and liquidation of liabilities in
the ordinary course of business.
Management's Plan for Continued Existence
The Company has incurred operating losses for the past several years, the
majority of which are related to the development of the Company's healthcare
connectivity technology and were fully anticipated by management. These losses
have produced operating cash flow deficiencies, and negative working capital which
raise substantial doubt about its ability to continue as a going concern.
Management has secured an equity line of credit, as further described in Note 8,
and management is presently in discussions regarding alternative sources of
additional equity capital, which would enable the Company to continue to fund
operations until such time as revenues from the Company's internet communication
products for the healthcare industry will be sufficient to fund operations.
Management reports that progress continues with regard to new strategic alliances
with major healthcare organizations as well as in advancing the Company's
existing alliances from the "pilot program" stage toward the "production contract
stage".
Note 3 - Discontinued Operations
In February 2000, the Company closed on the sale of the assets of its remaining
staffing businesses for $1,000,000. The purchase price was paid with $500,000
cash at closing and the Company receiving a $500,000 subordinated note
receivable. The note provided for interest at prime plus 1% and was due in May
of 2001. The note was repaid on December 29, 2000. This sale was the final step
of a plan approved by the board of directors in December 1999 for the Company to
divest itself of the staffing businesses and focus its efforts on its internet
communication software products for the healthcare industry.
The accompanying financial statements reflect the results of operations of the
remaining staffing businesses as a discontinued business segment. The
discontinued results of operations include those direct revenues and expenses
associated with running the remaining staffing businesses as well as an
allocation of corporate costs.
The results of operations of the Company's discontinued remaining staffing
businesses are as follows:
For the Years Ended
December 31,
---------------------------
2000 1999
---------------------------
Revenue $ 1,128,000 $ 10,812,000
Direct costs of services 927,000 8,472,000
---------------------------
Gross margin 201,000 2,340,000
---------------------------
Selling, general and administrative 219,000 2,193,000
Interest expense 18,000 446,000
Litigation settlement 137,000 -
---------------------------
Net loss $ (173,000) $ (299,000)
===========================
During the fourth quarter of 2000, the Company wrote off unrealizable assets
related to the discontinued operations in the amount of $43,000, and $322,000 in
remaining related liabilities. The net write-off of assets and liabilities
totaling $279,000, less net assets acquired by the purchaser of $77,000, has been
recorded as an increase of $202,000 to the gain from the disposal of the
remaining staffing businesses as of December 31, 2000.
During the first quarter of 2000, the Company reported the following gain on the
disposal of the assets of its remaining staffing businesses:
Sales price $ 1,000,000
Accounts receivable collection costs (100,000)
------------
900,000
Net assets acquired, liabilities assumed and
liabilities written off 202,000
------------
Gain on disposal of the remaining staffing businesses 1,102,000
Loss from operation of the remaining staffing
businesses through the disposal date (173,000)
------------
Net gain on disposal of the remaining staffing
businesses $ 929,000
============
Also as previously noted the purchaser did not acquire the Company's accounts
receivable as part of the sale. However, in connection with the sale, the
purchaser will collect the Company's receivables and remit the proceeds to the
Company net of a 10% collection fee. The $100,000 reflected above represents the
Company's estimate of the collection costs to be paid to purchaser for performing
this function.
Note 4 - Acquisition of Assets
On March 1, 2000, the Company purchased the assets and assumed certain
liabilities of Automated Design Concepts, Inc., an entity owned by a director of
the Company, for the issuance of 60,400 shares of common stock valued at $374,000
and a payment of $100,000. The Company also entered into a two-year lease for
$1,000 per month expiring in February 2002. Assets purchased include cash and
accounts receivable.
The purchase was accounted for under the purchase method. The purchase price was
allocated to the assets purchased and liabilities assumed based on the fair
market values at the date of acquisition as follows:
Cash $ 6,000
Accounts receivable 27,000
Goodwill 487,000
Accounts payable (41,000)
Accrued liabilities (5,000)
------------
$ 474,000
============
The results of operations have been reflected from the date of acquisition
forward. The resulting goodwill is being amortized over 15 years.
During the third quarter of 2001, the Company discontinued operation of its
Automated Design Concepts division to focus on its core business and as a cost
saving measure. As a result, $443,000 of impairment expense has been included
in Consolidated Statements of Operations for the year ended December 31, 2001.
This amount represents the unamortized balance of the investment at the time of
discontinuance.
The following table summarizes the unaudited pro forma results of the Company
giving effect to the acquisition as if it had occurred on January 1, 2000. The
unaudited pro forma information is not necessarily indicative of the results of
operations of the Company had this acquisition occurred at the beginning of the
years presented, nor is it necessarily indicative of future results.
For the Years Ended
December 31,
---------------------------
2000 1999
---------------------------
Sales $ 440,000 $ 569,000
===========================
Net income (loss) $ (5,408,000) $ (4,816,000)
===========================
Loss per share $ (0.13) $ (0.20)
===========================
Note 5 - Balance Sheet Disclosures
Software development costs consist of the following:
December 31,
---------------------------
2001 2000
---------------------------
Software development costs $ 929,000 $ 495,000
Less accumulated amortization (280,000) (124,000)
---------------------------
$ 649,000 $ 371,000
===========================
Annual amortization expense, which is included in costs of services provided was
$156,000 and $124,000 for the years ended December 31, 2001 and 2000,
respectively.
Property and equipment consists of the following:
December 31,
---------------------------
2001 2000
---------------------------
Furniture and fixtures $ 103,000 $ 91,000
Computer hardware and purchased software 609,000 552,000
Leasehold improvements 29,000 28,000
---------------------------
741,000 671,000
Less property, plant and equipment - accumulated
depreciation (376,000) (253,000)
---------------------------
$ 365,000 $ 418,000
===========================
Depreciation expense was $123,000, $97,000 and $86,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Intangible assets consist of the following:
December 31,
---------------------------
2001 2000
---------------------------
Goodwill acquired through Cymedix acquisition $ 2,369,000 $ 2,332,000
Goodwill acquired through the Automated Design
Concepts, Inc. acquisition - 487,000
License agreement with ZirMed.com - 720,000
---------------------------
2,369,000 3,539,000
Less accumulated amortization (634,000) (520,000)
---------------------------
$ 1,735,000 $ 3,019,000
===========================
Amortization expense was $209,000, $205,000, and $157,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
During the third quarter of 2001, the Company discontinued operation of its
Automated Design Concepts, division, and terminated its license agreement with
ZirMed.com. As a result, $1,111,000 of impairment expense has been included in
the Consolidated Statements of Operations for the year ended December 31, 2001.
This amount represents the unamortized balance of each investment at the time of
discontinuance.
Accrued expenses consists of the following:
December 31,
---------------------------
2001 2000
---------------------------
Accrued payroll and benefits $ 294,000 $ 310,000
Accrued professional fees 57,000 60,000
Accrued license fees 53,000 -
Other accrued expenses 29,000 21,000
Accrued interest 17,000 -
---------------------------
$ 450,000 $ 391,000
===========================
At various times during 2001, the Company was delinquent with payroll tax
deposits. At December 31, 2001 and 2000, $131,000 and $200,000, respectively was
accrued for estimated taxes, interest and penalties. During 2001, the Company
wrote off $100,000 of previously recorded accrued payroll tax liabilities assumed
in the Cymedix acquisition as management determined the Company was over accrued
and has recorded the write-off as an adjustment to previously recorded goodwill.
Note 6 - Long-Term Debt
Long-term debt consists of:
December 31,
---------------------------
2001 2000
---------------------------
Notes payable - finance company, interest accrues at
7%, monthly payments of principal and interest of
$23,730 are payable through July 2002. $ 140,000 $ 115,000
Notes payable - finance company, interest accrues at
7%, monthly payments of principal and interest of
$1,417 are payable through October 2002. 18,000 22,000
---------------------------
158,000 137,000
Less current portion (158,000) (137,000)
---------------------------
$ - $ -
===========================
Convertible Promissory Note
In October 1999, the Company raised approximately $488,000 net of expenses
through the issuance of a $500,000 14% Convertible Promissory Note and warrants
to purchase 500,000 shares of the Company's common stock at $.50 per share. The
$500,000 in principal plus accrued interest was payable on June 28, 2000. The
note was convertible into the Company's common stock at a conversion price of
$.50 per share, for the first 90 days outstanding, and at the lower of $.50 per
share or 80% of the lowest closing bid price for the Common Stock during the last
five trading days prior to conversion, for the remaining life of the note. The
note was secured by the intellectual property of the Company's wholly owned
subsidiary Cymedix Lynx Corporation. The warrants were recorded as a discount on
the debt valued at $238,000 using the Black-Scholes option pricing model using
assumptions of life of 3 years, volatility of 225%, no dividend payment, and a
risk-free rate of 5.5%. The discount was fully amortized at December 31, 1999,
as the remaining debt of $400,000 at December 31, 1999, was converted in January
2000 into 800,000 shares of common stock and the security interest released.
Convertible Note Payable Credit Facility
In December 2000, the Company obtained a credit facility under which it issued a
convertible promissory note and common stock purchase warrants. The credit
facility provided that the Company could draw against this facility in increments
as follows: $750,000 upon closing, which occurred January 10, 2001; $250,000
within 10 days of an effective registration statement, which occurred February
13, 2001; and $500,000 draws at the 60th day, 90th day and the 150th day from the
effective registration statement. These advances could be made only if the
Company's common stock price remained above $1 for five business days prior to
the draw. During the draw down periods, the Company drew $1,500,000 under the
convertible note. Advances under the convertible note bear interest at an annual
rate of 10% and provide for semi-annual payments on July 10, 2001 and January 10,
2002. All outstanding balances under this arrangement were converted or redeemed
during 2001 into common shares. The note payable balance was convertible at $.90
per share for up to the first $750,000 and any remaining balance at $1.00 per
share. The initial $750,000 draw on this arrangement has an imputed discount
recorded, which was valued at $75,000 for the "in-the-money" conversion feature
of the first advance. In addition, the noteholder can force a redemption of the
note or any portion thereof, for either cash or stock at the option of the
Company, but if for stock, at a redemption price of eighty (80%) percent of the
Volume Weighted Market Price (as defined) per common share during the twenty
Trading Days ending on the day of the notice delivered by the holder.
In connection with this credit facility, the Company also agreed to issue
warrants to purchase common stock to the holder of the convertible promissory
note. The Company issued 750,000 warrants in connection with drawdowns under the
convertible note. The warrants have an exercise price of $1.75 and terms of two
years from the date of issuance. The Company also issued 54,167 warrants to
purchase common stock to two finders assisting with the transaction. The finder
warrants also have terms of two years and an exercise price of $1.75.
The Company has imputed values for the 750,000 and 54,168 warrants issued to the
provider of the credit facility and the finders using the Black-Scholes Option
pricing model. The first 500,000 warrants issued to the provider of the credit
facility were valued at $249,000 and have been treated as a discount on the debt
to be amortized over its remaining life. The related 54,168 warrants issued to
finders which have been recorded as debt issue costs and amortized over the
remaining life of the debt. In connection with the final draw under the
credit facility in May, the Company issued 250,000 warrants to the provider of
the credit facility. The 250,000 warrants issued to the provider of the credit
facility were valued at $209,000 using the Black-Scholes pricing model and have
been treated as a discount on the debt to be amortized over its remaining life.
In connection with the final draw under the credit facility, The Company issued
warrants to purchase 25,000 shares issued to the finders. The total finder
warrants have been valued at $48,000 using the Black-Scholes option-pricing
model, and have been treated as a discount on the debt to be amortized over its
remaining life. The values of all warrants issued under this facility were
determined using the following assumptions; lives of two years, exercise prices
of $1.75, volatility of 117%, no dividend payment and a risk-free rate of 5.5%.
During February 2001, $100,000 of the convertible note was converted into 111,111
shares of common stock. During the period April through September, $900,000 of
the note was redeemed. These redemptions were satisfied by the issuance of
1,384,661 shares of common stock. During October 2001, the remaining $500,000
convertible note was redeemed by the issuance of 1,069,368 shares of common
stock. During July 2001, 52,928 shares of common stock was issued as payment of
accrued interest of $40,000 through July 10, 2001. As a result of conversions
and redemptions at modified conversion prices $1,286,000 of financing costs were
recorded reflecting the intrinsic value of the share differences from issuable
shares at the date the advances were received.
During March 2001, the Company, under an amendment to its convertible note
payable credit facility, received $350,000 from the credit facility provider for
the issuance of 636,364 shares of its common stock as a private placement
transaction. As a part of this common stock issuance, the Company issued
warrants to purchase 636,364 shares of common stock at $.80 per share with a term
of two years from the date of issuance. As a result of the warrant issuance, the
Company has recorded financing expense of $262,000 in the accompanying financial
statements, using the Black-Scholes option-pricing model. The company also
issued warrants to purchase 63,636 shares of common stock at $.80 per share with
a term of two years to two finders assisting the transaction. The finders
warrants have been valued at $40,000 using the Black-Scholes pricing model and
have been included as financing costs in the accompanying financial statements.
The calculated values were computed using the following assumptions: lives of 2
years, exercise prices of $.80, volatility of 117%, no dividend payments and a
risk free rate of 5.5%.
During the period May through December 2001, the Company received $850,000, under
a second amendment to the credit facility, for the issuance of 1,235,944 shares
of its common stock, in additional private placement transactions. As a part of
these common stock issuances, the Company issued warrants to purchase 168,919
shares of common stock at $1.00 per share with a term of two years from the date
of issuance. The Company has recorded finanacing expense of $113,000 related to
the warrant issuance in the accompanying financial statements, using the
Black-Scholes option-pricing model. The calculated values were computed using the
following assumptions: lives of 2 years, exercise prices of $.80, volatility of
117%, no dividend payments and a risk free rate of 5.5%.
As a result of shares issued under the private placements at below market prices,
which have been treated as a discount on the debt based on their fair market
values at issuance, financing costs of $448,000 have been recorded.
Note 7 - Commitments and Contingencies
Operating Leases
The Company leases office facilities in New York, New Jersey, Colorado and
California and various equipment under non-cancelable operating leases.
Rent expense for these leases was:
Year Ending December 31,
------------------------
2001 $ 396,000
2000 $ 315,000
1999 $ 293,000
Future minimum lease payments under these leases are approximately as follows:
Year Ending December 31,
------------------------
2002 $ 550,000
2003 413,000
2004 309,000
2005 26,000
-------------
$ 1,298,000
=============
Litigation
In the normal course of business, the Company is party to litigation from time to
time. The Company maintains insurance to cover certain actions and believes that
resolution of such litigation will not have a material adverse effect on the
Company.
During the fourth quarter of 1997, an action was filed against the Company in the
Eastern District of New York under the caption New York Healthcare, Inc. v.
International Nursing Services, Inc., et al. On February 15, 2000, the Company
agreed in principle to settle this claim. In connection with the settlement, the
Company issued a warrant to purchase 35,000 of the Company's common stock at
$3.96 per share. The Company recorded expense of approximately $137,000 related
to the issuance of the warrant, which has been included in the results of
discontinued operations. The warrants were valued using the Black-Scholes
pricing model, using assumptions of volatility of 273%, no dividend payments and
a risk free rate of 5.5%.
On November 12, 1999, an action was filed in California Superior Court, which has
since been removed to the U. S. District Court, Central District of California,
against Medix Resources, Inc. and its wholly owned subsidiary, Cymedix Lynx
Corporation. As of November 3, 2000, a settlement agreement was reached between
the Company and the plaintiff whereby the company paid the plaintiff $66,000
cash, and issued an option to purchase 50,000 of the Company's common stock at
$.25 per share. The Company recorded expense of approximately $102,000 related
to the issuance of the option. The warrants were valued using the Black-Scholes
pricing model, using assumptions of volatility of 273%, no dividend payments and
a risk free rate of 5.5%.
On June 1, 2000, an action was filed in the District Court of the City and County
of Denver, Colorado, against Medix Resources, Inc., and its wholly-owned
subsidiary, Cymedix Lynx Corporation, alleging that a predecessor company of
Cymedix Lynx Corporation had promised to issue stock options to the plaintiff but
had failed to honor that promise. On June 15, 2001, the matter was settled by
paying the plaintiff $35,000 and issuing to him 2 year warrants to purchase
195,000 shares of the Company's common stock at $.50 per share. The settlement
was approved by the court on July 6, 2001. The case has been dismissed with
prejudice. The warrants issued in this settlement have been valued at $137,000
using the Black-Scholes pricing model, using assumptions of volatility of 132%,
no dividend payments and a risk-free rate of 5.5%, and have been included as an
increase to goodwill in the accompanying financial statements, as a result of an
unrecorded liability that existed at the time of the Cymedix merger.
On July 11, 2000, an action was filed in the United States District Court,
Southern District of New York, against Medix Resources, Inc., alleging that the
Company granted to plaintiff the right to purchase preferred stock convertible
into the Company's common stock and warrants to purchase the Company's common
stock in connection with the Company's private financings during 1999, and then
failed to permit plaintiff to exercise that right. On May 2, 2001, the Company
agreed to settle the matter by paying the plaintiff $20,000 and issuing him a
three year warrant (issued over a 18 month period) to purchase 137,500 shares of
the Company's common stock at $.50 per share. The settlement was approved by the
Court on May 3, 2001. The case has been dismissed with prejudice. The warrants
issued in this settlement have been valued at $64,000 using the Black-Scholes
pricing model, using assumptions of volatility of 132%, no dividend payments, and a
risk-free rate of 5.5%, and have been included as an expense in the Consolidated
Statement of Operations.
On September 27, 2000, an action was filed in the United States District Court,
Eastern District of New York, against Medix Resources, Inc. alleging that the
Company failed to properly and fully convert the Company's convertible preferred
stock held by one of the Plaintiffs, and had failed to maintain the registration
for public sale with the Securities and Exchange Commission of shares underlying
warrants held by both Plaintiffs. The Company settled the litigation by issuing
to one plaintiff 90,000 shares of the Company's common stock, valued at $51,000,
and extending the exercise period of the warrants of the other plaintiff until
December 31, 2003, valued at $33,000. The shares and warrants issued in this
settlement have been valued at $84,000 using the Black-Scholes pricing model, for
the modification to the warrant, using assumptions of a life of 2 years, exercise
price of $1.00, volatility of 132%, no dividend payments and a risk-free rate of
5.5%, and have been included as an expense in the Consolidated Statement of
Operations.
On August 7, 2001, a former officer of the Company filed an action in the
District Court of Arapahoe County, Colorado, against the Company and its former
President and CEO. The plaintiff alleges (1) breach of an employment agreement,
a stock option agreement and the related stock option plan, (2) a duty of good
faith and fair dealing, and (3) violation of the Colorado Wage Claim Act.
Plaintiff's seeks unspecified damages to be determined at jury trail, including
interest, punitive damages, plaintiff's attorney fees, and a 50% penalty under
the Colorado Wage Claim Act. The Company and its co-defendants have answered the
plaintiff's complaint, denying any liability. The court set discovery to be
completed by July 31, 2002, and the trial to begin on September 9, 2002.
Management of the Company intends to vigorously defend this action, and does not
expect any resolution of this matter to have a material adverse effect on the
Company's financial condition or results of operation. Currently an estimate of
possible loss to the Company if unsucessful in defending this action cannot be
made.
On December 17, 2001, Plantiff, Vision Management Consulting, L.L.C., filed suit
against us in the Superior Court of New Jersey, Law Division - Essex County,
entitled Vision Managment Consulting, L.L.C. v. Medix Resources, Inc., Docket No.
ESX-L-11438-01. The complaint alleges breach of contract, unjust enrichment,
breach of duty in good faith and fair dealing and misrepresentations by us in
connection with a negotiated settlement agreement, which had resulted from claims
between the parties arising out of the termination of operations by our Automated
Design Concepts division earlier in 2001. Plaintiff seeks unspecified damages to
be proven at jury trial, together with attorneys fees, costs of suit and interest
on judgement, as well as such further relief as the Court deems just and
equitable. We have answered the plaintiff's complaint, denying any liability and
setting forth a counterclaim seeking the award to us of our costs of defending
this action and such further relief as the Court deems just and proper.
Management intends to vigorously defend this action and does not expect any
resolution of this matter to have a material adverse effect on the Company's
results of operations or financial condition. The Court has appointed a mediator
for the case to try to facilitate a settlement between the parties. Currently an
estimate of possible loss to the Company if unsucessful in defending this action
cannot be made.
Note 8 - Stockholders' Equity
On March 20, 2000, the Company authorized 2,500,000 shares of preferred stock.
1996 Private Placement
In July and September 1996, the Company completed a private placement of 244
units, each unit consisting of a share of convertible preferred stock, $10,000
per unit, $1 par value ("1996 Preferred Stock"), a warrant to purchase 8,000
shares of the Company's common stock at $2.50 per share and a unit purchase
option to purchase an additional unit at $10,000 per unit.
During 1998, 18.25 units were converted resulting in the issuance of an
additional 939,320 shares of common stock in 1998.
During 1999 4.5 units were converted into 241,072 shares of common stock.
Additionally, the Company repurchased from another holder 2.5 units in a
negotiated agreement for $25,000. The Company has 1.0 remaining unit of its 1996
preferred stock outstanding at December 31, 2001 and 2000. The remaining unit
may be converted into the Company's common stock including accrued dividends at
the lesser of $1.25 per common share or 75% of the prior five day trading average
of the Company's common stock.
1997 Private Placement
In January and February 1997, the Company completed a private placement of 167.15
Units, each unit consisting of one share of convertible preferred stock, $10,000
per unit, $1 par value, "1997 Preferred Stock", and a warrant to purchase 10,000
shares of common stock at $1.00 per share.
In 1998, 5.0 units were converted resulting in the issuance of 178,950 shares of
common stock.
During 1999 14.5 units were converted into 572,694 shares of common stock. During
2000, the remaining 5.0 units were converted into 50,000 shares of common stock.
1999 Private Placement
During 1999, the Company initiated three private placement offerings each
consisting of one share of preferred stock (as designated) and warrants to
purchase common stock. There are no dividends payable on the preferred stock if
a registration statement is filed by a certain date as specified in the offering
agreements and remains effective for a two year period. If dividends are
payable, the preferred stock will provide for a 10% dividend per annum for each
day during which the registration statement is not effective. The preferred
shares are also redeemable at the option of the Company after a date as specified
in the offering agreements for $1,000 per share plus any accrued unpaid
dividends. In addition, if a registration statement is not effective by the date
as specified in the offering agreements the shares may be redeemed at the request
of the holder at $1,000 per share plus any accrued unpaid dividends.
The first private placement consisted of 300 shares of Series A preferred stock
each with 1,000 warrants for $1,000 per unit, which raised total proceeds of
$300,000. The warrants included with each unit entitle the holder to purchase
common shares at $1.00 per share, expiring in October 1, 2000. The preferred
shares are currently convertible into common shares at $.25 per common share
through March 1, 2003. During 1999, 115 shares of Series A preferred stock were
converted into 460,000 common shares. During 2000, 185 shares of Series A
preferred stock were converted into 740,000 common shares. All of the warrants
included with the Series A preferred stock were exercised in 2000.
The second private placement consisted of 1,832 shares of Series B preferred
stock each with 2,000 warrants for $1,000 per unit, which raised total proceeds
of $1,816,500 (net of offering costs of $15,500). The Company also issued a
warrant to purchase 50,000 shares of common stock at $.50, which expires in May
2002, for services rendered in connection with the private placement. The
warrants included with each unit entitle the holder to purchase common shares at
$.50 per share, expiring in October 1, 2003. The preferred shares are currently
convertible into common shares at $.50 per common share through October 1, 2003.
During 1999, 1,015 shares of Series B preferred stock were converted into
2,030,000 common shares. During 2000, 767 shares of Series B preferred stock
were converted into 1,534,000 common shares. The warrants are callable by the
Company for $.01 upon thirty days written notice. The Company has not called any
of these warrants as of the date hereof.
The third private placement consisted of 1,995 shares of Series C preferred stock
each with 4,000 warrants for $1,000 per unit, which raised total proceeds of
$1,995,000. The warrants, included with each unit, entitled the holder to
purchase common shares at $.50 per share, expiring in April 1, 2003. The
preferred shares are convertible beginning April 1, 2000 into common shares at
$.50 per common share through April 1, 2003. During 2000, 1,120 shares of Series
C preferred stock were converted into 2,240,000 common shares. During 2001, 500
shares of Series C preferred stock were converted into 1,000,000 shares of common
stock. After April 1, 2000, the warrants are callable by the Company for $.01
upon thirty days written notice. The Company has not called any of these
warrants as of the date hereof.
Equity Line
The Company has entered into an Equity Line of Credit Agreement dated as of June
12, 2001, which provides that the Company can put to the provider, subject to
certain conditions, the purchase of common stock of the Company at prices
calculated from a formula as defined in the agreement. Under the agreement, the
providers of the Equity Line of Credit have committed to advance to the Company
funds in an amount of up to $10,000,000, as requested by the Company, over a
24-month period in return for common stock issued by the Company to the
providers. The principal conditions to any such advance, which may be waived,
are as follows:
o There must be thirteen stock market trading days between any two requests
for advances made by the Company.
o The Company can only request an advance if the volume weighted average
price of the common stock as reported by Bloomberg L.P. for the day before the
request is made is equal to or greater than the volume weighted average price as
reported by Bloomberg L.P. for the 22 trading days before a request is made.
o The Company will not be able to receive an advance amount that is greater
than 175% of the average daily volume of its common stock over the 40 trading
days prior to the advance request multiplied by the purchase price.
The purchase price for each advance will be equal to 91% of the three lowest
daily volume weighted average prices during the 22 trading days before a request
is made.
The Company will receive the amount requested as an advance within 10 days of its
request, subject to satisfying standard closing conditions. The issuance of
shares of common stock to the providers in connection with the equity line
financing will be exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof. The Company has agreed to register for
immediate re-sale the shares being issued to the providers of the Equity Line of
Credit before any drawdowns may occur. The Company has registered 9,500,000
shares. The related Registration Statement was declared effective by the SEC on
August 6, 2001. The Company has also agreed that its executive officers and
directors will not sell any shares of its common stock during the ten trading
days following any advance request by the Company.
The Company will pay an aggregate of 7% of each amount advanced under the equity
line financing to two parties affiliated with the providers of the Equity Line of
Credit for their services relating thereto. In addition, upon the effective date
of this Registration Statement registering the securities to be issued under the
Equity Line of Credit, the Company issued to those same two parties an aggregate
of 198,020 shares of common stock, and on December 9, 2001 (180 days after the
date of the Equity Line of Credit Agreement) the Company issued to them an
additional 344,827 shares of our common stock shares. In addition, the Company
has paid legal fees in an aggregate amount of $15,000.
During the period August to December 2001, the company received $1,510,000, net
of commissions and escrow fees from nine equity line advances, resulting in the
issuance of 2,748,522 shares of common stock. The 542,847 shares issued to
finders in connection with the equity line, described above, were valued at
$407,000, additionally the incremental differences of shares issued at below market
prices on the line totaled $391,000, both of which have been presented as a
reduction to net proceeds from the advances received.
Accumulated Deficit
Of the $34,059,000 cumulative deficit at December 31, 2001 and $23,423,000 at
December 31, 2000, the approximate amount relating to the Company's technology
business from inception is $21,112,000 and $10,631,000, respectively. In
addition, a premium of $2,332,000 was paid upon the acquisition of Cymedix Lynx
in 1998, producing a total investment of $23,544,000 at December 31, 2001 and
$12,963,000 at December 31, 2000 in the technology to date.
Stock Options
In May 1988, the Company adopted an incentive stock option plan (ISO), which
provides for the grant of options representing up to 100,000 shares of the
Company's common stock to officers and employees of the Company upon terms and
conditions determined by the Board of Directors. Options granted under the plan
are generally exercisable immediately and expire up to ten years after the date
of grant. Options are granted at a price equal to the market value at the date
of grants, or in the case of a stockholder who owns greater than 10% of the
outstanding stock of the Company, the options are granted at 110% of the fair
market value.
In 1994, the Board of Directors established, the Omnibus Stock Plan of 1994 (1994
Plan) and reserved 500,000 shares of the Company's common stock for grant under
terms, which could extend through January 2004. All options and warrants issued
under this plan are non-qualified. Grants under the 1994 Plan may be to
employees, non-employee directors, and selected consultants to the Company, and
may take the form of non-qualified options, not lower than 50% of fair market
value. To date, the Company has not issued any options below fair market value
at the date of grant.
In 1996, the Board of Directors established the 1996 Stock Option Plan (the "1996
Plan") with terms similar to the 1994 Plan. The Board of Directors of the
Company reserved 4,000,000 shares of common stock for issuance under the 1996
Plan.
In August 1999, the Board of Directors established the 1999 Stock Option Plan
(the "1999 Plan"), which provides for the grant of incentive stock options
("ISOs") to officers and other employees of the Company and non-qualified options
to directors, officers, employees and consultants of the Company. Options
granted under the plan are generally exercisable immediately and expire up to ten
years after the date of grant. Options are granted at a price equal to the
market value at the date of grant. The Board of Directors has reserved
10,000,000 shares of common stock for granting of options under the 1999 Plan.
The following table presents the activity for options outstanding:
Weighted
Incentive Non-qualified Average
Stock Stock Exercise
Options Options Price
------------ ------------ ------------
Outstanding - December 31, 1998 3,054,065 1,157,050 $ 0.35
Granted 5,050,000 662,500 0.31
Forfeited/canceled (586,188) (930,366) 0.41
Exercised - (256,184) 2.78
------------ ------------ ------------
Outstanding - December 31, 1999 7,517,877 633,000 0.32
Granted 2,255,000 110,000 3.82
Forfeited/canceled (10,000) - 0.25
Exercised (3,900,235) (139,499) 0.28
------------ ------------ ------------
Outstanding - December 31, 2000 5,862,642 603,501 1.62
Granted 2,289,000 - 0.71
Forfeited/canceled (865,000) (65,834) 3.03
Exercised (1,267,142) (173,500) 0.25
------------ ------------ ------------
Outstanding - December 31, 2001 6,019,500 364,167 $ 1.40
============ ============ ============
The following table presents the composition of options outstanding and
exercisable:
Options Outstanding Options Exercisable
----------------------- -----------------------
Range of Exercise Prices Number Price* Life* Number Price*
------------------------ ----------- ----------- ----------- ----------- -----------
$.19 - .55 2,723,667 $ 0.41 7.46 2,601,833 $ 0.40
$.60 - 1.88 2,365,000 0.76 0.54 1,943,750 0.73
$2.25 - 4.97 1,295,000 4.67 6.45 800,000 4.56
----------- ----------- ----------- ----------- -----------
Total - December 31,
2001 6,383,667 $ 1.40 4.69 5,345,583 $ 1.14
=========== =========== =========== =========== ===========
*Price and Life reflect the weighted average exercise price and weighted average
remaining contractual life, respectively.
The Company has issued 110,000 stock options to consultants which have been
valued at $79,000 and recorded as consulting expense, using the Black-Scholes
options pricing model. The assumptions used include lives ranging from 2 to 5
years, exercise prices ranging from $0.67 to $0.92, volatility of 132%, no
dividend payments and a risk free rate of 5.5%.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's option been determined based on
the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Corporation's net loss and basic loss per common share would
have been changed to the pro forma amounts indicated below:
For the Years Ended
December 31,
-----------------------------------------
2001 2000 1999
-------------- ------------- ------------
Net loss - as reported $(10,636,000) $ (5,415,000) $ (4,847,000)
Net loss - pro forma (12,035,000) (14,256,000) (6,136,000)
Basic loss per common share - as reported (0.21) (0.13) (0.30)
Basic loss per common share - pro forma (0.24) (0.34) (0.36)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
For the Years Ended
December 31,
----------------------------------------
2001 2000 1999
-------------- ------------- -----------
Approximate risk free rate 5.50% 5.50% 5.50%
Average expected life 5 years 10 years 10 years
Dividend yield 0% 0% 0%
Volatility 132% 273% 225%
Estimated fair value of total options
granted $1,399,000 $8,841,000 $1,289,000
Warrants
The Company has an obligation to issue up to 7,000,000 warrants under an
agreement with a pharmacy management company for the Company's proprietary
software to be interfaced with core medical service providers, in which one of
the Company's audit committee members is a related party to the pharmacy
management company. The agreement provides for 3,000,000 warrants with an
exercise price of $.30, 3,000,000 warrants with an exercise price of $.50, and
1,000,000 warrants with an exercise price of $1.75 all expiring September 8,
2004. The warrants to be issued by the Company are granted in 1,000,000
increments based on certain performance criteria. At December 31, 1999,
1,000,000 of the warrants had been granted but were not issued yet. In
connection with the obligation to issue the 1,000,000 warrants earned, the
Company recorded expense of $1,364,000 valued using the Black-Scholes option
pricing model, with assumptions of 132% volatility, no dividend yield and a
risk-free rate of 5.5%. No warrants were granted during 2000. During 2001,
850,000 of the warrants had been granted but were not issued by December 31,
2001. In connection with the obligation to issue the 850,000 warrants earned,
the Company recorded expense of $590,000 during the third quarter of 2001 valued
using the Black-Scholes option pricing model, with assumptions of 132%
volatility, no dividend yield and a risk-free rate of 5.5%.
At December 31, 2001, the Company will have the obligation to grant 5,150,000
warrants under the agreement in the future if the performance criteria specified
are met.
The Company also issued and modified warrant terms in the settlement of certain
litigation (Note 7). These warrants and modifications have been valued at
$234,000 using the Black-Scholes option pricing model. (See assumptions used in
Note 7).
The following table presents the activity for warrants outstanding:
Weighted
Average
Number of Exercise
Warrants Price
---------------------------
Outstanding - December 31, 1998 3,463,954 $ 1.81
Issued 12,721,000 0.51
Forfeited/canceled (993,828) 4.84
Exercised (400,000) 0.31
---------------------------
Outstanding - December 31, 1999 14,791,126 0.53
Issued 35,000 3.96
Forfeited/canceled (32,506) 0.71
Exercised (9,352,620) 0.53
---------------------------
Outstanding - December 31, 2000 5,441,000 0.53
Issued 2,066,587 1.12
Forfeited/canceled (36,000) 0.80
Exercised (22,000) 0.19
---------------------------
Outstanding - December 31, 2001 7,449,587 $ 0.69
===========================
All of the outstanding warrants are exercisable and have a weighted average
remaining contractual life of 2.31 years.
Note 9 - Income Taxes
As of December 31, 2000, the Company has net operating loss (NOL) carryforwards
of approximately $21,800,000, which expire in the years 2000 through 2021. The
utilization of the NOL carryforward is limited to $469,000 on an annual basis for
net operating loss carryforwards generated prior to September 1996, due to an
effective change in control, which occurred as a result of the 1996 private
placement. As a result of the significant sale of securities during 1999, the
Company's net operating loss carryforwards will be further limited in the future
to an annual amount of $231,000 due to those changes in control. The Company
also has a deferred tax liability of approximately $221,000 related to
capitalized software development costs. The Company has concluded it is
currently more likely than not that it will not realize its net deferred tax
asset and accordingly has established a valuation allowance of approximately
$7,400,000 and $5,000,000, respectively. The change in the valuation allowance
for 2001 and 2000 was approximately $2,413,000 and $1,668,000, respectively.
Note 10 - Employee Benefit Plan
Effective March 25, 1997, the Company adopted a defined contribution retirement
savings plan, which covers all employees age 21 or older with one thousand hours
of annual service. Matching contributions are made by the Company at $0.25 for
each $1 that the employee contributes up to 8% of compensation during 1998.
The Company has certain violations under the plan, which are considered
reportable transactions. The Company was delinquent in filing a complete Form
5500, and was notified by the Department of Labor to complete its filing. The
Company has complied in filing the Form 5500 within the specified time period,
however, the Company could be subject to certain penalties as a result.
The Company's matching contributions vest to the participant according to the
following vesting schedule:
Years of Service
----------------
1 10%
2 20%
3 30%
4 40%
5 60%
6 80%
7 100%
Note 11 - Related Party Transactions
Prior to being elected to the board of directors of the Company in 1999, a
company affiliated with one of the Company's directors, entered into agreements
with us to provide executive search services and sales and marketing service to
us. In connection with those agreements, the Company issued a 3-year option to
acquire up to 25,000 shares of the Company's common stock at an exercise price of
$.55 per share. An expense of approximately $13,000 related to the issuance of
the option was recorded. The Company paid the related company approximately
$51,000 and $152,000 during 2001 and 2000, respectively. The Company also
entered into an agreement with the affiliated company for rental space, use of
clerical employees and to pay a portion of utility and telephone costs. Rent
expense for 2001 and 2000 was approximately $111,000 and $93,000, respectively.
During 2000, the Company paid two companies affiliated with another of the
Company's directors $118,000 for services and related expenses and approximately
$66,000 for software development and web-site hosting and development services
and purchase of computer equipment. The Company also acquired a business from a
director of the Company for $474,000 in 2000 (Note 4).
The Company also has an obligation to issue warrants to a pharmacy management
company in which a member of the Company's audit committee is a related party,
if certain performance criterion are met in the future (Note 7).
The Company has a consulting agreement with one of the Company's directors to
assist with marketing of the Company's products. The Company paid the director
$0 and $52,000 for such consulting services in 2001 and 2000, respectively.
During July 2001, the Company received $136,000 as a short- term advance from a
related party, $50,000 of which was repaid during August 2001. An additional
$30,000 and $50,000 was advanced to the company by the related party during
September and December 2001, leaving an outstanding balance of $166,000 at
December 31, 2001. The entire amount was repaid during February 2002.
Note 12 - Subsequent Events
The Company entered into a secured convertible loan agreement with a Company,
dated February 19, 2002, pursuant to which we borrowed $1,000,000 from WellPoint
Health Networks Inc. The loan becomes payable on February 19, 2003, if not
converted into our common stock. The loan earns annual interest at a floating
rate of 300 basis points over prime, as it is adjusted from time to time, which
is also payable at maturity and may be converted into common stock. Conversion
into common stock is at the option of either WellPoint or Medix at a contingent
conversion price. The conversion price will be either (i) at the price at which
additional shares are sold to other private placement investors if Medix obtains
written commitments for at least an additional $4,000,000 of equity by the close
of business on September 30, 2002, from persons not affiliates of WellPoint, and
if such sales are closed by the maturity date of the loan, or (ii) at a price
equal to 80% of the then-current Fair Market Value (as defined below) if Medix is
unable to obtain a written commitment for the additional equity investment by the
close of business on September 30, 2002 or close the sales by the maturity date.
For this purpose, "Fair Market Value" shall be the average closing price of Medix
common stock for the twenty trading days ending on the day prior to the day of
the conversion. The Company will be required to record financing costs
during the first quarter of 2002 associated with this loan agreement as a result
of the in-the-money conversion feature totalling approximately $70,000. The
loan is secured by the grant of a security interest in all Medix's
intellectual property, including its patent, copyrights and trademarks. While
Medix can cure a default in the repayment of the loan at the fixed maturity date
by the forced conversion of the loan into its common stock, a cross default,
breach of representation or warranty, and bankruptcy or similar event of default
will trigger the foreclosure provision of the security agreement.
Note 13 - Summarized Quarterly Results (Unaudited)
The following table presents unaudited operating results for each quarter within
the two most recent years. The Company believes that all necessary adjustments
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the following quarterly results when read
in conjunction with the financial statements. Results of operations for any
particular quarter are not necessarily indicative of results of operations for a
full fiscal year.
First Second Third Fourth
Quarter (4) Quarter Quarter (2) Quarter (3),(5)
----------- ----------- ----------- ---------------
December 31, 2000
Revenues $ 64,000 $ 126,000 $ 104,000 $ 32,000
Operating expenses 1,054,000 2,011,000 1,455,000 2,090,000
Gross profit (loss) 61,000 106,000 31,000 (52,000)
Loss from continuing operations (981,000) (1,849,000) (1,380,000) (2,134,000)
Gain (loss) from discontinued
operations 650,000 - - 279,000
Net income (loss) (331,000) (1,849,000) (1,380,000) (1,855,000)
Basic earnings (loss) per share (1) (0.01) (0.04) (0.03) (0.02)
Diluted earnings (loss) per share (1) (0.01) (0.04) (0.03) (0.02)
December 31, 2001
Revenues $ 30,000 $ - $ - $ (1,000)
Operating expenses 2,190,000 1,427,000 3,053,000 1,261,000
Gross profit (loss) 25,000 (28,000) (5,000) (176,000)
Loss from continuing operations (2,259,000) (1,635,000) (3,183,000) (2,912,000)
Net income (loss) (2,259,000) (1,635,000) (3,183,000) (2,912,000)
Basic earnings (loss) per share (1) (0.05) (0.03) (0.06) (0.07)
Diluted earnings (loss) per share (1) (0.05) (0.03) (0.06) (0.07)
(1) Earnings per share are computed independently for each quarter and the full
year based upon respective average shares outstanding. Therefore, the sum
of the quarterly net earnings per share amounts may not equal the annual
amounts reported.
(2) Included in third quarter 2001 operating expense is $1,111,000 of expenses
related to the impairment of intangible assets. (Note 4)
(3) Included in fourth quarter 2001 operating loss is $1,022,000 in financing
costs. (Notes 6 and 8)
(4) During the first quarter of 2000, the Company closed on the sale of assets
of its remaining staffing business and discontinued these operations.
(Note 3)
(5) During the fourth quarter of 2000, the Company wrote off unrealizable
assets related to the discontinued operations, and adjusted remaining
liabilities settled for less than recorded amounts. (Note 3)
MEDIX RESOURCES, INC.
Consolidated Balance Sheets
September 30, December 31,
2002 2001
(Unaudited)
Assets
Current assets
Cash and cash equivalents ..................... $ 267,000 $ 8,000
Accounts receivable, trade .................... 1,000 --
Prepaid expenses and other .................... 240,000 344,000
----------- -----------
Total current assets ...................... 508,000 352,000
Software development costs, net ................. 1,024,000 649,000
Property and equipment, net ..................... 335,000 365,000
Goodwill, net ................................... 1,735,000 1,735,000
----------- -----------
Total assets .................................... $ 3,602,000 $ 3,101,000
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Notes payable ................................. $ 17,000 $ 158,000
Convertible notes payable ..................... 1,000,000 --
Advance from related party ................... 50,000
Accounts payable .............................. 567,000 851,000
Accounts payable-related parties .............. 130,000 166,000
Accrued expenses .............................. 407,000 450,000
Deferred revenue .............................. 155,000 --
Accrued payroll taxes interest and penalties .. 131,000 131,000
----------- -----------
Total current liabilities ................. 2,457,000 1,756,000
----------- -----------
Stockholders' equity
1996 Preferred stock, 10% cumulative
convertible, $1 par value; 488 shares
authorized; 155 shares issued; 1 share
outstanding .................................. -- --
1999 Series B convertible preferred stock,
$1 par value; 2,000 shares authorized; 1,832
shares issued; 50 shares outstanding ......... -- --
1999 Series C convertible preferred stock,
$1 par value; 2,000 shares authorized; 1,995
shares issued; 100 and 375 shares
outstanding .................................. -- --
Common stock, $.001 par value; 100,000,000
authorized; 65,842,599 and 56,651,409 issued
and outstanding .............................. 66,000 56,000
Dividends payable with common stock ........... 8,000 7,000
Additional paid-in capital .................... 39,848,000 35,341,000
Accumulated deficit ........................... (38,777,000) (34,059,000)
------------ ------------
Total stockholders' equity ................ 1,145,000 1,345,000
------------ ------------
Total liabilities and stockholders' equity ...... $ 3,602,000 $ 3,101,000
============ ============
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Unaudited Consolidated Statements of Operations
For the Three For the Three For the Nine For the Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
............. ............. ............. .............
Revenues ...................... $ -- $ -- $ 10,000 $ 30,000
Direct costs of services ...... 103,000 5,000 495,000 38,000
------------ ------------ ------------ ------------
Gross margin .................. (103,000) (5,000) (485,000) (8,000)
------------ ------------ ------------ ------------
Software research and
development costs ............ 153,000 348,000 533,000 947,000
Selling, general and
administrative expenses ...... 1,422,000 1,594,000 3,390,000 4,611,000
Impairment of intangible Assets -- 1,111,000 -- 1,111,000
------------ ------------ ------------ ------------
Net loss from operations ...... (1,678,000) (3,058,000) (4,408,000) (6,677,000)
Other income .................. 2,000 11,000 7,000 11,000
Financing Costs ............... (43,000) (121,000) (246,000) (346,000)
Interest expense .............. (13,000) (15,000) (71,000) (64,000)
------------ ------------ ------------ ------------
Net loss ...................... $ (1,732,000) $ (3,183,000) $ (4,718,000) $ (7,076,000)
============ ============ ============ ============
Net loss per common share ..... $ (0.03) $ (0.06) $ (0.08) $ (0.14)
============ ============ ============ ============
Weighted average shares
outstanding ................... 63,767,646 51,267,407 60,698,928 49,308,780
============ ============ ============ ============
Had the Company adopted FAS 142 as of January 1, 2001, the historical amounts previously
reported would have been adjusted to the following:
Net (loss) as reported $(3,183,000) $(7,076,000)
Add back: Goodwill amortization 39,000 121,000
----------- -----------
Adjusted net loss $(3,144,000) $(6,955,000)
=========== ===========
Basic and diluted loss per share
as reported $ (0.06) $ (0.14)
========== ==========
Goodwill amortization $ -- $ --
=========== ==========
Adjusted loss per share $ (0.06) $ (0.14)
========== ==========
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Unaudited Consolidated Statements of Cash Flows
For the Nine Months
Ended September 30,
---------------------------
2002 2001
------------ -----------
Cash flows from operating activities
Net loss ............................................. $(4,718,000) $(7,076,000)
Adjustments to reconcile net income (loss) to net
cash flows (used in) provided by operating activities
Depreciation and amortization ...................... 238,000 375,000
Amortization of discount and warrants-
convertible debt .................................. 70,000 374,000
Options and warrants issued in conjunction with
stock issuance, services and for litigation
settlements, respectively .......................... 177,000 503,000
Options and warrants issued in for consulting
services ........................................... 92,000 --
Write off of unrecoverable intangible assets, net -- 1,111,000
Write off of leasehold improvements ................. 7,000 --
Net changes in current assets and current liabilities 589,000 1,130,000
----------- -----------
Net cash flows (used in) provided by operating
activities ...................................... (3,545,000) (3,583,000)
----------- -----------
Cash flows from investing activities
Software development costs incurred .................. (522,000) (366,000)
Purchase of property and equipment ................... (69,000) (66,000)
----------- -----------
Net cash flows (used in) investing activities .... (591,000) (432,000)
----------- -----------
Cash flows from financing activities
Advances received on convertible note ................ 1,000,000 1,500,000
Advances from related party .......................... 50,000 --
Proceeds from short term borrowings-related parties .. 155,000 --
Repayment of short term borrowings-related parties ... (191,000) --
Payments on capital leases and debt .................. (208,000) (130,000)
Proceeds from the issuance of common stock, net of
offering costs ...................................... 3,474,000 1,481,000
Net proceeds from exercise of options and warrants ... 115,000 230,000
----------- -----------
Net cash flows provided by (used in) financing
activities ...................................... 4,395,000 3,081,000
----------- -----------
Net increase (decrease) in cash and cash equivalents ... 259,000 (934,000)
Cash and cash equivalents at beginning of period ....... 8,000 1,007,000
----------- -----------
Cash and cash equivalents at end of period ............. $ 267,000 $ 73,000
=========== ===========
Non-cash and investing and financing activities for the nine months ended September 30,
2002:
Options and warrants valued at $92,000 for services provided.
Options valued at $132,000 as financing costs issued to an officer for past
financial support.
An accrued liability of $590,000 for warrants earned in 2001 was satisfied by
issuing the warrants.
Warrants issued to related party in connection with advances provided valued at
$45,000.
In-the-money conversion feature on convertible debt valued at $70,000.
Financed insurance policies of $65,000 by issuing a note payable.
Non-cash and investing and financing activities for the nine months ended September 30,
2001:
Conversion of preferred stock into common stock.
Conversion of $1,000,000 note payable into 1,618,477 shares of common stock.
Financed insurance policies of $3,000 by issuing a note payable.
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments), which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The unaudited consolidated financial
statements as of September 30, 2002 have been derived from audited financial
statements. The unaudited consolidated financial statements contained herein
should be read in conjunction with the financial statements and notes thereto
contained in the Company's Form 10-K for the fiscal year ended December 31,
2001. The results of operations for the nine months ended September 30, 2002 are
not necessarily indicative of the results for the entire fiscal year ending
December 31, 2002.
Cost of Services Provided
Cost of services provided includes amortization of software development costs on
projects ready for their intended use, license and data service fees.
Note 2 - Goodwill
September 30,
2002
-------------
Goodwill acquired through the Cymedix acquisition $ 2,369,000
Less accumulated amortization (634,000)
-----------
$ 1,735,000
===========
The Company has completed step one, impairment review of FAS 142, effective
January 1, 2002, and has determined that the fair value of that goodwill
associated with its Cymedix reporting unit using a discounted cash flow method
had no impairment.
Note 3 - Equity Transactions
The Company received proceeds of $114,750 from the exercise of stock options
resulting in the issuance of 315,000 shares of common stock during the first
three quarters of 2002.
Equity Line
The Company had entered into an Equity Line of Credit Agreement dated as of June
12, 2001, which was terminated by the mutual agreement of the parties on August
6, 2002. During the period January to April 2002, the Company received $972,000,
net of commissions and escrow fees from eight equity line advances, resulting in
the issuance of 1,954,715 shares of common stock.
Warrants
As of February 18, 2002, the Company executed a Amended and Restated Common
Stock Purchase Warrant obligating the Company to issue up to 7,000,000 warrants
under an agreement with a pharmacy management company for the Company's
proprietary software to be interfaced with core medical service providers, in
which one of the Company's audit committee members is a related party to the
pharmacy management company. The agreement provides for 3,000,000 warrants with
an exercise price of $.30, 3,000,000 warrants with an exercise price of $.50,
and 1,000,000 warrants with an exercise price of $1.75 all expiring September 8,
2004. The right to exercise the warrants are earned in increments based on
certain performance criteria. At September 30, 2002, 1,850,000 of the warrants
had been earned.
The Company has the obligation to provide 5,150,000 warrants under the Amended
and Restated Common Stock Purchase Warrant in the future if the performance
criteria specified are met.
The agreement provides for a total of 5,150,000 remaining warrants under five
performance criteria categories which can be earned in any order or
concurrently. Had all of the remaining performance criteria been met at
September 30, 2002, the fair value of the related warrants and resulting expense
would have been approximately $ $1,691,000, using the Black-Scholes option
pricing model, with assumptions of 121% volatility, no dividend yield and a
risk-free rate of 5.5%.
Convertible Loan
The Company entered into a secured convertible loan agreement dated February 19,
2002 with WellPoint Health Networks Inc. in which a member of the Company's
audit committee is a related party, pursuant to which we borrowed $1,000,000.
The loan would have become payable on February 19, 2003, if not converted into
our common stock. The loan earned annual interest at a floating rate of 300
basis points over prime, as it is adjusted from time to time, which was also
payable at maturity and may be converted into common stock. Conversion into
common stock was at the option of either WellPoint or Medix at a contingent
conversion price. The Company recorded financing costs during the first quarter
of 2002 associated with this loan agreement as a result of the in-the-money
conversion feature totaling $70,000. The loan was secured by the grant of a
security interest in all Medix's intellectual property, including its patent,
copyrights and trademarks. Medix converted the principal of and interest accrued
on the note into 2,405,216 common shares on October 9, 2002. The security
interest in Medix's intellectual property was also released.
The Company received a $50,000 advance from a director of the Company, during
July 2002. The advance allows for conversion into 125,000 shares of the
Company's common stock. The Company also issued 125,000 warrants, exercisable at
$.50 per share in connection with the advance. This advance was converted into
125,000 shares of common stock subsequent to September 30, 2002. The warrants
and number of conversion shares are identical to those offered under the private
placements.
Private Placements
During April 2002, the Company initiated a private placement of its $.001 par
value common stock. A total of 3,452,500 units were placed, each consisting of
one share of common stock and one warrant. Subscribers purchased each unit for
$0.40 and are entitled to exercise warrant rights to purchase one share of the
common stock of the company at a purchase price of $.0.50 per share for a five
year period on or after September 1, 2002 and prior to September 1, 2007. The
Company received a total of $1,381,000 from this private placement. The Company
has committed to register the above underlying shares in a registration
statement with the Securities and Exchange Commission within 90 days of
completion of the offering. Subsequently, some of these subscribers holding
warrants to purchase 1,770,000 shares of common stock, have agreed to amend the
exercise period of their warrants from July 1, 2003 to December 31, 2008
During July 2002, the Company initiated a second private placement of its $.001
par value common stock. A total of 3,600,000 units were placed during the period
July to October 2002, each consisting of one share of common stock and one
warrant. Subscribers purchased each unit for $0.40 and are entitled to exercise
warrant rights to purchase one share of the common stock of the company at a
purchase price of $.0.50 per share for a five year period on or after January 1,
2003 and prior to January 1, 2008. The Company received a total of $1,440,000
from this private placement. The Company has committed to register the above
underlying shares in a registration statement with the Securities and Exchange
Commission within 90 days of completion of the offering.
Note 4 - Stock Options
During the first nine months of 2002, the Company granted options to purchase
1,918,500 shares at exercise- prices of $.38 to $.94 per share to current
employees and directors and consultants of the Company, under the Company's 1999
Stock Option Plan. During the first nine months of 2002, 315,000 stock options
were exercised.
Note 5 - Related Party Transactions
The Company received advances from a related party in 2001 that totaled $166,000
at December 31, 2001. The entire amount was repaid during February 2002. During
July and August 2002, the Company received advances that totaled $130,000 from a
related party.
The Company also received an advance of $50,000 from a member of the board of
directors during July 2002, which was converted subsequent to September 30, 2002
into 125,000 shares of common stock. The Company also issued 125,000 warrants,
exercisable at $.50 per share in connection with the advance. The warrants and
number of conversion shares are identical to those offered under the private
placements.
The Company has also entered into transactions and agreements with Wellpoint
Health Networks, Inc., in which a member of the Company's audit committee is a
related party. (See Note 3, Warrants and Convertible Loan.)
Note 6 - Litigation
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) a 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 principal 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 $32,000 of the settlement amount was
paid during September 2002.
Subsequent Events - Acquisition Letter of Intent
On October 30, 2002, the Company announced that it has entered into a
non-binding Letter of Intent with PocketScript, LLC. Under the Letter of Intent,
Medix would purchase all of the assets of PocketScript and related companies,
subject to the completion of satisfactory due diligence on the part of both
companies and negotiation and execution of definitive documents by December 20,
2002. If consummated, Medix would issue its convertible preferred stock to
PocketScript, convertible into 12 million shares of common stock, subject to a
downward adjustment if a certain closing value is not realized. In addition,
Medix would issue up to $4 million in additional convertible preferred stock if
certain business enhancement events occur within six months of the closing of
the acquisition. The sale of any stock issued by Medix would be restricted for
periods from 3 to 24 months after closing. Medix must also pay to PocketScript
$100,000 on or before October 31, 2002. Medix will also enter into employment or
consulting agreements with key PocketScript employees, and will be required to
raise $1 million prior to closing. Finally, PocketScript will obtain the
termination of a right of first refusal held by a third party.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
PocketScript, LLC
Mason, Ohio
We have audited the accompanying balance sheets of PocketScript, LLC (formerly
PocketScript, Inc.) as of December 31, 2001 and 2000, and the related statements
of operations, changes in redeemable preferred stock stockholders' equity and
cash flows for the years ended December 31, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PocketScript, LLC (formerly
PocketScript, Inc.) as of December 31, 2001 and 2000, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has experienced recurring losses and has a working
capital deficit, which raise substantial doubt about its ability to continue as
a going concern. Management's plans regarding those matters also are described
in Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Ehrhardt Keefe Steiner & Hottman PC
--------------------------------------
Ehrhardt Keefe Steiner & Hottman PC
February 5, 2003
Denver, Colorado
POCKETSCRIPT LLC (FORMERLY POCKETSCRIPT, INC.)
Balance Sheets
December 31,
------------------------- September 30,
2001 2000 2002
---------- ---------- ----------
(unaudited)
Assets
Current assets
Cash $ - $ 153,621 $ 10,027
Accounts receivable, net - 5,055 18,427
Prepaid expenses and other - 11,302 20
---------- ---------- ----------
Total current assets - 169,978 28,474
---------- ---------- ----------
Non-current assets
Property and equipment, net 2,020,057 2,650,818 303,632
Other assets 77,029 59,200 27,029
---------- ---------- ----------
Total non-current assets 2,097,086 2,710,018 330,661
---------- ---------- ----------
Total assets $2,097,086 $2,879,996 $ 359,135
========== ========== ==========
Liabilities and Stockholders' (Members) Deficit
Current liabilities
Convertible debentures $ - $2,131,000 $ -
Notes payable 1,890,400 - 250,000
Bank overdraft 5,643 - -
Accounts payable 2,148,326 1,184,731 20,730
Accounts payable - related parties - - 329,981
Accrued expenses 1,311,873 539,543 208,579
---------- ----------- ----------
Total current liabilities 5,356,242 3,855,274 809,290
---------- ---------- ----------
Notes payable, less current portion - - 1,364,689
---------- ---------- ----------
Total liabilities 5,356,242 3,855,274 2,173,979
---------- ---------- ----------
Commitments and contingencies
Redeemable convertible cumulative
preferred stock, $0.01 par value:
Series A- 0% rate, authorized shares -
8,000,000, issued and outstanding
shares - 3,680,702 and 2,256,023 at
December 31, 2001 and 2000,
respectively, with liquidation
preferences aggregating $5,521,208
(2001) and $3,380,658 (2000) 5,521,208 3,380,658 -
Series B1- 8% rate, authorized shares
- 2,379,795, issued and outstanding
shares - 2,054,795 at December 31,
2001 and 2000 with liquidation
preferences aggregating $3,342,193
(2001) and $3,102,193 (2000) 3,260,000 3,020,000 -
Series B2- 8% rate, authorized shares
- 9,620,205, no shares issued and
outstanding - - -
Equity (deficit)
Members capital, 100 units issued and
outstanding at September 30, 2002 - - 1,000
Common stock, $.001 par value,
50,000,000 shares authorized,
10,000,000 shares issued and
outstanding at September 30, 2002
(unaudited) December 31, 2001 and
2000, respectively 100,000 100,000 -
Additional paid-in capital 999,852 849,852 8,880,060
Accumulated deficit (13,140,216) (8,325,788) (10,695,904)
----------- ---------- -----------
Total stockholders' (members)
deficit (12,040,364) (7,375,936) (1,814,844)
----------- ---------- ----------
Total liabilities and stockholders'
(members) deficit $2,097,086 $2,879,996 $ 359,135
========== ========== ==========
See notes to consolidated financial statements.
POCKETSCRIPT LLC (FORMERLY POCKETSCRIPT, INC.)
Statements of Operations
For the Year Ended For the Nine Months
December 31, Ended September 30,
----------------------- -----------------------
2001 2000 2002 2001
---------- ---------- ---------- ----------
(Unaudited)
Sales
Revenues $ 597,505 $ 81,439 $ 135,159 $ 597,505
---------- ---------- ---------- ----------
Operating expenses
Selling, general and
administrative expenses 3,933,270 6,467,412 485,998 3,522,095
Software research and
development costs 1,032,214 1,144,895 45,925 1,032,214
---------- ---------- ---------- ----------
Total operating expenses 4,965,484 7,612,307 531,923 4,554,309
Other income (expense)
Financing costs (150,000) (290,926) - (150,000)
Interest expense (59,976) (121,128) (38,791) (59,676)
Other income 3,527 53,097 - 3,202
---------- ---------- ---------- ----------
Total other income
(expense) (206,449) (358,957) (38,791) (206,474)
---------- ---------- ---------- ----------
Net loss before reorganization
items (4,574,428) (7,889,825) (435,555) (4,163,278)
Reorganization Items
Discharge of liabilities - - 3,915,324 -
Reorganization expenses - - (470,847) -
Write-off of assets - - (564,610) -
---------- ---------- ---------- ---------
Total gain from
reorganization items - - 2,879,867 -
Net income (loss) (4,574,428) (7,889,825) 2,444,312 (4,163,278)
Dividend on preferred stock (240,000) (20,000) - (180,000)
---------- ---------- ---------- ----------
Net income (loss) applicable to
common stockholders (LLC
members) $(4,814,428) $(7,909,825) $2,444,312 $(4,343,278)
=========== =========== ========== ===========
Basic and diluted income (loss)
per share (LLC unit) $ (0.48) $ (0.79) $24,443.12 $ (0.43)
========== =========== ========== ===========
Weighted average shares (LLC
units) outstanding 10,000,000 10,000,000 100 10,000,000
========== ========== ========== ==========
See notes to consolidated financial statements.
POCKETSCRIPT LLC (FORMERLY POCKETSCRIPT, INC.)
Statement of Changes in Redeemable Preferred Stock and Stockholders' Equity(Deficit)
For the Years Ended December 31, 2001, 2000 and 1999
Redeemable Preferred Stock Stockholders' Equity (Deficit)
--------------------------------------------------------------------- --------------------------------------------------------------------------------------
Series A Series B-1 Series B-2 Common Stock Members' Interests Additional Stockholders'
--------------------- --------------------- --------------------- ---------------------- --------------------- Paid-in Accumulated Equity
Shares Amount Shares Amount Shares Amount Shares Amount Units Amount Capital Deficit (Deficit)
--------- ---------- --------- --------- --------- --------- ---------- --------- --------- ---------- ---------- ---------- ------------
Balance at December 31, 1999 - $ - - $ - - $ - 10,000,000 $ 100,000 - $ - $ 309,200 $ (315,963) $ 93,237
Issuance of stock options
to consultants - - - - - - - - - - 249,726 - 249,726
Issuance of warrants - - - - - - - - - - 290,926 - 290,926
Issuance of redeemable
convertible preferred stock 1,700,600 2,550,115 2,054,795 3,000,000 - - - - - - - - -
Distribution to stockholder - - - - - - - - - - - (100,000) (100,000)
Dividend on redeemable
convertible preferred stock - - - 20,000 - - - - - - - (20,000) (20,000)
Conversion of debentures 555,423 830,543 - - - - - - - - - - -
Net loss - - - - - - - - - - - (7,889,825) (7,889,825)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------- -----------
Balance at December 31, 2000 2,256,023 3,380,658 2,054,795 3,020,000 - - 10,000,000 100,000 - - 849,852 (8,325,788) (7,375,936)
Conversion of debentures 1,424,679 2,140,550 - - - - - - - - - - -
Dividend on redeemable
convertible preferred stock - - - 240,000 - - - - - - - (240,000) (240,000)
Issuance of warrants - - - - - - - - - - 150,000 - 150,000
Net loss - - - - - - - - - - - (4,574,428) (4,574,428)
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------- ------------
Balance at December 31, 2001 3,680,702 5,521,208 2,054,295 3,260,000 - - 10,000,000 100,000 - - 999,852 (13,140,216) (12,040,364)
Retirement of preferred
stock (unaudited) - - (2,054,795) (3,260,000) - - - - - - 2,260,000 - 2,260,000
Net income (unaudited) - - - - - - - - - - - 2,444,312 2,444,312
Bankruptcy reorganization
and Conversion to LLC
(unaudited) (3,680,702) (5,521,208) - - - - (10,000,000) (100,000) 100 1,000 5,620,208 - 5,521,208
---------- ---------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- ---------- ------------
Balance at September 30,
2002 (unaudited) - $ - - $ - - $ - - $ - 100 $ 1,000 $8,880,060 $(10,695,904) $(1,814,844)
========= ========= ========= ========= ========= ========= ========= ========= ========= ========= ========== =========== ===========
See notes to consolidated financial statements.
POCKETSCRIPT LLC (FORMERLY POCKETSCRIPT, INC.)
Statements of Cash Flows
For the Years Ended For the Nine Months
------------------------- Ended
December 31, September 30,
------------------------- ------------------------
2001 2000 2002 2001
----------- ----------- ----------- -----------
(Unaudited)
Cash flows from operating activities
Net loss $(4,574,428) $(7,889,825) $2,444,312 $(4,163,278)
----------- ----------- ---------- -----------
Adjustments to reconcile net loss
to net cash used in operating
activities
Depreciation and amortization 740,798 288,085 151,815 555,598
Issuance of stock options and
warrants for services 150,000 540,652 - 150,000
Interest on convertible debt 9,550 93,543 - 9,550
Reorganization items - - (3,350,614) -
Changes in operating assets and
liabilities
Accounts receivable, net 5,055 (5,055) (18,427) 5,055
Prepaid expenses and other 11,302 (61,302) 49,980 11,302
Accounts payable and accrued
liabilities 1,735,925 1,642,764 559,335 1,617,221
----------- ----------- ---------- -----------
Net cash used in operating
activities (1,921,798) (5,391,138) (163,599) (1,814,552)
----------- ----------- ---------- ----------
Cash flows from investing activities
Purchase of intangible assets (17,829) - - (17,829)
Purchase of property and equipment (110,037) (2,935,278) - (82,076)
----------- ---------- ---------- ----------
Net cash used in investing
activities (127,866) (2,935,278) - (99,905)
----------- ---------- ---------- ----------
Cash flows from financing activities
Bank overdraft 5,643 - (5,643) -
Proceeds from issuance of
convertible debentures - 2,868,000 -
Proceeds from issuance of
preferred stock - 5,550,115 -
Proceeds from notes payable 1,890,400 1,500,000 179,269 1,890,400
Repayment of notes payable - (1,600,000) - -
----------- ---------- ---------- ----------
Net cash provided by
financing activities 1,896,043 8,318,115 173,626 1,890,400
----------- ---------- ---------- ----------
Net (decrease) increase in cash (153,621) (8,301) (10,027) (24,057)
Cash - beginning of year 153,621 161,922 - 153,621
----------- ---------- ---------- ----------
Cash - end of year $ - $ 153,621 $ 10,027 $ 129,564
=========== ========== ========== ==========
Deemed distribution on debt
assumption $ - $ 100,000 $ - $ 100,000
=========== ========== ========== ==========
Dividend on redeemable convertible
preferred stock $ 240,000 $ 20,000 $ - $ 180,000
=========== ========== ========== ==========
Convertible notes payable converted
to redeemable series A preferred
stock $ 2,131,000 $ 818,000 $ - $ 818,000
=========== ========== ========== ==========
Redeemable preferred Series B-1
stock retired $ - $ - $3,260,000 $ -
=========== ========== ========== ==========
Licensed software returned for
repurchase of B-1 preferred stock $ - $ - $1,000,000 $ -
=========== ========== ========== ==========
Debt forgiveness in reorganization
items $ - $ - $ 564,610 $ -
=========== ========== ========== ==========
Equipment write-off in
reorganization items $ - $ - $3,915,224 $ -
=========== ========== ========== ==========
See notes to consolidated financial statements.
MEDIX RESOURCES, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business and Summary of Significant Accounting Policies
PocketScript, LLC (formerly PocketScript, Inc.) (the Company) was incorporated
in Ohio on November 5, 1999. The Company and Way Over The Line, LLC (WOTL) are
related parties as an officer and shareholder of the Company is the owner of
WOTL. The Company provides technology that allows physicians to issue
prescriptions electronically through the use of a handheld computer that is
linked wirelessly to the pharmacist and others involved in the prescription
workflow.
PocketScript, Inc. was originally incorporated as an S Corporation and
subsequently converted into an Ohio C Corporation in 2000 and became a Delaware
C Corporation through a merger with a Delaware Corporation established for the
purpose of the merger. In 2002 after emergence from bankruptcy, PocketScript,
LLC, purchased the assets of PocketScript, Inc. Because the business operations
have remained intact, the accompanying financial statements have been presented
as that of a continuous business enterprise.
Unaudited Interim Financial Statements
The September 30, 2002 and 2001 financial statements are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments), which are, in
the opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for those interim periods. The
results of operations for the nine months ended September 30, 2002 and 2001 are
not necessarily indicative of the results expected for an entire year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company grants credit in the normal course of business to customers in the
United States. The Company periodically performs credit analysis and monitors
the financial condition of its customers to reduce credit risk.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including accounts receivable,
notes receivable, accounts payable and accrued expenses approximate their fair
values due to the relatively short maturity of these instruments.
The carrying amounts of debt issued approximate their fair value because
interest rates on these instruments approximate market interest rates.
Revenue Recognition
The Company defers the recognition of all revenue until collectibility is
probable, persuasive evidence of an arrangement exists, and the price of the
products or services being sold is fixed and determinable. Revenue will be
generated principally through pharmacy benefits managers, pharmacies and
pharmaceutical manufacturers based on a transaction fee for each prescription
processed or based upon a monthly fee in lieu of transaction fees. These fees
will be recognized upon the occurrence of the transaction or ratably over the
service period. Revenue will also be generated from the sale of software
licenses and the sale or lease of hardware. The software licenses and leased
hardware revenue will be recognized ratably over the term of the license or
lease beginning after the software and hardware have been delivered and
installed and the title and risks of ownership have been passed to the customer.
Revenue from the sale of hardware will be recognized upon shipment of the
product. The Company will also earn fees from data compilation and distribution,
which will be recognized as earned. Revenue from Internet advertising contracts
will be recognized ratably over the service period, with incremental revenues
(as determined by customer usage) recognized on a per transaction basis. No
revenue will be recognized that is subject to a refund or the performance of a
future obligation.
Income Taxes
Effective January 1, 2000, the Company changed its status from an S corporation
to a C Corporation for tax purposes. Income taxes are provided based on the
liability method of accounting pursuant to Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (SFAS 109). Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income taxes are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The Company's net deferred tax assets are fully reserved for by a
valuation allowance.
Subsequent to the purchase of the Company's assets through Chapter 11,
bankruptcy proceedings those assets and secured liabilities were acquired in
2002 by PocketScripts, LLC, accordingly no provision for income taxes has been
included in the accompanying financial statements.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided utilizing the
straight-line method over the estimated useful lives for owned assets of 3
years.
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered. The Company evaluates the fair value of such assets compared to
their carrying values in accordance with SFAS No. 144, to determine whether any
impairment is required.
Financing Costs
The company records as financing costs in its statement of operations
amortization of in-the-money conversion features on convertible debt accounted
for in accordance with EITF 98-5 and 00-27, amortization of discounts from
warrants issued with debt securities in accordance with APB No. 14 and
amortization of discounts resulting from other securities issued in connection
with debt based on their relative fair values, and any value associated with
inducements to convert debt in accordance with FASB 84.
Research and Development Costs
The Company expenses research and development costs as incurred.
Advertising Costs
The Company expenses advertising costs as incurred.
Advertising expenses were $50,192 and $92,862 for the years ended December 31,
2001 and 2000, and $100 (unaudited) and $50,192 (unaudited), for the nine-months
ended September 30, 2002 and 2001, respectively.
Basic Loss Per Share
The Company applies the provisions of Statement of Financial Accounting Standard
No. 128, "Earnings Per Share" (FAS 128). All dilutive potential common shares
have an antidilutive effect on diluted per share amounts and therefore have been
excluded in determining net loss per share. The Company's basic and diluted loss
per share are equivalent and accordingly only basic loss per share has been
presented.
The weighted average LLC units outstanding as a result of the Company's
emergence from bankruptcy and conversion to an LLC in 2002 has been
retroactively adjusted as if they were outstanding at January 1, 2002.
For the years ended December 31, 2001 and 2000, and the period ended September
30, 2001 (unaudited) total stock options, warrants and convertible debt and
preferred stock of 8,298,946 were not included in the computation of diluted
loss per share because their effect was antidilutive, however, if the Company
were to achieve profitable operations in the future, they could potentially
dilute such earnings. The Company had no dilutive securities outstanding at
September 30, 2002.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for years beginning after June 15,2002. The Company
believes the adoption of this statement will have no material impact on its
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 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 does not
expect the adoption of this statement to have a material effect on the Company's
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, the 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 is currently evaluating what effect the adoption of this
statement will have the Company's financial statements. The Company does not
expect the adoption of this statement to have a material effect on the Company's
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 Company does
not expect the adoption of this statement to have a material effect on the
Company's financial statements.
Note 2 - Chapter 11 Bankruptcy Reorganization and Emergence
In February 2002, the Company filed a voluntary petition for Chapter 11 with the
bankruptcy court. In late February 2002 the Company filed a motion to sell
substantially all of its assets free and clear of liens to an entity represented
by an organized group of secured creditors (the "Secured Creditor Group") for an
amount ($1,600,000), which approximated the balances owed to the secured
creditor group and certain fees associated with the Chapter 11 proceedings. The
court ordered a federally supervised auction of the Company's assets on March
27, 2002. No competing bids were received and the court entered an order to sell
the assets to the Secured Creditor Group. The entity, which purchased the
assets, was PocketScripts, LLC whose members were also stockholders of
PocketScripts, LLC (formerly PocketScript, Inc.)
In connection with the bankruptcy proceedings and the Company's emergence,
assets that were not recovered from off-site locations were written-off totaling
$564,610, professional fees and other associated costs of $470,847 were
incurred, and unsecured liabilities of $3,460,324 and secured liabilities of
$455,000 belonging to creditors outside of the Secured Creditor Group were
discharged.
Note 3 - Management's Plans
The Company has incurred operating losses for the past several years resulting
in a accumulated deficit at September 30, 2002 of $(10,695,904)(unaudited).
These losses have produced operating cash flow deficiencies, and negative
working capital, which raise substantial doubt about its ability to continue as
a going concern.
In December of 2002, the company entered into a definitive merger agreement to
be acquired by Medix Resources, Inc. (Medix) through the issuance of Medix
preferred stock, which is convertible into common shares. Management plans
include the raising of capital once the acquisition is completed. The
acquisition is dependent upon a successful stockholders vote by Medix
stockholders. If the acquisition is not consummated and the subsequent capital
is not raised, the Company may be unable to continue in existence. The
accompanying financial statements do not include any adjustments as a result of
this uncertainty.
Note 4 - Related Party Transactions
In 1999, the Company purchased certain intellectual property, including
trademarks, servicemarks and other intangible assets, from WOTL in which two
shareholders received common stock valued at $9,200 for their development and
assignment of this intellectual property.
In 2000, the Company assumed a note payable from a bank of $100,000, which was
assigned to the Company from WOTL. In connection with this assumption of debt
for a related party the Company has recorded a deemed distribution to owners of
$100,000 due to the common control relationship.
The Company paid WOTL for certain management and programming services provided,
with total expense for the years ended December 31, 2001 and 2000 and the
nine-months ended September 30, 2002 and 2001 of $32,500 and $32,500, $32,500
(unaudited) and $45,925 (unaudited), respectively.
The Company paid a law firm for legal services, in which the Company's general
counsel and CFO have an ownership interest, totaling $14,227, $43,877, $15,000,
and $11,727 for the years ended December 31, 2001, 2000 and the nine months
ended September 30, 2002 (unaudited) and 2001 (unaudited).
Note 5 - Balance Sheet Disclosures
Property and equipment consists of the following:
December 31,
-------------------------- September 30,
2001 2000 2002
------------ ----------- ------------
(unaudited)
Furniture and fixtures $ 168,182 $ 165,745 $ 607,262
Computer hardware and purchased software 2,880,758 2,773,158 -
------------ ----------- -----------
3,048,940 2,938,903 607,262
Less property, plant and equipment -
accumulated depreciation (1,028,883) (288,085) (303,630)
------------ ----------- ------------
$ 2,020,057 $ 2,650,818 $ 303,632
============ =========== ============
Depreciation expense was $740,798 and $288,085 for the years ended December 31,
2001 and 2000, and $151,815 and $555,598 for the nine-months ended September 30,
2002 (unaudited) and 2001 (unaudited), respectively.
In January 2002, $1,000,000 of previously purchased software was returned to a
strategic partner in return for the retirement of all Series B-1 preferred
stock.
Accrued expenses consists of the following:
December 31,
-------------------------- September 30,
2001 2000 2002
------------ ----------- ------------
(unaudited)
Accrued payroll and benefits $ 713,127 $ 539,543 $ 170,079
Other accrued expenses 598,746 - 38,500
------------ ----------- ------------
$ 1,311,873 $ 539,543 $ 208,579
============ =========== ============
At various times during 2002, the Company was delinquent with payroll tax
deposits. At September 30, 2002, $20,000 was accrued for estimated taxes,
interest and penalties.
Note 6 - Notes Payable
On September 12, 2000, the Company entered into a credit facility with a
strategic partner. The facility allowed the Company to borrow up to $1,500,000
at an interest rate equal to the prime rate plus 2%. The Company borrowed
$1,500,000 and repaid the balance during 2000 from proceeds received under the
Series B-1 preferred stock offering (Note 9). This facility was canceled on
December 19, 2001.
Notes payable consist of the following:
December 31,
-------------------------- September 30,
2001 2000 2002
------------ ----------- ------------
(unaudited)
Note payable to a bank, interest at 9%,
due April 2001, currently in default.
Collateralized by substantially all
assets. Guaranteed by certain
shareholders. $ 250,000 $ - $ 250,000
Note payable to a bank, interest at 9%,
due April 2001, in default at December
31, 2001. Collateralized by
substantially all assets. Guaranteed
by certain shareholders. 350,000 - -
Note payable to a bank, interest at
prime plus 5% default rate (9.75% at
December 31, 2001 and September 30,
2002), due June 2001, in default at
December 31, 2001. Collateralized by
substantially all assets. Guaranteed
by certain shareholders. 340,000 - -
Note payable to a corporation, interest
at bank prime plus 5% default rate
(9.75% at December 31, 2001 and
September 30, 2002), due June 2001, in
default at December 31, 2001.
Collateralized by substantially all
assets. 100,000 - -
Notes payable to corporations, interest
at prime plus 2% (6.75% at December
31, 2001), due May 2001, in default at
December 31, 2001. Collateralized by
substantially all assets. 455,000 - -
Notes payable to stockholders, interest
at prime plus 5% default rate (9.75%
at December 31, 2001 and September 30,
2002), due June 2001, in default at
December 31, 2001. Collateralized by
substantially all assets. 395,400 - -
Notes payable to secured creditors,
interest accrues at 10% until January
1, 2004 when the balance of accrued
interest is payable in full and
thereafter interest is payable monthly
until maturity at September 30, 2005.
Collateralized by substantially all
assets. - - 1,364,689
------------ ------------ ------------
1,890,400 - 1,614,669
Less current portion (1,890,400) - (250,000)
------------ ------------ -------------
$ - $ - $ 1,364,689
============ ============ ============
Remaining maturities under notes payable are as follows:
Period Ended September 30, Amount
-------------------------- ----------
2003 $ 250,000
2004 -
2005 1,314,689
----------
$1,614,669
==========
Note 7 - Convertible Debentures
In June 2000, the Company completed a $1,000,000 convertible debenture offering.
Each debenture is automatically convertible into one share of redeemable
convertible preferred stock upon the earliest of (i) the closing of an offering
by the Company of $5,000,000 or more of a new series of preferred stock, (ii)
the sale of the Company or (iii) January 8, 2001. The debentures are initially
convertible at a maximum price of $5.00 per share or 200,000 shares, subject to
a discount based on the timing of future equity issuances escalating from
12.5%-50% through January 8, 2001, with a minimum conversion price of $1.50.
After January 8, 2001, the debentures are convertible at $1.50 per share. The
debentures accrue interest at a rate of 8% per annum, payable monthly in
additional convertible debentures. In January 2001 a total of $1,000,000
representing all convertible debentures plus accrued interest was converted into
694,767 shares of Series A redeemable convertible preferred stock. There was no
in-the money conversion feature associated with the issuance of these
convertible notes payable as the value of the common stock was deemed to be
$1.50 based on conversion rates of recent redeemable convertible preferred stock
issued.
The Company also issued a $1,000,000 convertible debenture to a strategic
partner in June 2000 in conjunction with a services agreement. Each debenture is
automatically convertible into one share of redeemable convertible preferred
stock upon the events described in the preceding paragraph. The debentures are
convertible at a price of $1.50 per share or 666,666 shares. The debentures
accrue interest at a rate of 8% per annum, payable monthly in additional
convertible debentures. In January 2001 a total of $1,000,000 representing the
convertible debenture plus accrued interest was converted into 694,767 shares of
Series A redeemable convertible preferred stock. There was no in-the money
conversion feature associated with the issuance of these convertible notes
payable as the value of the common stock was deemed to be $1.50 based on
conversion rates of recent redeemable convertible preferred stock issued.
On September 15, 2000, the Company completed an $868,000 convertible debenture
offering. Each debenture is automatically convertible into one share of
redeemable convertible preferred stock upon the earliest of (i) the closing of
an offering by the Company of $10,000,000 or more of a new series of preferred
stock, (ii) the sale of the Company or (iii) March 25, 2001. The debentures are
convertible at a price of $1.50 per share, or 578,667 shares, after March 25,
2001 or upon a sale. Upon a qualified offering, the conversion price will be
equal to the per share price of the new stock issuance, less a 25% discount.
Under the terms of the agreement, the discounted conversion price will range
from $1.50-$1.75 per share. Should the per share price of the new stock issuance
be less than $1.50, the conversion price will be equal to the per share price of
the new issuance. The debentures accrue interest at a rate of 8% per annum,
payable monthly in additional convertible notes. A total of $818,000 convertible
debentures plus accrued interest was converted into 555,423 shares of Series A
redeemable convertible preferred stock in accordance with the agreement on
December 19, 2000. In March 2001 a total of $50,000 representing the remaining
convertible debenture plus accrued interest was converted into 35,145 shares of
Series A redeemable convertible preferred stock.
Note 8 - Commitments and Contingencies
Operating Leases
The Company leased office space under non-cancelable operating leases and is
currently renting office space under a month-to-month lease. Rent expense for
these leases was:
Year Ending December 31,
------------------------
2001 $ 214,241
2000 $ 163,873
Nine Months Ending
September 30, (unaudited)
-------------------------
2002 $ 61,500
2001 $ 152,170
Note 9 - Redeemable Convertible Preferred Stock
In February 2000, the Company issued Series A redeemable convertible preferred
stock, which has the same voting rights as the common stock of the Company. Each
share of preferred stock is convertible, at the option of the holder, into
common stock at an initial per share price of $1.50. This price may be adjusted
proportionately to any common stock activity to avoid dilution upon conversion.
The Company has reserved shares of its authorized but unissued common stock for
the full number of shares of common stock issuable on the conversion of all
outstanding preferred shares. At the Company's discretion, preferred shares may
automatically be converted into shares of common stock upon the closing of a
public offering in which the gross proceeds exceed $20,000,000.
In January 2000, the Company issued 1,533,932 shares of Series A preferred stock
for $2,300,115. Under the terms of a separate agreement with a strategic
partner, the Company sold 166,668 shares of Series A redeemable convertible
preferred stock for $250,000 in December 2000.
In December 2000, the Company issued 2,054,795 shares of Series B-1 redeemable
convertible preferred stock for $3,000,000. The preferred stock carries an 8%
cumulative dividend. Each share of preferred stock is convertible, at the option
of the holder, into common stock at an initial per share price of $1.50. This
price may be adjusted proportionately to any common stock activity to avoid
dilution upon conversion. The Company has reserved shares of its authorized but
unissued common stock for the full number of shares of common stock issuable on
the conversion of all outstanding preferred shares. At the Company's discretion,
preferred shares may automatically be converted into shares of common stock upon
the closing of a public offering in which the gross proceeds exceed $30,000,000.
The Company recorded preferred dividends of 240,000, $20,000 and $180,000 for
the years ended December 31, 2001 and 2000 and the nine-months ended September
30, 2002.
After January 2005, the Company shall, at the option of any holder, redeem
shares of preferred stock by paying the shareholder a price calculated in
accordance with the shareholder agreement. In the event of any voluntary or
involuntary liquidation of the Company, before any distribution of payment is
made to the holders of common stock, the holders of preferred stock are entitled
to receive an amount equal to $1.50 per share, plus the amount of any declared
and unpaid dividends. Any assets remaining after such payments to preferred
shareholders shall be distributed pro rata among all shareholders.
Each holder of preferred stock is entitled to such number of votes equal to the
number of shares of common stock into which all of such holder's preferred stock
is convertible.
In January 2002, the Series B-1 redeemable convertible stock was retired by
agreement of the parties. In connection with the retirement, the Company
returned previously purchased software of with a purchased cost of $1,000,000 as
consideration for the return of the preferred shares. The difference between the
carrying value of the purchased software of $1,000,000 and the value of the
preferred stock including cumulative accrued dividends of $3,260,000 was
recorded as an increase to additional paid-in-capital of $2,260,000.
Note 10 - Stockholders' Equity
Common Stock
Effective January 1, 2000, the Company's Articles of Incorporation were amended
resulting in one class of voting common stock. Prior to January 1, 2000, there
were two classes of common stock - voting Class A stock and nonvoting Class B.
Accordingly, all references in the financial statements related to share
amounts, including information concerning stock option plans, have been adjusted
retroactively to reflect this.
Stock Split
The Company declared a 100 for 1 stock split effective January 1, 2000. The
Company subsequently declared a 10-for-1 stock split effective June 8, 2000.
Accordingly, all references in the financial statements related to share
amounts, including information concerning stock option plans, have been adjusted
retroactively to reflect the stock splits.
Effective January 1, 2000, the Board of Directors formalized the Employee Stock
Option Plan (the Plan). The Plan provides for the issuance of up to 3,000,000
common shares in connection with the issuance of nonqualified and incentive
stock options. The Company's Board of Directors determines eligibility. The
exercise price of the options is generally the fair market value at the date of
grant. Options under the plan generally vest over three years, or earlier in the
event of a change in control, as defined.
Stock Options
The Company follows the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan.
The Company uses the Black-Scholes option-pricing model to estimate fair value
of options and warrants granted. Had compensation cost for the Company's warrant
issuances and stock options issued to employees in 2000 been determined based on
the fair value at the grant date for awards consistent with the provisions of
SFAS No. 123, the Corporation's net loss and loss per share would have been
increased to the pro forma amounts indicated below:
December 31,
-----------------------------
2001 2000
------------- -------------
Net loss - as reported $ (4,574,453) $ (7,889,825)
Net loss - pro forma $ (4,574,453) $ (10,420,090)
Basic loss per share - as reported $ (0.48) $ (0.79)
Basic loss per share - pro forma $ (0.48) $ (1.04)
Employee stock options outstanding were as follows:
Weighted-
Average
Option Exercise
Shares Price
----------- ------------
Balance at January 1, 2000 - $ -
Options Granted 2,038,530 0.69
----------- ------------
Balance at December 31, 2000 and 2001 2,038,530 $ 0.69
=========== ============
During 2000, the Company granted 1,656,530 options at $0.50 per share and
382,000 options at $1.50 per share. Employee options exercisable totaled
1,339,280 at December 31, 2001. The fair value of option grants in 2000 was
$2,530,265 using the Black-Scholes option pricing model, with assumptions of
300% and 100% volatility, expected lives of seven years, no dividend yield and a
risk-free rate of 5.5%.
Stock Options to Consultants
In April 2000, the Company issued 196,500 options to purchase common stock to an
outside consultant at an exercise price of $1.50 per share. These options were
fully vested as of June 30, 2000 and expire June 30, 2007. The fair value of
these options of $249,726 were expensed, with fair value estimated using the
Black-Scholes option pricing model, with assumptions of 100% volatility,
expected lives of seven years, no dividend yield and a risk-free rate of 5.5%.
All outstanding stock options were eliminated as part of the Company's Chapter
11 bankruptcy proceeding (Note 2).
Stock Warrants
During 2000, the Company issued 228,919 warrants to outside consultants in
connection with the convertible debentures and the redeemable convertible
preferred stock issuances. Each warrant entitles the holder to purchase one
share of Series A redeemable convertible preferred stock at a price of $1.50,
subject to adjustments in certain events as defined in the agreement. The
warrants are exercisable immediately. The Company recorded financing charges of
$290,926 related to the issuance of these warrants. The fair value of the
warrants was estimated using the Black-Scholes option-pricing model, with
assumptions of 100% volatility, expected lives of seven years, no dividend yield
and a risk-free rate of 5.5%.
On April 12, 2001, associated with borrowings of $150,000, $150,000 and $100,000
from three shareholders, the Company issued 37,500, 37,500 and 25,000 warrants
to the three shareholders, respectively. Each warrant entitles the holder to
purchase one share of the Company's common stock at a price of $0.01 per share,
subject to adjustments in certain events as defined in the agreement. The
warrants are exercisable immediately and expire 90 days after $5 million in
venture capital financing is raised. These warrants have been valued at
$150,000, or $1.50 per option share which equals the estimated value of the
underlying common stock, based on conversion rates of recent redeemable
preferred stock issued.
The following table presents the activity for stock purchase warrants:
Exercise
Shares Price Expiration Date
---------- ------------ -----------------
Balance at January 1, 1999 - $ - -
February 7, 2007 -
Issuances 228,919 1.50 June 30, 2007
---------- -----------
February 7, 2007 -
Balance at December 31, 2000 228,919 1.50 June 30, 2007
Issuances 100,000 1.50 *
---------- -----------
February 7, 2007 -
Balance at December 31, 2001 328,919 $ 1.50 June 30, 2007 and *
========== ===========
* 90 days after raising $5,000,000 in venture capital.
All warrants were eliminated as part of the Company's Chapter 11 bankruptcy
proceeding (Note 2).
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Introduction
The following unaudited pro forma condensed consolidated financial information
gives effect to the PocketScript merger under the purchase method of accounting.
These pro forma statements are presented for illustrative purposes only. The pro
forma adjustments are based upon available information and assumptions that we
believe are reasonable. The pro forma condensed consolidated financial
statements do not purport to represent what the consolidated results of
operations or financial position of Medix Resources would actually have been if
the PocketScript merger had in fact occurred on the dates that we refer to
below, nor do they purport to project the results of operations or financial
position of Medix Resources for any future period or as of any date,
respectively.
Under the purchase method of accounting, tangible and identifiable intangible
assets acquired and liabilities assumed are recorded at their estimated fair
market values. The excess of the purchase price, including estimated fees and
expenses related to the merger, over the net assets acquired is classified as
goodwill on the accompanying unaudited pro forma condensed consolidated balance
sheet.
The unaudited pro forma condensed consolidated balance sheet as of September 30,
2002, was prepared by combining the historical cost balance sheet at September
30, 2002 for Medix Resources with the historical cost balance sheet at September
30, 2002, for PocketScript, giving effect to the merger as though it had been
completed on September 30, 2002.
The unaudited pro forma condensed consolidated statements of operations for the
periods presented were prepared by combining Medix Resources' statements of
operations for the nine months ended September 30, 2002 and the year ended
December 31, 2001 with PocketScript's statements of operations for the same
periods, giving effect to the merger as though it had occurred on January 1,
2001. These unaudited pro forma condensed consolidated financial statements do
not give effect to any restructuring costs or to any potential cost savings or
other operating efficiencies that could result from the merger.
The historical financial statements of Medix Resources for the year ended
December 31, 2001 are derived from audited consolidated financial statements and
for the nine months ended September 30, 2002 are derived from unaudited
condensed consolidated financial statements of Medix Resources, all of which are
presented elsewhere in this proxy statement. The historical financial statements
of PocketScript for the year ended December 31, 2001 are derived from audited
consolidated financial statements and for the nine months ended September 30,
2002 are derived from unaudited condensed consolidated financial statements of
PocketScript, all of which are presented elsewhere in this proxy statement.
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 2002
Medix(1) PocketScript(2) Total Pro Forma Combined
---------- --------------- ---------- ----------- --------
Assets
Cash and cash equivalents $ 267,000 $ 10,027 $ 277,027 $ (100,000) (3) $ 177,027
Accounts receivable, trade 1,000 18,427 19,427 19,427
Prepaid expenses and other 240,000 20 240,020 - 240,020
---------- ------------ ---------- ----------- -----------
Total current assets 508,000 28,474 536,474 (100,000) 436,474
Software development costs, net 1,024,000 - 1,024,000 (800,000) (4) 224,000
Property and equipment, net 335,000 303,632 638,632 46,368 (3) 685,000
Other assets - 27,029 27,029 (27,029) (3) -
Customer contracts - - - 162,000 162,000
Purchased technology - - - 3,500,000 3,500,000
Goodwill, net 1,735,000 - 1,735,000 5,434,500 (3) 7,169,500
---------- ------------ ---------- ----------- -----------
Total assets $3,602,000 $ 359,135 $3,961,135 $ 8,215,839 $12,176,974
========== ============ ========== =========== ===========
Liabilities and Stockholders' Equity
Notes payable $ 17,000 $ 250,000 $ 267,000 $ - $ 267,000
Convertible notes payable 1,000,000 - 1,000,000 - 1,000,000
Advance from related party 50,000 - 50,000 - 50,000
Accounts payable 567,000 20,730 587,730 995 (3) 588,725
Accounts payable-related parties 130,000 329,981 459,981 - 459,981
Accrued expenses 407,000 170,079 577,079 - 577,079
Deferred revenue 155,000 38,500 193,500 - 193,500
Accrued payroll taxes, interest,
and penalties 131,000 - 131,000 - 131,000
---------- ------------ ---------- ----------- -----------
Total current liabilities 2,457,000 809,290 3,266,290 995 3,267,285
---------- ------------ ---------- ----------- -----------
Long-term debt - 1,364,689 1,364,689 - 1,364,689
---------- ------------ ---------- ----------- -----------
Total liabilities - 2,173,979 4,630,979 995 4,631,974
---------- ------------ ---------- ----------- -----------
Commitments and contingency
Stockholders' equity
Common stock, $.001 par value;
100,000,000 authorized; 65,842,599
issued and outstanding. 66,000 1,000 67,000 (1,000) (3) 66,000
Dividends payable with common stock 8,000 - 8,000 - 8,000
Preferred stock - - - 7,200,000 (3) 7,200,000
Additional paid-in capital 39,848,000 8,880,060 48,728,060 (8,880,060) (3) 39,848,000
Accumulated deficit (38,777,000) (10,695,904) (49,472,904) 9,895,904 (39,577,000)
---------- ------------ ---------- ----------- -----------
Total stockholders' equity 1,145,000 (1,814,844) (669,844) 8,214,844 7,545,000
Total liabilities and stockholders'
equity $3,602,000 $ 359,135 $3,961,135 $ 8,215,839 $12,176,974
========== ============ ========== =========== ===========
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended September 30, 2002
Medix(1) PocketScript(2) Total Pro Forma Ref. Combined
---------- --------------- ---------- ----------- ---- -----------
Sales $ 10,000 $ 135,159 $ 145,159 $ - $ 145,159
---------- ------------ ---------- ----------- -----------
Revenues 10,000 135,159 145,159 - 145,159
---------- ------------ ---------- ----------- -----------
Operating expenses
Amortization of software costs
and license fees 495,000 - 495,000 - 495,000
Software research and development
costs 533,000 45,925 578,925 - 578,925
Selling, general and administrative
expenses 3,390,000 485,998 3,875,998 616,235 (5) 4,492,233
Impairment of assets - - - 151,000 (4) 151,000
---------- ------------ ---------- ----------- -----------
Total operating expenses 4,418,000 531,923 4,949,923 767,235 5,717,158
---------- ------------ ---------- ----------- -----------
Income (loss) from operations (4,408,000) (396,764) (4,804,764) (767,235) (5,571,999)
---------- ------------ ---------- ----------- -----------
Other income (expense)
Other income 7,000 7,000 - 7,000
Interest expense (71,000) (38,791) (109,791) - (109,791)
Financing costs (246,000) - (246,000) - (246,000)
Reorganization gain - 2,879,867 2,879,867 2,879,867 (7) -
---------- ------------ ---------- ----------- -----------
Net (loss) income $(4,718,000) $ 2,444,312 $(2,273,688) $ 2,112,632 $(5,920,790)
=========== ============ =========== =========== ===========
Extraordinary item - forgiveness
of debt income - - - - -
---------- ------------ ---------- ----------- -----------
Net loss after extraordinary item $(4,718,000) $ 2,444,312 $(2,273,688) $ 2,112,632 $(5,920,790)
=========== ============ =========== =========== ===========
Dividend on preferred stock - - - - -
---------- ------------ ---------- ----------- -----------
Net (loss) income applicable to
common stockholders $(4,718,000) $ 2,444,312 $(2,273,688) $ 2,112,632 $(5,920,790)
=========== ============ =========== =========== ===========
Basic and diluted loss per common share $ (0.08) $ (0.08)
========== ===========
Weighted average pro forma shares
outstanding - basic and diluted 60,698,928 12,000,000 (6) 72,698,928
========== =========== ===========
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2001
Medix(1) PocketScript(2) Total Pro Forma Ref. Combined
---------- --------------- ---------- ----------- ---- -----------
Sales $ 29,000 $ 597,505 $ 626,505 $ - $ 626,505
---------- ------------ ---------- ----------- -----------
Revenues 29,000 597,505 626,505 - 626,505
---------- ------------ ---------- ----------- -----------
Operating expenses
Amortization of software costs
and licensefees 213,000 - 213,000 - 213,000
Software research and development
costs 1,075,000 1,032,214 2,107,214 - 2,107,214
Selling, general and administrative
expenses 5,746,000 3,933,270 9,679,270 283,103 (5) 9,962,373
Impairment of assets 1,111,000 - 1,111,000 649,000 (4) 1,760,000
---------- ------------ ---------- ----------- -----------
Total operating expenses 8,145,000 4,965,484 13,110,484 932,103 14,042,587
---------- ------------ ---------- ----------- -----------
Income (loss) from operations (8,116,000) (4,367,979) (12,483,979) (932,103) (13,416,082)
---------- ------------ ---------- ----------- -----------
Other income (expense)
Other income 12,000 3,202 15,202 - 15,202
Interest expense (104,000) (59,676) (163,676) - (163,676)
Financing costs (2,428,000) (150,000) (2,578,000) - (2,578,000)
---------- ------------ ---------- ----------- -----------
Net loss $(10,636,000) $ (4,574,453) $(15,210,453) $ (932,103) $(16,142,556)
============ ============ ============ =========== ============
Extraordinary item - - - - -
------------ ------------ ----------- ----------- ------------
Net loss after extraordinary item $(10,636,000) $ (4,574,453) $(15,210,453) $ (932,103) $(16,142,556)
============ ============ ============ =========== ============
Dividend on preferred stock - (240,000) (240,000) - (240,000)
------------ ------------ ----------- ----------- -----------
Net loss applicable to common stockholders $(10,636,000) $ (4,814,453) $(15,450,453) $ (932,103) $(16,382,556)
============ ============ ============ =========== ============
Basic and diluted loss per common share $ (0.21) $ (0.26)
============ ============
Weighted average pro forma shares
outstanding - basic and diluted 50,740,356 12,000,000 (6) 62,740,356
============ =========== ============
Notes to Unaudited Pro Forma Balance Sheet and Statements of Operations
1. Reflects the September 30, 2002 and December 31, 2001 balances filed by
Medix Resources, Inc. (Medix) on Forms 10-K and 10-Q.
2. Reflects the balances from the historical financial statements of the
acquiree, PocketScript, LLC (PocketScript) at September 30, 2002 and
December 31, 2001.
3. To record the merger consideration and purchase price allocation in
connection with the acquisition. Medix paid an initial deposit of $100,000
in connection with the merger; additionally Medix is to issue 12,000,000
shares of preferred stock subject to certain adjustments and additional
contingent payment consideration of up to $4,000,000 in common stock for
future performance criteria being satisfied. The preliminary purchase price
allocation below does not include any contingent consideration or
transaction fees and expenses. The value of the preferred stock is based
upon the 12,000,000 initial shares being issued which are convertible into
one share of Medix common stock, using a common share price of $.60 for
Medix common stock. The purchase price allocation is as follows:
Consideration:
Cash $ 100,000
Preferred Stock 7,200,000
Assumed Liabilities 2,175,000
----------
Total consideration $9,475,000
----------
Purchase Price Allocation:
Current Assets $ 28,500
Fixed Assets 350,000
Customer Contracts 162,000
Purchased Technology 3,500,000
Goodwill 5,434,500
----------
Total assets acquired $9,475,000
----------
The acquired intangible assets are amortized over their estimated useful
lives of five years for Customer Contracts and four years for Purchased
Technology. The purchase price allocation is based on preliminary
information obtained from an outside valuation being performed and is
subject to finalization and adjustment.
4. To adjust the balance of capitalized software development costs abandoned
at September 30, 2002, and recorded the related impairment balances for the
nine-month period ended September 30, 2002 and the year ended December 31,
2001.
5. To remove the historical depreciation and amortization and record the
depreciation
6. and amortization for the assets acquired based on the purchase price
allocation described in note 3 above.
7. To remove the gain from PocketScript Chapter 11 bankruptcy reorganization.
Annex A
MERGER AGREEMENT
dated as of December 19, 2002
among
PS PURCHASE CORP.,
MEDIX RESOURCES, INC.,
POCKETSCRIPT, LLC,
and
STEPHEN S. BURNS
MERGER AGREEMENT dated as of December 19, 2002 (this "Agreement"),
---------
among (i) POCKETSCRIPT, LLC, an Ohio limited liability company (the
"Company"), (ii) MEDIX RESOURCES, INC., a Colorado corporation ("Medix"),
-----
(iii) PS Purchase Corp., a Delaware corporation (the "Merger Sub"), and a
----------
wholly-owned subsidiary of Medix, and (iii) STEPHEN S. BURNS, ("Burns " or
-----
the "Representative").
--------------
W I T N E S S E T H:
-------------------
WHEREAS, the parties to this Agreement desire to effect a strategic
business combination;
WHEREAS, Burns owns approximately 25% of the issued and outstanding
Units (as hereinafter defined) of the Company;
WHEREAS, in furtherance of the foregoing, upon the terms and subject to
the conditions of this Agreement and in accordance with Chapter 1705 of the
Ohio Revised Code (the "Ohio Statute"), the Merger Sub will merge with and
------------
into the Company in accordance with the provisions of the Ohio Statute, with
the Company as the surviving corporation;
WHEREAS, the Board of Directors of Medix and the sole Manager of the
Company has approved and determined that this Agreement, and the transactions
contemplated herein, including the Merger (as hereinafter defined), are
advisable, fair to, and in the best interests of, their respective
corporations and stockholders; and
WHEREAS, the Board of Directors of Medix and the sole Manager of the
Company has resolved to recommend adoption and approval of the Merger, this
Agreement and the transactions contemplated herein to the stockholders of
Medix and the members of the Company (the "Members"), respectively, and has
-------
determined that the Merger, this Agreement, and the transactions contemplated
hereby are fair to such stockholders or Members, as the case may be, and to
recommend that the stockholders of Medix and the Members, approve and adopt
the Merger, this Agreement and the transactions contemplated herein.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements contained in this
Agreement and intending to be legally bound hereby, the parties hereto agree
as follows:
ARTICLE I.
General
-------
Section 1.1. The Merger.
-----------
Upon the terms and subject to the conditions of this Agreement, and in
accordance with the Ohio Statute and the Delaware General Corporation Law
(the "DGCL"), at the Effective Time (as hereinafter defined), the Merger Sub
----
shall be merged with and into the Company (the "Merger"). As a result of the
------
Merger, the separate existence of the Merger Sub shall cease and the Company
shall continue as the surviving corporation of the Merger (the "Surviving
----------
Corporation"). The corporate existence of the Company, with all its purposes,
-----------
rights, privileges, franchises, powers and objects, shall continue unaffected
and unimpaired by the Merger and, as the Surviving Corporation, it shall be
governed by the laws of the State of Ohio.
Section 1.2. Effective Time; Closing.
-------------------------
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in Articles VII, VIII and IX hereof, the parties hereto
shall cause the Merger to be consummated by filing the Certificate of Merger
with the Secretary of State of the State of Ohio and by making all other
filings or recordings required under the Ohio Statute and the DGCL in
connection with the Merger, in such form as is required by, and executed in
accordance with the relevant provisions of, the Ohio Statute or such other
applicable Law. The date and time when the Merger shall become effective is
hereinafter referred to as the "Effective Time". The closing of the Merger
--------------
and the transactions contemplated hereby (the "Closing") shall be held at
-------
10:00 a.m., local time, at the offices of Moses & Singer LLP, located at 1301
Avenue of the Americas, New York, New York 10019, on a date mutually agreed
to by the parties hereto (the "Closing Date").
------------
At the Effective Time, the effect of the Merger shall be as provided in
the applicable provisions of the Ohio Statute. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time all
of the property, rights, privileges, powers and franchises of the Company and
the Merger Sub shall vest in the Surviving Corporation, and all debts,
liabilities, obligations, restrictions, disabilities and duties of the
Company and the Merger Sub shall become the debts, liabilities, obligations,
restrictions, disabilities and duties of the Surviving Corporation.
Section 1.3. Articles of Organization.
--------------------------
The Certificate of Merger shall provide that the Articles of
Organization of the Company as amended and restated as set forth in such
Certificate of Merger shall become the Articles of Organization of the
Surviving Corporation, until the same shall thereafter be altered, amended or
repealed in accordance with applicable law or such Articles of Organization.
Section 1.4. Operating Agreement.
---------------------
The Certificate of Merger shall provide that the Operating Agreement of
the Company in effect immediately prior to the Effective Time shall become
the Operating Agreement of the Surviving Corporation, until the same shall
thereafter be altered, amended or repealed in accordance with applicable law,
the Articles of Organization of the Surviving Corporation or such Operating
Agreement.
Section 1.5. Directors, Managers and Officers.
----------------------------------
The Certificate of Merger shall provide that from and after the
Effective Time, until the earlier of their resignation or removal or until
their respective successors are duly elected or appointed and qualified in
accordance with applicable law, (i) the directors of the Merger Sub at the
Effective Time shall become the Managers of the Surviving Corporation, and
(ii) the officers of the Merger Sub at the Effective Time shall become the
officers of the Surviving Corporation.
Section 1.6. Taking of Necessary Action; Further Assurances.
-----------------------------------------------
Prior to the Effective Time, and subject to the terms and conditions
provided herein, the parties hereto shall take, or cause to be taken (as the
case may be), all such action as may be necessary or appropriate in order to
effectuate the Merger as provided in this Agreement as expeditiously as
reasonably practicable.
ARTICLE II.
Effect of Merger on Capital Stock
---------------------------------
Section 2.1. Merger Consideration
--------------------
Subject to adjustment pursuant to Article III and the Contingent
Payments (as hereinafter defined) upon the attainment of certain Qualifying
Events (as hereinafter defined) pursuant to Article IV below, the initial
consideration (the "Initial Merger Consideration") payable in the Merger with
----------------------------
respect to all voting units and non-voting Units issued and outstanding at
the Effective Time and all securities convertible into or exercisable or
exchangeable for Units of the Company shall be Twelve Million (12,000,000)
shares (subject to adjustment as provided in Section 3.2 hereof) of Medix
common stock, $.001 par value per share (the "Common Stock"). The Initial
------------
Merger Consideration together with the Contingent Payments are hereinafter
referred to as the "Merger Consideration".
--------------------
Section 2.2. Conversion.
------------
At the Effective Time, by virtue of the Merger and without any action
on the part of Medix, the Merger Sub, the Company or the holders of any of
the following securities:
(a) Each unit of ownership interests in the Company (each a "Unit" and
----
collectively, the "Units") issued and outstanding immediately prior to the
-----
Effective Time shall be canceled and shall by virtue of the Merger and
without any action on the part of the holder thereof be converted
automatically into the right to receive with respect to each holder of a
Unit, the Per Unit Merger Consideration (as hereinafter defined), subject to
adjustment pursuant to Article III below, upon the surrender of the
certificates representing such Member's Units in the manner set forth in
Section 2.3. All such Units, when so converted, shall no longer be
outstanding and shall automatically be canceled and retired and shall cease
to exist, and each holder of a certificate representing Units shall cease to
have any rights with respect thereto, except the right to receive such number
of shares of Common Stock into which Units Company have been converted. The
"Per Unit Merger Consideration" shall mean, One Hundred Twenty Thousand
------------------------------
($120,000) shares of Common Stock (subject to adjustment as provided in
Section 3.2 hereof) for each Unit issued and outstanding at the Effective
Time and exchanged in the Merger.
(b) Each share of common stock, $.01 par value per share, of the Merger Sub
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and nonassessable
voting unit of the Surviving Corporation and shall constitute the only issued
and outstanding ownership interest in the Surviving Corporation.
(c) If after the date hereof and prior to the Effective Time, Medix shall
have declared a stock split (including a reverse split) of Common Stock or a
dividend payable in Common Stock or effected any recapitalization or
reclassification of its common stock or any other similar transaction, then
the Per Unit Merger Consideration shall be appropriately adjusted to reflect
such stock split, dividend, recapitalization, reclassification or similar
transaction.
(d) At the Effective Time, each option, warrant or other right or security
to purchase, convert, exchange or otherwise receive a Unit in the Company
shall be canceled and cease to exist.
Section 2.3. Exchange of Certificates.
--------------------------
(a) As soon as reasonably practicable after the Effective Time, Medix and
the Surviving Corporation shall mail (or cause a designated agent to mail) to
each holder of record of Units reflected on the books and records of the
Company (i) a letter of transmittal (which letter shall specify that delivery
shall be effected, and risk of loss and title to the certificates
representing the Units shall pass, only upon delivery to Medix or an agent
designated by Medix a properly executed assignment and letter of transmittal
and shall be in such form and have such other provisions as Medix may
reasonably specify), and (ii) instructions for use in effecting the
assignment of the Units in exchange for certificates representing shares of
Common Stock.
(b) Upon the delivery to Medix or an agent designated by Medix of such
assignment and letter of transmittal, duly executed, and such other documents
as may reasonably be required by Medix, the holder, subject to the escrow
arrangements provided for in Section 2.3(d) below, will be entitled to
receive certificates representing the number of whole shares of Common Stock
to be issued in respect of the Units surrendered.
(c) No certificate or scrip representing fractional shares of Common Stock
shall be issued upon the surrender for exchange of Units, and such fractional
share interests will not entitle the owner thereof to vote or to any rights
as a stockholder of Medix. All fractional shares of Common Stock that a
holder of Units would otherwise be entitled to receive as a result of the
Merger shall be rounded to the nearest whole number of shares.
(d) If a certificate for Common Stock is to be sent to a Person other than
the Person in whose name the Units surrendered for exchange are registered,
it shall be a condition of the exchange that the Person requesting such
exchange shall pay to Medix any transfer or other taxes required by reason of
the delivery of such certificate to a Person other than the registered holder
of the certificate surrendered, or shall establish to the satisfaction of
Medix that such tax has been paid or is not applicable. "Person" shall mean
------
any individual, corporation, partnership (general or limited), limited
liability company, limited liability partnership, trust, joint venture,
joint-stock company, syndicate, association, entity, unincorporated
organization or government or any political subdivision, agency or
instrumentality thereof. Notwithstanding the foregoing, the shares of Common
Stock constituting the Initial Merger Consideration (the "Escrow Shares")
-------------
shall de deposited into an escrow account (the "Escrow Account") pursuant to
--------------
an escrow agreement (the "Escrow Agreement"), among Medix, the Representative
----------------
and the escrow agent (the "Escrow Agent") in form and substance reasonably
------------
satisfactory to the parties thereto. The Escrow Agent shall be a bank or
trust company with capital and surplus exceeding $500,000,000 reasonably
satisfactory to Medix and the Representative. The Escrow Shares shall (i)
secure the obligations with respect to any adjustments or indemnification
obligations under this Agreement; (ii) insure compliance with all applicable
Law restricting the transfer or distribution of such shares and (iii) provide
for the Escrow Shares to be released in accordance with the terms and
conditions set forth in the Escrow Agreement which shall provide for timely
release of such number of Escrow Shares permitted to be sold in accordance
with the schedule for sale of shares set forth in the Escrow Agreement.
(e) The shares of Common Stock issued in exchange for the Units in
accordance with the terms hereof shall constitute satisfaction and payment in
full satisfaction of all of Medix's or the Surviving Corporation's
obligations under this Agreement with respect to the Initial Merger
Consideration and all rights pertaining to such Units, and the
Representative, in his individual capacity and, on behalf of the Members,
hereby waives and releases Medix and the Surviving Corporation from any and
all claims or liabilities relating to such exchange or arising out of the
further disposition of such shares of Common Stock.
Section 2.4. Dividends and Distributions.
-----------------------------
No dividends or other distributions that are declared or made after the
Effective Time with respect to Common Stock payable to holders of record
thereof after the Effective Time shall be paid to a Member entitled to
receive certificates representing Common Stock until such Member has properly
surrendered such Member's certificates representing Units. Upon such
surrender, there shall be paid to the Member in whose name the certificates
representing such Common Stock shall be issued any dividends which shall have
become payable with respect to such Common Stock between the Effective Time
and the time of such surrender, without interest. After such surrender, there
shall also be paid to the Member in whose name the certificates representing
such Common Stock shall be issued any dividend on such Common Stock that
shall have a record date subsequent to the Effective Time and prior to such
surrender and a payment date after such surrender; provided that such
--------
dividend payments shall be made on such payment dates. In no event shall the
Member entitled to receive such dividends be entitled to receive interest on
such dividends.
Section 2.5. No Liability.
--------------
None of Medix, the Merger Sub, the Company or the Surviving Corporation
shall be liable to any Person in respect of any Common Stock or any dividends
or distributions with respect thereto, in each case delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law. If any certificate shall not have been surrendered prior to six (6)
months after the Effective Time, any such Common Stock, dividends or
distributions in respect thereof or such cash shall, to the extent permitted
by applicable law, be delivered to Medix, upon demand, and any Members who
have not theretofore complied with the provisions of this Article II shall
thereafter look only to Medix for satisfaction of their claims for such
Common Stock, dividends or distributions in respect thereof or such cash.
Section 2.6. Withholding Rights.
--------------------
The Surviving Corporation shall be entitled to deduct and withhold from
the consideration otherwise payable pursuant to this Agreement to any Member
such amounts as it is required to deduct and withhold with respect to the
making of such payment under the Internal Revenue Service Code of 1986, as
amended (the "Code") (as hereinafter defined) and the rules and regulations
----
promulgated thereunder, or any provision of state, local or foreign tax law.
To the extent that amounts are so withheld by the Surviving Corporation, such
withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the Member in respect of which such deduction and
withholding was made by the Surviving Corporation.
Section 2.7. Closing of Company Unit Journal.
---------------------------------
At the Effective Time, the Unit journal of the Company shall be closed
and no transfer of Units shall thereafter be made. If, after the Effective
Time, assignment of Units are presented to the Surviving Corporation, they
shall, when accompanied by proper documentation, be exchanged for the Pro
Rata Merger Consideration for the Units represented thereby in the manner
provided in this Article II and any dividends or distributions payable
pursuant to Section 2.4.
ARTICLE III.
Adjustments to Merger Consideration
-----------------------------------
Section 3.1. Closing Balance Sheet.
----------------------
For the purpose of determining the adjustment, if any, to the Initial
Merger Consideration, as soon as practicable (but in any event within ninety
(90) days) after the Closing Date (as hereinafter defined), the Surviving
Corporation shall deliver to the Representative an audited balance sheet of
the Company prepared on an accrual basis as of the Closing Date (the "Closing
--------
Balance Sheet"). The Closing Balance Sheet shall be accompanied by a report
-------------
or reports thereon of Medix's independent certified public accountants that
the Closing Balance Sheet presents fairly the financial position of the
Company on the Closing Date in conformity with GAAP applied on a consistent
basis.
Section 3.2. Adjustment
----------
The Initial Merger Consideration shall be decreased, dollar-for-dollar,
by the amount by which the sum of (i) the amount of the aggregate
indebtedness set forth on Schedule 3.2 of the Company Disclosure Letter, (ii)
------------
the amount, if any, by which (A) the Company's current liabilities (accounts
payable and accrued expenses) and any outstanding indebtedness, other than
(x) the indebtedness set forth on Schedule 3.2 of the Company Disclosure
------------
Letter, (y) $100,000 paid to the Company by Medix relating to certain prepaid
programming and (z) the $100,000 in expenses referred to in Section 10.8,
exceeds (B) the sum of the Company's current assets (including cash, cash
equivalents, accounts receivables that are less than ninety (90) days past
due and prepaid expenses) and deposits, as determined in conformity with GAAP
applied on a consistent basis in accordance with the Company's historical
practices and as reflected on the Closing Balance Sheet and (iii) the amount
paid to dissenting Members that demand fair cash value for their Units under
the Ohio Statute, is greater than Fifty Thousand Dollars ($50,000). The
amount of any adjustment required pursuant to this Section 3.2 shall be
effected by a reduction in the shares of Common Stock constituting the
Initial Merger Consolidation as determined based upon an assumed price of
$0.50 per share of Common Stock. The "Company Disclosure Letter" shall mean
-------------------------
the Company disclosure schedules delivered by the Company to Medix
concurrently with the execution and delivery of this Agreement. The Company
Disclosure Letter shall include specific references to each provision of this
Agreement to which information contained in the Company Disclosure Letter is
intended to apply.
Section 3.3. Acceptance of Closing Balance Sheet
-----------------------------------
Following the delivery of the Closing Balance Sheet, the Surviving
Corporation will allow the Representative reasonable access during regular
business hours to all work papers, books and records and all additional
information used in preparing the Closing Balance Sheet and will make the
officers, employees and independent certified public accountants reasonably
available to discuss with the Representative such papers, books, records and
information. The Representative shall, within thirty (30) days following
receipt of the Closing Balance Sheet, notify the Surviving Corporation of its
acceptance of the Closing Balance Sheet or that the Closing Balance Sheet
does not present fairly the financial position of the Company at such date
stating in detail the specific items or amounts in dispute. If such
notification is not given within such thirty (30) day period, then the
Closing Balance Sheet shall be deemed to be the Closing Balance Sheet upon
which the Adjusted Initial Merger Consideration (as hereinafter defined)
shall be determined.
Section 3.4. Dispute Resolution
------------------
In the event that the Representative notifies the Surviving Corporation
that the Closing Balance Sheet does not present fairly the financial position
of the Company and the Surviving Corporation does not agree with the
Representative's claim, the Representative and the Surviving Corporation
shall meet and use their respective reasonable best efforts to resolve the
items or amounts in dispute. If the Representative and the Surviving
Corporation are unable to reach an agreement within thirty (30) days after
receipt of the Representative's notification, a mutually acceptable
nationally-recognized accounting firm (the "Accounting Referee") will review
------------------
the disputed items or amounts and compute the Adjusted Initial Merger
Consideration. In reviewing the Closing Balance Sheet, the Accounting
Referee shall consider only the items or amounts in dispute (and to the
extent required, any other items or amounts necessary to derive the disputed
items or amounts). Such determination shall be made within thirty (30) days
after the date on which the Accounting Referee is selected and shall be
binding on the parties. The fees, costs and expenses of the Accounting
Referee shall be borne by the party that is furthermost from the Accounting
Referee's final determination.
Section 3.5. Adjusted Initial Merger Consideration.
-------------------------------------
Within ten (10) days following the acceptance by the Representative of
the Closing Balance Sheet or resolution of any Closing Balance Sheet dispute,
Medix shall be entitled to have released from the Escrow Account or set-off
against and the Members hereby agree to surrender for cancellation and
release from the Escrow Agreement or set-off against the number of shares of
Common Stock equal to the amount, on a dollar-for-dollar basis, (based on the
Average Closing Price as of the Closing Date) that current liabilities
exceeds current assets by an amount greater than $50,000 as finally
determined in accordance with this Article III. The Initial Merger
Consideration as adjusted pursuant to this Article III is hereinafter
referred to as the "Adjusted Initial Merger Consideration".
-------------------------------------
Section 3.6. Payment of Liabilities.
----------------------
On the Closing Date, Medix shall cause the Surviving Corporation to pay
in full all of the indebtedness set forth in Schedule 3.2 of the Company
-------------
Disclosure Letter, excluding the indebtedness to KeyBank National Association.
ARTICLE IV.
Contingent Consideration
------------------------
Section 4.1. Qualifying Events.
------------------
In addition to the Initial Merger Consideration, the Members shall be
entitled to receive contingent consideration upon the attainment of certain
performance criteria or milestones (each, a "Qualifying Event") as set forth
----------------
below (each a "Contingent Payment" and collectively, the "Contingent
------------------ -----------
Payments"). The number of shares of Common Stock to be issued and delivered
upon the achievement of each Qualifying Event shall be determined by dividing
$1,000,000 by the average closing price of Common Stock, as listed on the
American Stock Exchange ("AMEX"), for the period commencing on the Closing
----
Date to the date of satisfaction of the applicable Qualifying Event (the
"Contingent Payment Price").
-------------------------
(a) Telcom Contingent Payment. The Members shall be entitled to receive an
aggregate of $1,000,000 of Common Stock if the Surviving Corporation (which
for purposes of this Section 4.1 shall include the Surviving Corporation,
Medix and their respective affiliates) executes and delivers a marketing or
strategic alliance agreement with a national telecommunication company set
forth on Schedule 4.1 (such Schedule 4.1 may be amended by Medix and Burns
------------ ------------
upon their mutual consent, such consent not to be unreasonably withheld)
within six (6) months of the Closing Date. Such agreement must be
satisfactory in form and substance to the Surviving Corporation in its
reasonable discretion and must include a minimum term of one (1) year and the
potential of generating material revenue for the Surviving Corporation if the
Surviving Corporation performs its obligations under the agreement.
(b) Hardware Vendor Contingent Payment. The Members shall be entitled to
receive an aggregate of $1,000,000 of Common Stock if the Surviving
Corporation executes and delivers a strategic development, marketing or
distribution agreement with a national handheld vendor set forth on Schedule
---------
4.1 within six (6) months of the Closing Date. Such agreement must be
---
satisfactory in form and substance to the Surviving Corporation in its
reasonable discretion and must include, without limitation, material
performance obligations on the part of such vendor, a term of at least one
(1) year, and the potential of generating material revenue for the Surviving
Corporation if Surviving Corporation performs its obligations under the
agreement.
(c) RXHub Contingent Payment. The Members shall be entitled to receive an
aggregate of $1,000,000 of Common Stock if within one (1) year from the date
on which the public announcement is made that PocketScript Express launched
the RxHub System, not less than five thousand (5,000) physicians shall have
executed an average of at least two hundred fifty (250) electronic
prescriptions utilizing the RxHub System.
(d) Pharmaceutical Company Contingent Payment. The Members shall be
entitled to receive an aggregate of $1,000,000 of Common Stock if the
Surviving Corporation executes and delivers a marketing or strategic alliance
agreement with a national pharmaceutical company set forth on Schedule 4.1
------------
within six (6) months of the Closing Date. Such agreement must be
satisfactory in form and substance to the Surviving Corporation in its
reasonable discretion and must include, without limitation, material
performance obligations on the part of the Pharmaceutical Company, a minimum
term of one (1) year, and the potential of generating material revenue for
the Surviving Corporation if the Surviving Corporation performs its
obligations under the agreement.
Section 4.2. Maximum Amount of Contingent Payments.
-------------------------------------
In no event and under no circumstances shall the aggregate amount of
Contingent Payment payable pursuant to this Article IV exceed $4,000,000 in
value as determined based on the applicable Contingent Payment Price.
Section 4.3. Delivery of Contingent Payments
-------------------------------
Medix shall deliver to the Escrow Agent for deposit into the Escrow
Account the number of shares of Common Stock calculated in accordance with
this Article IV within thirty (30) days of satisfying the milestone
applicable to each respective Qualifying Event. The shares of Common Stock
issued and delivered in connection with the satisfaction of the applicable
Qualifying Event and deposited in the Escrow Account shall be released in
accordance with the terms and conditions of the Escrow Agreement. Upon
issuance and delivery of the Common Stock relating to the Contingent
Payments, such issuance shall constitute satisfaction and payment in full of
all of Medix's or the Surviving Corporation's obligations under this
Agreement with respect to the Contingent Payment in question and the
Representative, in his individual capacity and on behalf of the Members,
hereby waives and releases Medix and the Surviving Corporation from any and
all claims or liabilities relating to such Contingent Payment or arising out
of the further disposition of such shares of Common Stock.
ARTICLE V.
Representation and Warranties of
the Company and Burns
---------------------
The Company and Burns, in his individual capacity and as Representative
of the Members pursuant to Section 8.16 below, jointly and severally,
represent and warrant to Medix and the Merger Sub as follows:
Section 5.1. Title - Member
--------------
Each Member is the beneficial and record owner of, and has good and
valid title to, the number, percentage and class of Units (both voting and
non-voting) set forth opposite such Member's name on Schedule 5.1 of the
------------
Company Disclosure Letter, with the full power and authority to vote such
Units and to transfer and otherwise dispose of such Units free and clear of
all security interests, judgments, liens, pledges, adverse claims, charges,
escrows, options, warrants, rights of first refusal, rights of first offer,
mortgages, indentures, security interests, or other agreements, arrangements,
encumbrances or defects of any kind or character (collectively,
"Encumbrances"). The Units are such Member's only voting, equity or other
financial instrument (including, but not limited to, any right to receive
distributions or profits from the Company) in the Company. Except as
described on Schedule 5.1 of the Company Disclosure Letter, there are no
------------
agreements or understandings between any Member and any other Person with
respect to the voting, sale or other disposition of any Member's Units or any
other matter relating to the Company.
Section 5.2. Authority - Burns.
------------------
Burns has full and absolute legal right, power and authority to execute
and deliver each of the Merger Documents (as hereinafter defined) to which
Burns is a party, and to perform his obligations contemplated thereby. This
Agreement has been validly executed and delivered by Burns, and constitutes a
valid and binding obligation of Burns enforceable against him in accordance
with its terms. Each other Merger Document executed by Burns, when executed
and delivered in accordance with the provisions hereof, shall be a valid and
binding obligation of Burns, enforceable against him in accordance with its
respective terms. As used herein, the term "Merger Documents" shall mean
collectively the following: (i) this Agreement, (ii) the Employment
Agreement (as hereinafter defined), (iii) the Escrow Agreement, (iv) the
Registration Rights Agreement (as hereinafter defined), (v) the Voting
Agreement (as hereinafter defined) and (vi) each other agreement, certificate
or other instrument delivered herewith.
Section 5.3. Organization; Power - Company.
------------------------------
The Company is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Ohio, has all
requisite power and authority to own, lease and operate the assets,
properties and rights used to carry on the business, operations and affairs
of the Company as now being conducted and to execute and deliver the Merger
Documents to which it is a party, to perform its obligations thereunder and
to consummate the transactions contemplated thereby.
Section 5.4. Authority - Company.
--------------------
The Company has taken all limited liability company action necessary to
authorize the execution and delivery of the Merger Documents to which the
Company is a party, the performance of its obligations thereunder and the
consummation of the transactions contemplated thereby (other than with
respect to the Merger, the approval and adoption of this Agreement and the
transactions contemplated hereby by the Members of the Company in accordance
with applicable law and the Company's Articles of Organization and Operating
Agreement and the filing and recordation of appropriate merger documents as
required by the Ohio Statute). This Agreement has been executed and
delivered by one or more managers or officers of the Company in accordance
with such authorization and constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms. Each
Merger Document and each other document or instrument contemplated thereby,
when executed and delivered in accordance with the provisions thereof, shall
be a valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
Section 5.5. Qualifications.
-----------------
The Company is qualified in all jurisdictions wherein the character of
the property owned or leased or the nature of the activities conducted by it
makes such qualification necessary. Schedule 5.5 of the Company Disclosure
------------
Letter sets forth a list of all such jurisdictions.
Section 5.6. No Conflict.
--------------
The execution and delivery by the Company and Burns of the Merger
Documents to which it or he is a party, consummation of the transactions
contemplated thereby, and their compliance with the provisions thereof, will
not (i) violate or conflict with the Company's articles of organization or
operating agreement, each as amended to the date hereof; (ii) violate,
constitute a default (whether with notice, lapse of time, or both), conflict
with, or give rise to any right of termination, cancellation, or acceleration
under any agreement, indenture, note, bond, mortgage, deed of trust, lease,
security, license, permit, or instrument to which the Company or Burns is a
party, or to any of their respective assets are subject; (iii) result in the
imposition of any Encumbrance on any of the assets of the Company; (iv)
violate or conflict with any Laws (as hereinafter defined); or (v) require
any consent, approval or other action of, notice to, or filing with any
Person, except for those that have been obtained or made. "Laws" means all
----
laws, rules, regulations, ordinances, orders, judgments, injunctions, decrees
and other legislative, administrative or judicial restrictions.
Section 5.7. Capitalization.
-----------------
(a) Schedule 5.7 of the Company Disclosure Letter sets forth all Units of
------------
the Company, including the names of the holders thereof and the number,
percentage and class held by each. All of the issued and outstanding Units
of the Company are duly authorized, validly issued, fully paid and
nonassessable. Except for the Units listed on Schedule 5.7 of the Company
------------
Disclosure Letter there are no other membership, equity, voting or
profit-sharing interests, rights or securities of or with respect to the
Company.
(b) Except as set forth on Schedule 5.7 of the Company Disclosure Letter,
------------
there are no outstanding (i) securities convertible into or exchangeable for
Units or any other equity interests of the Company, (ii) options, warrants or
other rights to purchase or otherwise acquire from the Company or any equity
owner thereof Units or any other equity interests of the Company or
securities convertible into or exchangeable for Units or any other equity
interests of the Company, (iii) contracts, agreements or commitments,
relating to the issuance by the Company of any Units or any other equity
interests of the Company, any convertible or exchangeable securities, or any
options, warrants or other rights to acquire Units or any other equity
interests of the Company, or (iv) voting trusts, voting agreements, proxies
or other agreements, instruments or understandings with respect to the
voting, issuance, redemption, transfer or other disposition of the Units or
any other equity interests of the Company to which the Company or any equity
owner is a party. No Person has the right to nominate or elect directors or
managers of the Company except through the ownership of units of Units.
There are no preemptive rights and, except with respect to the Units listed
on Schedule 5.7 of the Company Disclosure Letter, there are no contracts,
------------
agreements or understandings (whether written or oral) providing for the
sharing of profits, revenues or other distributions or payments from the
Company.
Section 5.8. Subsidiaries; Investments.
----------------------------
The Company does not, directly or indirectly, own, have the power to
vote or to exercise a controlling influence with respect thereto, through
management contract or otherwise, nor does it have the right to acquire any
equity interest or other interest in, any corporation, partnership, joint
venture, or other Person, nor has it made, nor has it any commitments to
make, any loans or guarantees to any Person.
Section 5.9. Financial Information.
------------------------
(a) Schedule 5.9 of the Company Disclosure Letter sets forth the unaudited
------------
balance sheet (the "Balance Sheet") of the Company for the seven (7) month
-------------
period ended November 30, 2002 (the "Balance Sheet Date") and the related
------------------
statements of income for the period then ended, including any footnotes
thereto (all of the foregoing being hereafter collectively referred to as the
"Financial Statements").
--------------------
(b) The Financial Statements referred to above fairly present the financial
position of the Company as of the dates indicated and the results of
operations and cash flows of the Company and for the periods indicated on an
accrual basis. The Financial Statements have been prepared in accordance
with GAAP consistently applied throughout the periods covered thereby and in
accordance with the books and records of the Company maintained in accordance
with historical practice. The Financial Statements are complete and correct
and consistent with the books and records of the Company. The assets and
accounts receivable set forth in the Financial Statements are the result of
bona fide transactions or claims in the Ordinary Course of Business.
"Ordinary Course of Business" shall mean the ordinary course of business of
----------------------------
the Company consistent with past practice and custom, including with respect
to quantity, quality and frequency.
Section 5.10. Absence of Undisclosed Liabilities.
-----------------------------------
(a) The Company does not have any loss or liability in excess of $5,000
individually or $10,000 in the aggregate of any nature, whether or not
accrued, absolute, contingent, determined or determinable or any loss
contingency, which is not disclosed or provided for on the Balance Sheet or
required under GAAP to be disclosed on the Balance Sheet, and there is no
basis or event for or relating to any present or future action, suit,
proceeding, charge, claim or demand giving rise to any such loss or
liability. All reserves established by the Company on the Balance Sheet are
adequate to cover any loss or liability of the Company.
(b) Except as set forth on Schedule 3.2 of the Company Disclosure Letter,
------------
the Company has repaid in full all indebtedness or other obligations of the
Company for borrowed money, evidence of which has been delivered to Medix.
Section 5.11. No Consent or Approval Required.
---------------------------------
Except as set forth on Schedule 5.11 of the Company Disclosure Letter,
-------------
no consent, waiver, approval or authorization of, or declaration to or filing
with, any governmental or regulatory authority, or any other Person, is
required for the valid authorization, execution and delivery by the Company
and Burns of the Merger Documents to which it or he is a party or for the
consummation of the transactions contemplated thereby, including but not
limited to, the consent of creditors with respect to any loans or other
indebtedness of the Company and under Office Leases (as hereinafter defined).
Section 5.12. Changes.
--------
Except as set forth on Schedule 5.12 of the Company Disclosure Letter,
-------------
since the Balance Sheet Date there has not been any:
(i) material adverse change in the business, assets, properties, rights,
affairs, operations, financial condition or prospects of the Company or any
deviation from historical accounting and other practices in connection with
the maintenance of the Company's books and records;
(ii) damage, destruction or loss, whether or not covered by insurance,
affecting the assets, properties or business of the Company;
(iii) declaration or payment of any dividend or distribution in respect of
the Units of the Company, or any direct or indirect redemption, purchase or
other acquisition of any of such Units or any issuance of any securities by
the Company;
(iv) increase in or prepayment of the compensation payable or to become
payable by the Company to any of its Members, directors, managers, officers,
employees, consultants or agents, or the making of any bonus payment or
similar arrangement (including without limitation any change-in-control or
"golden parachute" agreement or understanding) or adoption, amendment,
modification or termination of any bonus, incentive, stock option,
profit-sharing, severance or other plan, agreement or commitment for the
benefit of the Members, directors, managers, officers or employees of the
Company or any action with respect to any other Company Benefit Plan (as
hereinafter defined);
(v) cancellation or write-off of any indebtedness or other obligation due
to the Company;
(vi) obligation or liability (whether absolute, accrued, contingent or
otherwise and whether due or to become due) created or incurred, or any
transaction, contract or commitments entered into, by the Company other than
such items created or incurred in the Ordinary Course of Business and
consistent with past practice, but in no event greater than $5,000 in the
aggregate;
(vii) change in the manner in which the Company bills its clients, handles
its accounts or otherwise deals with clients but excluding variable end user
agreements and any changes involving amounts less than $5,000;
(viii) waiver, cancellation or release of any rights or claims of the
Company except in the Ordinary Course of Business and consistent with past
practices and for fair value, or any lapse or other loss of a right of the
Company to use its assets;
(ix) sale, lease, license, assignment or transfer of assets of the Company
except in the Ordinary Course of Business and consistent with past practices;
(x) commitments for capital expenditures by the Company in excess of $5,000
in the aggregate;
(xi) change in the Ordinary Course of Business and consistent with past
practice, with respect to the payment of accounts payable or other current
liabilities and the collection of accounts receivable, including, without
limitation, any acceleration or deferral of the payment or collection
thereof, as applicable;
(xii) grant of a security interest or other Encumbrance in any of the assets,
properties or rights of the Company;
(xiii) change in the articles of organization, operating agreement or
other governing documents of the Company, except as contemplated by the
Merger Documents;
(xiv) transactions with any affiliated Person;
(xv) to the Company's and Burn's best knowledge, any material change in the
Laws or regulations governing the Company and its business, operations,
affairs, assets, properties or rights;
(xvi) any material adverse change in the Company's cash, cash equivalents or
marketable securities or other liquid assets reflected in the Financial
Statements;
(xvii) any license or sublicense of any rights under or with respect to
any Intellectual Property (as hereinafter defined) other than in the Ordinary
Course of Business;
(xviii) other events or conditions of any character which materially
adversely affect, or could materially adversely affect, the business,
operations, affairs, assets, properties or rights of the Company; and
(xix) any commitment, agreement, arrangement or understanding (whether
written or oral) to do any of the foregoing.
Section 5.13. Contracts.
----------
(a) Schedule 5.13 of the Company Disclosure Letter sets forth a list of all
-------------
written or oral contracts, agreements, understandings, licenses, commitments
and other instruments (including all amendments, modifications or extensions
relating thereto) to which the Company is a party or by which any of its
assets, properties or rights are bound, other than contracts or agreements
involving amounts not in excess of $5,000 annually (each a "Contract" and
--------
collectively, the "Contracts"). Except for the Contracts set forth on
---------
Schedule 5.13 of the Company Disclosure Letter, there are no other contracts,
-------------
agreements, understandings, licenses, commitments or other instruments
relating to the Company and its business, operations and affairs.
(b) With respect to each Contract listed on Schedule 5.13 of the Company
-------------
Disclosure Letter:
(i) each Contract is legal, valid binding, enforceable and in full force
and effect;
(ii) each Contract will continue to be legal, valid, binding, enforceable
and in full force and effect on identical terms following the consummation
of the transactions contemplated by the Merger Documents;
(iii) the Company is not in breach or default or alleged to be in breach or
default under any of the Contracts, and the Company has no notice or
knowledge of any state of facts which would, with or without the giving of
notice or lapse of time or both, constitute a default thereunder;
(iv) to the Company's and Burn's best knowledge, the other parties to each
Contract are not in breach or default or alleged to be in breach or default
thereunder and no event has occurred which with the lapse of time would
constitute or breach or default or permit termination, modification or
acceleration under any Contract;
(v) no party to a Contract has repudiated any provision of any such
Contract;
(vi) the Company has furnished to Medix a correct and complete copy of each
Contract (including any amendments, modifications or renewals relating
thereto); and
(vii) each Contract involving amounts in excess of $5,000 annually is
established in a written instrument executed and delivered by the parties
thereto.
(c) No products or services leased or sold by the Company is subject to any
warranty, guaranty or indemnity that is not included in the standard terms of
sale or lease of the Company in the Ordinary Course Business. The Company
has provided Medix true and complete copies of all sales or purchase orders
or standard terms of sale or lease used by the Company.
(d) All products or services sold, leased or provided by the Company prior
to the Closing, conform in all material respects to contractual commitments,
express or implied warranties, specifications, and quality standards
established by the Company. The Company has no liability for replacement or
repair of any products or services sold or leased except as may arise in the
Ordinary Course of Business. No product liability claims have been asserted
or threatened against the Company or any of its products or services and the
Company and Burns are not aware of any events or circumstances that could
reasonably be expected to result in a product liability claim.
Section 5.14. Employee Benefit Plans.
-----------------------
(a) Schedule 5.14 of the Company Disclosure Letter hereto contains a true
-------------
and complete list of (i) each plan, program, policy, payroll practice,
contract, agreement or other arrangement, or commitment therefore, providing
for compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits of any kind,
whether formal or informal, funded or unfunded, written or oral, and whether
or not legally binding, which is now or previously has been sponsored,
maintained, contributed to or required to be contributed to the Company by or
pursuant to which the Company has any liability, contingent or otherwise,
including, but not limited to, any "employee benefit plan" within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") (each, a "Company Benefit Plan"); and (ii) each management,
----- --------------------
employment, bonus, option, equity (or equity related), severance, consulting,
non-compete, confidentiality or similar agreement or contract, pursuant to
which the Company has any liability, contingent or otherwise, between the
Company and any current, former or retired employee, officer, consultant,
independent contractor, agent or director of the Company (an "Employee")
--------
(each, an "Employee Agreement"). Neither the Company nor any ERISA Affiliate
------------------
(as defined in 2.13(b)) currently sponsors, maintains, contributes to, or is
required to contribute to, nor has the Company ever sponsored, maintained,
contributed to or been required to contribute to, or incurred any liability
to, (i) any "multiemployer plan" (as defined in ERISA Section 3(37)) or (ii)
any Company Benefit Plan which provides, or has any liability to provide,
life insurance, medical, severance or other employee welfare benefits to any
Employee upon his or her retirement or termination of employment, except as
required by Section 4980B of the Code.
(b) An "ERISA Affiliate" is defined as (i) any entity that is a member of a
---------------
controlled group with the Company, as described in Section 414(b) of the
Code, or that is under common control with the Company, for the purposes of
Section 414(c) of the Code or ERISA Section 4001(a)(14); (ii) any entity that
is part of an affiliated service group with the Company as described in
Section 414(m) of the Code; or (iii) any entity that is required to be
aggregated with the Company pursuant to regulations under Section 414(o) of
the Code.
(c) The Company has made available to Medix current, accurate and complete
copies of all documents embodying or relating to each Company Benefit Plan
and each Employee Agreement, including all amendments thereto, trust or
funding agreements relating thereto (if any), the three most recent annual
reports (Series 5500 and related schedules) required under ERISA, summary
annual reports, the most recent determination letter received from the
Internal Revenue Service (the "IRS"), the most recent summary plan
---
description (with all material modifications), if the Company Benefit Plan is
funded, the most recent annual and periodic accounting of Company Benefit
Plan assets, and all material communications to any Employee or Employees
relating to any Company Benefit Plan or Employee Agreement.
(d) With respect to each Company Benefit Plan (i) the Company and each
ERISA Affiliate, if any, has performed all obligations required to be
performed by it under each Company Benefit Plan and Employee Agreement and
neither the Company nor any ERISA Affiliate is in default under or in
violation of, any Company Benefit Plan, (ii) each Company Benefit Plan has
been established and maintained in accordance with its terms and in
compliance with all applicable laws, statutes, orders, rules and regulations,
including but not limited to ERISA and the Code, including without limiting
the foregoing, the timely filing of all required reports, documents and
notices, where applicable, with the IRS and the Department of Labor (the
"Department"); (iii) each Company Benefit Plan intended to qualify under
-----------
Section 401 of the Code is, and since its inception has been, so qualified
and a determination letter has been issued by the IRS to the effect that each
such Company Benefit Plan is so qualified and that each trust forming a part
of any such Company Benefit Plan is exempt from tax pursuant to Section 501
(a) of the Code and no circumstances exist which would adversely affect this
qualification or exemption; (iv) no "prohibited transaction," within the
meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred
with respect to any Company Benefit Plan; (v) no action or failure to act and
no transaction or holding of any asset by, or with respect to, any Company
Benefit Plan has or may subject the Company or any ERISA Affiliate or any
fiduciary to any tax, penalty or other liability, whether by way of indemnity
or otherwise; (vi) there are no actions, proceedings, arbitrations, suits or
claims pending, or to the best knowledge of the Company and any ERISA
Affiliate threatened or anticipated (other than routine claims for benefits)
against the Company or any ERISA Affiliate or any administrator, trustee or
other fiduciary of any Company Benefit Plan with respect to any Company
Benefit Plan or Employee Agreement, or against any Company Benefit Plan or
against the assets of any Company Benefit Plan; (vii) no event or transaction
has occurred with respect to any Company Benefit Plan that would result in
the imposition of any tax under Chapter 43 of Subtitle D of the Code; (viii)
each Company Benefit Plan can be amended, terminated or otherwise
discontinued without liability to the Company or any ERISA Affiliate; (ix) no
Company Benefit Plan is under audit or investigation by the IRS, the
Department or the Pension Benefit Guaranty Corporation (the "PBGC"), and to
----
the best knowledge of the Company and any ERISA Affiliate, no such audit or
investigation is pending or threatened.
(e) The execution of, and performance of the transactions contemplated in,
this Agreement and the other Merger Documents will not (either alone or upon
the occurrence of any additional or subsequent events) constitute an event
under any Company Benefit Plan or Employee Agreement that will or may result
in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligations to fund benefits with respect to any Employee.
(f) With respect to each Company Benefit Plan (other than a multiemployer
plan) which is an "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA ("Pension Plan"), hereto, (i) no steps have been taken
------------
to terminate any Pension Plan now maintained or contributed to, no
termination of any Pension Plan has occurred pursuant to which all
liabilities have not been satisfied in full, no liability under Title IV of
ERISA has been incurred by the Company or any ERISA Affiliate which has not
been satisfied in full, and no event has occurred and no condition exists
that could reasonably be expected to result in the Company or any ERISA
Affiliate incurring a liability under Title IV of ERISA or could constitute
grounds for terminating any Pension Plan; (ii) no proceeding has been
initiated by the PBGC to terminate any Pension Plan or to appoint a trustee
to administer any Pension Plan; (iii) each Pension Plan which is subject to
Part 3 of Subtitle B of Title I of ERISA or Section 412 of the Code, has been
maintained in compliance with the minimum funding standards of ERISA and the
Code and no such Pension Plan has incurred any "accumulated funding
deficiency," as defined in Section 412 of the Code and Section 302 of ERISA,
whether or not waived; (iv) neither the Company nor any ERISA Affiliate has
sought nor received a waiver of its funding requirements with respect to any
Pension Plan and all contributions payable with respect to each Pension Plan
have been timely made; (v) no reportable event, within the meaning of
Section 4043 of ERISA, and no event described in Section 4062 or 4063 of
ERISA, has occurred with respect to any Pension Plan; and (vi) the present
value of all accrued benefits of each Pension Plan, determined on a plan
termination basis using the actuarial assumptions established by the PBGC as
in effect on the date of determination, does not as of the date hereof and
will not as of the Closing Date exceed the fair market value of the assets
(which for this purpose shall not include any accrued but unpaid
contributions) of such Pension Plan.
Section 5.15. Labor Relations; Employees.
---------------------------
The Company employs a total of 14 employees (including managers,
officers and contract employees) in connection with its business, operations
and affairs, and the names, positions, time devoted to the business, length
of employment with the Company, current salaries and benefits of such
employees are set forth on Schedule 5.15 of the Company Disclosure Letter.
-------------
The employees set forth on Schedule 5.15 of the Company Disclosure Letter
-------------
constitute all of the individuals used in connection with the Company's
business, operations and affairs in the Ordinary Course of Business. Except
as set forth on Schedule 5.15 of the Company Disclosure Letter:
-------------
(a) no employees or group of employees have attempted to conduct an
election for a collective bargaining unit;
(b) during the preceding five (5) year period, the Company has not been
subject to any administrative or judicial restrictions relating to labor and
employment practices;
(c) there is no unfair labor practices complaint or other complaint
relating to employee matters against the Company pending before the National
Labor Relations Board or any other governmental authority;
(d) there is no labor strike, dispute, slowdown or stoppage pending or
threatened against the Company;
(e) the Company is not delinquent in payments to any of its employees for
any compensation, benefits or reimbursements;
(f) the Company is not a party or bound by any collective bargaining
agreement;
(g) the Company has not been cited under the U.S. Occupational Safety and
Health Act or any other applicable Law relating to harassment and
discrimination, as a result of the Company's work environment or conditions
or of any of its employees and neither the Company nor Burns is aware of any
events or circumstances that could reasonably be expected to constitute or
result in a harassment or discrimination claim or a hostile work environment;
(h) no employee, contract employee or consultant is subject to any
confidentiality, non-disclosure or non-compete agreement with a third party
or any other restrictions with respect to such persons duties or activities
for the Company or in connection with or relating to the Company's business,
operations and affairs; and
(i) each employee, contract employee and consultant of the Company has
executed and delivered confidentiality and work-for hire agreements and such
agreements are in full force and effect and an enforceable obligation against
each such employee, contract employee or consultant.
Section 5.16. Compliance with Laws; Governmental Authorizations.
--------------------------------------------------
Schedule 5.16 of the Company Disclosure Letter sets forth a summary of
-------------
all Federal, state, local and foreign governmental, regulatory or agency
licenses, permits, orders, authorizations, certifications and approvals
necessary or required by applicable Law for the business, operations and
affairs of the Company as currently conducted (collectively, the "Permits").
-------
The Company has at all times complied with all applicable Laws, including but
not limited to the Health Insurance Portability and Accountability Act of
1996. The Company has obtained Permits necessary to conduct the business,
operations and affairs of the Company as presently conducted. The Permits
are valid and in full force and effect and the Company has at all times
complied with all requirements or conditions relating to the Permits. There
have been no violations of such Permits and such Permits are, and will
continue to be after the consummation of the transactions contemplated in the
Merger Documents, valid and in full force and effect. True and complete
copies of all Permits and all amendments, extensions and modifications
thereto have been delivered to Medix.
Section 5.17. Insurance.
----------
(a) Schedule 5.17 of the Company Disclosure Letter sets forth a list of all
-------------
policies of insurance held by the Company, specifying the insurer, amount of
coverage, type of insurance and policy number. The Company has delivered to
Medix correct and complete copies of all summaries and descriptions of such
policies.
(b) Except as set forth on Schedule 5.17 of the Company Disclosure Letter:
-------------
(i) all due premiums have been paid and are not subject to adjustment; no
claims are pending thereunder; and no notice of cancellation or termination
has been received with respect to any such policy;
(ii) such policies will not terminate or be subject to adjustment as a
result of the transactions contemplated by the Merger Documents;
(iii) the amounts and types of coverage under such policies are customary in
the Company's industry to insure against the risk relating to the assets,
properties, business and operations of the Company; and
(iv) such insurance complies in all respects, including, but not limited to,
the amount and type of coverage required by any applicable Law, Permit or
third party contract.
Section 5.18. Title to Assets.
----------------
(a) Except as set forth in Schedule 5.18 of the Company Disclosure Letter,
-------------
the Company has good and marketable title to, or a valid leasehold interest
in, all of the assets, properties, interests in assets or properties (whether
real, personal or mixed) or rights which are reflected on the Balance Sheet,
free and clear of all Encumbrances.
(b) The Company has delivered to Medix a list, attached as Schedule 5.18 of
-------------
the Company Disclosure Letter, of all assets and properties of the Company
relating to or used in connection with the business, operations and affairs
of the Company, in each case whether owned or leased. Such list identifies
all items by type, amount, make and model, indicates leased items, and, for
all items (including vehicles) on which the manufacturer has inscribed a
serial number, by serial number. Schedule 5.18 of the Company Disclosure
-------------
Letter also includes the net book value and original cost of each item. All
of the assets listed on Schedule 5.18 of the Company Disclosure Letter are in
-------------
good working order and condition, normal wear and tear excepted, and, to the
best knowledge of the Company and Burns, are free from defects, which would
cause the assets to fail. Each asset is substantially fit for the purposes
for which it is utilized. The assets and properties listed on Schedule 5.18
-------------
of the Company Disclosure Letter constitute substantially all of the
Company's right, title and interest in and to the assets, properties,
interests in assets and properties and rights (of every kind and description
and wherever located), used or owned by the Company relating to or in
connection with its business, operations and affairs as currently conducted
and as proposed to be conducted after consummation of the transactions
contemplated by the Merger Documents.
Section 5.19. Litigation.
-----------
Except as set forth on Schedule 5.19 of the Company Disclosure Letter,
-------------
there are no (i) actions, suits, claims, investigations, administrative or
other proceedings by or before any governmental authority, arbitrator,
mediator or other dispute resolution Person or court, whether at law or in
equity, whether civil or criminal in nature, pending or threatened against
the Company or any of its assets, properties, interests in assets of
properties or rights, or (ii) judgments, decrees, injunctions or orders of
any governmental authority, arbitrator, mediator or other dispute resolution
Person or court against or binding upon or threatened against the Company or
any of its assets, properties, interests in assets of properties or rights,
or questioning the validity or enforceability of any of the Merger Documents
and the transactions contemplated thereby. The Company is not in default
under any such judgment, decree, injunction or order. The Company has
delivered to Medix correct and complete copies of all documents and
correspondence relating to, or a description of, any of the matters described
in this Section 5.19.
Section 5.20. Related Party Transactions.
---------------------------
Except as set forth on Schedule 5.20 of the Company Disclosure Letter
-------------
and except for compensation to regular employees of the Company in the
Ordinary Course of Business, during the preceding three (3) year period, no
current or former Member, manager, director, officer, employee or holder of
any securities of the Company, or a member of the immediate family of any
such Person or any entity directly or indirectly controlled by any of the
foregoing, has been (i) a party, either directly or indirectly, to any
transaction with or received any compensation, economic gain or other
benefits (whether or not financial benefits) from the Company; (ii) the
direct or indirect owner of an interest (other than non-affiliated holdings
in publicly held entities) in any business that is or was a competitor,
supplier or customer of the Company; or (iii) to the Company's and Burn's
best knowledge, the recipient of any compensation, economic gain or other
benefits (whether or not financial benefits) from any business entity, or any
person employed by, or any stockholder or partner of, or otherwise affiliated
with, such business entity, that is a client, supplier, vendor or competitor
of the Company. All such transactions listed on Schedule 5.20 of the Company
-------------
Disclosure Letter are no less favorable than would be available if
contracting with an independent third party.
Section 5.21. Real Property.
--------------
(a) The Company neither owns any real property nor has any interest in any
real property, and is not obligated under or a party to any option, right of
first refusal or other contractual right to purchase, acquire, sell or
dispose of any parcel of real property.
(b) Schedule 5.21 of the Company Disclosure Letter sets forth a complete
-------------
and correct list of all real property leased by the Company ("Leased Real
------------
Property"). Medix has complete and correct copies of all leases relating to
--------
such Leased Real Property (each an "Office Lease" and collectively, the
------------
"Office Leases") and all existing or proposed amendments or modifications
--------------
thereto. The Company is not a lessor, sublessor or grantor under any
contract granting to another Person any right to the possession, use,
occupancy or enjoyment or any parcel of Leased Real Property.
(c) Except as set forth on Schedule 5.21 of the Company Disclosure Letter:
-------------
(i) all improvements on the Leased Real Property are in good operating
condition and repair (ordinary wear and tear excepted), and there does not
exist any condition which interferes with the use thereof;
(ii) to the Company's knowledge, the Leased Real Property and the operation
and maintenance thereof do not violate any material Laws;
(iii) each Office Lease is in full force and effect, as amended or modified,
all rent and other sums and charges payable thereunder are current, and no
rent has been paid more than one month in advance;
(iv) no notice of default or termination under any Office Lease is
outstanding, no termination event or condition or uncured default on the part
of the tenant named therein, or the lessor thereunder, exists under any
Office Lease and, to the Company's knowledge, no event has occurred and no
condition exists which, with the giving of notice or the lapse of time or
both, would constitute a default or termination event or condition under any
Office Lease, and all Office Leases are as of the date hereof, and will
continue to be, after the consummation of the transactions contemplated
herein or in the Merger Documents, in full force and effect and do now and
will then constitute legal, valid and binding obligations of the parties
thereto;
(v) the tenant named in the Office Lease has not advanced any amounts to or
on behalf of the lessor thereunder for which the tenant has not been
reimbursed, the tenant has not sublet the premises demised therein or any
portion thereof, nor has the tenant assigned, by operation of law or
otherwise, any of the Office Leases or any portion thereof;
(vi) the lessor under each Office Lease has no charge, lien, claim, defense
or offset of any kind under any Office Lease or otherwise against the
Company;
(vii) there are covenants of "quiet enjoyment" in the Office Leases, and the
leasehold estate under, and leasehold interest in, each Office Lease is held
free and clear of any Encumbrance or other matter affecting title thereto;
and
(viii) the Company is in full and complete possession of the premises
described under each Office Lease and is fully occupying the same and
conducting business therefrom.
Section 5.22. Tax Matters.
------------
(a) All Federal, foreign, state and local Tax (as hereinafter defined)
returns, declarations, reports, claims and information statements,
informational returns, including any schedule, attachment or amendment
relating thereto (collectively "Returns") for the Company for periods ending
-------
on or before the Closing Date have been or will be filed by their respective
due dates, including any extensions thereof. All of the Company's Federal,
state, local and foreign Tax liabilities, if any, as shown to be due on such
Tax Returns for all periods prior to the Closing Date, have been paid or will
be paid in full to the appropriate taxing authorities by the Company on or
before the Closing Date. All such Tax Returns filed through the date hereof
are true and correct and do not omit any items of income or claim any
deduction or exclusion, which is or may be subject to challenge. The Company
shall have made the entity classification election pursuant to Treasury
Regulation 301.7701-3 to be treated as "corporation" under the Code and such
election shall be effective as of the Closing Date. The Company has withheld
and paid all Taxes required to have been withheld and paid in connection with
amounts paid or owing to any person employed by the Company as a full,
part-time or contract employee or otherwise.
(b) In addition, (i) the Company has not waived any statute of limitations
affecting any Tax liability or agreed to any extension of time during which a
Tax assessment or deficiency assessment may be made; (ii) there are no
pending Tax audits of any Returns of the Company, and no material unresolved
questions or claims concerning the Company's Tax liability; (iii) the Company
has made full provision on its books and records and full provision will be
made on the Closing Balance Sheet for all Taxes payable for any periods that
end on or before the Closing Date for which no Return has yet been filed and
for periods which begin on or before the Closing Date and end after the
Closing Date to the extent such Taxes are attributable to the portion of the
periods ending on the Closing Date; (iv) the Company has not accrued or
otherwise incurred any liability for any Federal, state, local or foreign
Taxes, except in the Ordinary Course of Business and consistent with past
practice; and (v) the Company has never been a party to any Tax sharing
agreement or arrangement with any Person. The Company has delivered to
Medix correct and complete copies of all Tax Returns and examination reports
since the date of its organization.
(c) For purposes of this Agreement, "Tax" or "Taxes" means, with respect to
--- -----
any Person, (i) all income or franchise taxes (including any tax on or based
upon net income, or gross income, or income as specially defined, or
earnings, profits, selected items of income, earnings or profits) or net
worth or capital stock value and all gross receipts, sales, use, ad valorem,
transfer, franchise, license, registration, withholding, payroll, employment,
excise, severance, stamp, occupation, premium, real property, personal
property, windfall profits taxes, alternative or add-on minimum taxes,
customs duties or other taxes, fees, assessments or charges or any kind
whatsoever, together with any interest and any penalties, additions to tax or
additional amounts imposed by any taxing authority (domestic or foreign) on
such Person and (ii) any liability for the payment of any amount of the type
described in the immediately preceding clause (i) as a result of being a
"transferee" (within the meaning of Section 6901 of the Code or similar
provision of the Code or of any other applicable law) of any Person,
including, but not limited to, as a member of an affiliated, consolidated or
combined group.
Section 5.23. Intellectual Property.
----------------------
(a) Schedule 5.23 of the Company Disclosure Letter contains a correct and
-------------
complete list of all (i) patents, trademarks, trademark applications, trade
names, service marks, service mark applications, or copyrights, and to the
extent registered, the registration numbers, which are used or owned by the
Company, (ii) applications, filings and other formal actions pursuant to
Federal, state, local and foreign laws taken by the Company to perfect or
record its interest in the Intellectual Property, and (iii) other
Intellectual Property of the Company used in connection with or relating to
its business, operations and affairs. The Company owns or has the right to
use or bring infringement actions with respect to all Intellectual Property
listed on Schedule 5.23 of the Company Disclosure Letter. The Company has
-------------
not received any notice of any adversely held Intellectual Property or of any
claim of any other Person relating to any Intellectual Property of the
Company.
(b) All of the patents, copyrights, trademarks, trade names and service
marks listed on Schedule 5.23 of the Company Disclosure Letter are valid and
-------------
protectable, properly registered and in full force and effect and are not
subject to any taxes or fees. The Company (i) has not licensed, assigned or
granted to any Person rights of any nature to use any Intellectual Property;
(ii) is not obligated to pay royalties to anyone for use of the Intellectual
Property of a third party; and (iii) does not market, sell or use any
product, service or information that violates or infringes any Intellectual
Property of a third party. No current or former member, manager, officer,
director, investor, lender, employee, consultant or independent contractor of
the Company has any interests in or rights to any Intellectual Property owned
or used by the Company. Neither the Company nor any current or former
employee, consultant or agent has disclosed any material non-public
information relating to Intellectual Property to any third party, except
pursuant to a non-disclosure agreement.
(c) There is no pending or threatened claim or litigation against the
Company contesting the right to use its Intellectual Property, asserting the
misuse of any thereof, or asserting the infringement or other violation of
any Intellectual Property of a third party. No third party has infringed or
violated any Intellectual Property of the Company. The Company has taken
reasonable security measures to protect the secrecy, confidentiality and
value of its Intellectual Property, including but not limited to, client
lists and information, trade secrets, proprietary processes, models,
formulae, designs, improvements, systems, inventions, know-how, and other
confidential and proprietary information. Schedule 5.23 of the Company
-------------
Disclosure Letter contains a list of all Intellectual Property licensed by
the Company (excluding off-the-shelf software), including all software used
by the Company (excluding off-the-shelf software), and in the case of
customized software, the vendor and the party providing support therefore.
(d) Neither the execution, delivery or performance of the Merger Documents
nor the consummation of the transactions contemplated thereby, will (i)
breach, violate or conflict with any instrument or agreement governing any
Intellectual Property, (ii) cause the forfeiture or termination or give rise
to a right of forfeiture or termination of any Intellectual Property, or
(iii) in any way impair the right of the Company to use, sell, license or
dispose of or to bring any action for the infringement of, any Intellectual
Property or portion thereof.
(e) Medix has received a copy, or a description, of the Intellectual
Property listed on Schedule 5.23 of the Company Disclosure Letter.
-------------
(f) As used herein, the term "Intellectual Property" shall mean all
---------------------
patents, patent applications, trademarks, trademark applications, trade
names, service marks, service mark applications, logos, slogans, copyrights,
copyright applications, franchises, inventions, models, databases, systems,
processes, formulae, trade secrets, know-how, customer lists or account
information, computer software, programs, algorithms codes and any other
confidential, proprietary or technical information (whether or not subject to
patent or copyright protection).
Section 5.24. Accounts Receivable; Clients and Vendors.
-------------------------------------------
(a) Except as set forth on Schedule 5.24 of the Company Disclosure Letter,
-------------
all accounts and notes due and uncollected as reflected on the Balance Sheet
(i) have arisen from bona fide transactions in the Ordinary Course of
Business and consistent with past practice of the Company and represent valid
obligations due to the Company; (ii) are enforceable in accordance with their
respective terms; (iii) are not subject to deduction, set-off or
counterclaim; and (iv) will be collected in accordance with their respective
terms in their recorded amounts. Schedule 5.24 of the Company Disclosure
-------------
Letter lists any obligor who, together with all of its affiliates, owed
accounts and notes due and uncollected as reflected on the Balance Sheet, in
an aggregate amount of $5,000 or more.
(b) Except as set forth on Schedule 5.24 of the Company Disclosure Letter,
-------------
as of the date hereof there is (i) no account debtor or note debtor
delinquent in its payment by more than ninety (90) days; (ii) to the best
knowledge of the Company and Burns, no account debtor or note debtor is
insolvent or bankrupt; (iii) no account receivable or note receivable has
been pledged to any third party; or (iv) no claim, refusal or threatened
refusal to pay, or any rights of set-off against, any accounts or notes
receivable of the Company.
(c) Since January 1, 2002, no client listed on Schedule 5.24 of the Company
-------------
Disclosure Letter has cancelled or otherwise terminated or threatened to
cancel or otherwise terminate its relationship with the Company or has during
such period decreased or threatened to decrease, modify, or limit, its
business relationship with the Company in any material respect.
Section 5.25. Guaranties.
----------
The Company is not a guarantor or otherwise liable for any debt,
liability or other obligation of any other Person (the "primary obligor") in
---------------
any manner, whether directly or indirectly, and including any obligation,
direct or indirect, (a) to purchase or pay (or advance or supply funds for
the purchase or payment of) such liability, debt or other obligation or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment thereof, (b) to purchase or lease property, securities or
services for the purpose of assuring the owner of such liability, debt or
other obligation of the payment thereof, (c) to maintain working capital,
equity capital or any other financial statement condition or liquidity of the
primary obligor so as to enable the primary obligor to pay such liability,
debt or other obligation or (d) as an account party in respect of any letter
of credit issued to support such liability, debt or other obligation.
Section 5.26. Environmental Matters.
----------------------
(a) The Company has obtained all Permits which are required under all
Federal, state and local statutes, laws, regulations, ordinances, rules,
judgments, orders, decrees, concessions, grants, franchises, agreements or
governmental restrictions relating to the environment or the release of any
materials into the environment (collectively, "Environmental Laws"). The
------------------
Company is in compliance with the terms and conditions of all such Permits
and are also in compliance and has at all times complied with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in any Environmental Law
applicable to the Company and its business, operations, affairs, assets,
properties or operations or in any regulation, code, plan, order, decree,
judgment, injunction, notice or demand letter issued, entered, promulgated or
approved thereunder.
(b) The Company (i) has not handled, stored or released any pollutants,
contaminants, toxic or hazardous substances, materials, wastes, constituents,
compounds, chemicals, natural or manmade elements or forces (including,
without limitation, petroleum or any by-products or fractions thereof, any
form of natural gas, lead, asbestos and asbestos-containing materials,
building construction materials and debris, polychlorinated biphenyls
("PCBs") and PCB-containing equipment, radon, and other radioactive elements,
ionizing radiation, electromagnetic field radiation and other non-ionizing
radiation, sonic forces and other natural forces, infectious, carcinogenic,
mutagenic or etiologic agents, pesticides, defoliants, explosives,
flammables, corrosives and urea formaldehyde foam insulation) that are
regulated by any Environmental Laws (collectively, "Hazardous Substances");
--------------------
(ii) is not and will not be liable or responsible for clean-up costs,
remedial work or damages in connection with the handling, storage or release
by the Company of any Hazardous Substance prior to the Closing Date; and
(iii) has not received any claim for clean-up costs, remedial work or damages
from any Person or Federal, state or local government or any agency or
political subdivision thereof, in connection with the handling, storage or
release by the Company of any Hazardous Substance.
(c) The Company has not been assessed and is not liable for, subject to or
have been assessed or threatened, with respect to any claims, judgments,
damages, penalties, fines, liens, costs or expenses in connection with any
Environmental Laws or suffered any diminution in value, restrictions or loss
of use of any owned or leased property as a result of Environmental Laws.
Section 5.27. Records.
----------
All records, books, minutes, and other records and information relating
to the Company are complete and correct and reflect accurately all corporate
actions, issuances of Units and other securities and other actions taken by
or on behalf of the Company.
Section 5.28. Bank Accounts; Powers of Attorney.
------------------------------------
Schedule 5.28 of the Company Disclosure Letter sets forth a list of (i)
-------------
the name of each bank in which the Company has an account, safe deposit box,
or lock box, and the names of all persons authorized to draw thereon, or to
have access thereto, and (ii) the names of all persons holding powers of
attorney from the Company and a summary statement of the terms thereof.
Section 5.29. Brokers and Finders.
--------------------
No Person acting on behalf or under the authority of the Company or any
Member is or will be entitled to any broker's, finder's, or similar fee or
commission in connection with the transactions contemplated hereby.
Section 5.30. Investment Representations and Warranties.
------------------------------------------
Each of the Investment Letters and the Affiliates Letters (as such
terms are hereinafter defined) are true and correct in all respects.
Section 5.31. Disclosure.
-------------
None of the Merger Documents or other materials referred to herein, or
furnished to Medix by or on behalf of the Company or Burns, contains any
untrue statement of a material fact by the Company or Burns or omits to state
a material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances in which they were made, not
misleading.
ARTICLE VI.
Representations and Warranties of Medix and the Merger Sub
----------------------------------------------------------
Each of Medix and the Merger Sub hereby represents and warrants to the
Company as follows:
Section 6.1. Organization; Powers.
-----------------------
Each of Medix and the Merger Sub is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation. Each of Medix and the Merger Sub has all requisite
corporate power and authority to execute and deliver the Merger Documents to
which it is a party, to perform its obligations thereunder and to consummate
the transactions contemplated thereby.
Section 6.2. Authority.
------------
Each of Medix and the Merger Sub has taken all corporate action
necessary to authorize its execution and delivery of the Merger Documents to
which it is a party, the performance of its obligations thereunder, and its
consummation of the transactions contemplated thereby (other than with
respect to the Merger, the approval and adoption of this Agreement and the
transactions contemplated hereby by the stockholders of Medix, in accordance
with applicable law and Medix's certificate of incorporation and by-laws and
the filing and recordation of appropriate merger documents as required by the
Ohio Statute). This Agreement has been executed and delivered by one or more
officers of each of Medix and Merger Sub in accordance with such
authorization and constitutes a valid and binding obligation of each of Medix
and Merger Sub, enforceable against Medix or Merger Sub in accordance with
its terms. Each Merger Document and each other document or instrument
contemplated thereby, when executed and delivered in accordance with the
provisions thereof, shall be a valid and binding obligation of each of Medix
and Merger Sub, enforceable against Medix or Merger Sub in accordance with
its terms.
Section 6.3. No Conflict.
--------------
The execution and delivery by each of Medix and Merger Sub of the
Merger Documents to which it is a party, consummation of the transactions
contemplated thereby, and its compliance with the provisions thereof, will
not (i) violate or conflict with the certificate of incorporation or by-laws,
each as amended to the date hereof, of each of Medix and the Merger Sub (ii)
violate, constitute a default (whether with notice, lapse of time, or both),
conflict with, or give rise to any right of termination, cancellation, or
acceleration under any agreement, indenture, note, bond, mortgage, deed of
trust, lease, security, license, permit, or instrument to which either Medix
or the Merger Sub is a party, or to which it or any of their respective
assets are subject; or (iii) result in the imposition of any Encumbrance on
any asset of either Medix or Merger Sub; or (iv) violate or conflict with any
Laws.
Section 6.4. Litigation.
-----------
There are no (i) actions, suits, claims, investigations, administrative
or other proceedings by or before any governmental authority, arbitrator,
mediator or other dispute resolution Person or court, whether at law or in
equity, whether civil or criminal in nature, pending or threatened against
Medix or the Merger Sub, or any of their assets, properties, interests in
assets of properties or rights, or (ii) judgments, decrees, injunctions or
orders of any governmental authority, arbitrator, mediator or other dispute
resolution Person or court against or binding upon or threatened against
Medix or the Merger Sub or any of their assets, properties, interests in
assets of properties or rights, or questioning the validity or enforceability
of any of the Merger Documents and the transactions contemplated thereby.
Medix or the Merger Sub is not in default under any such judgment, decree,
injunction or order. Medix or the Merger Sub has delivered to the Company
correct and complete copies of all documents and correspondence relating to,
or a description of, any of the matters described in this Section 6.4.
Section 6.5. No Consent or Approval Required.
----------------------------------
No consent, waiver, approval or authorization of, or declaration to or
filing with, any governmental or regulatory authority, or any other Person,
is required for the valid authorization, execution and delivery by Medix or
the Merger Sub of the Merger Documents to which it is a party or for the
consummation of the transactions contemplated thereby that has not been
obtained, except for (i) applicable requirements under the Securities Act and
Exchange Act (as hereinafter defined); (ii) state securities and "blue sky"
laws; (iii) applicable requirements of AMEX; (iv) filings and recordations of
appropriate Merger Documents as required by the Ohio Statute; and (v)
approval by the stockholders of Medix, in accordance with applicable Law and
Medix's certificate of incorporation and by-laws.
Section 6.6. Common Stock.
---------------
Except for obtaining the approval of the stockholders of Medix for the
Merger and the issuance of shares of Common Stock as Merger Consideration,
the Common Stock issuable in connection with the Initial Merger Consideration
are duly authorized by all necessary action and will be when issued and sold
in accordance with the terms of this Agreement, validly issued, fully paid
and non-assessable and free and clear of all Taxes and Encumbrances. The
shares of Common Stock issuable in connection with Contingent Payments upon
satisfaction of the applicable Qualifying Event are duly authorized by all
necessary action and will be when issued and sold in accordance with the
terms of this Agreement validly issued, fully paid and non-accessible and
free and clear of all Taxes and Encumbrances. The shares of Common Stock
have been issued in compliance with all applicable agreements, instruments or
Laws, including but not limited to, the Securities Act of 1933 (the
"Securities Act") and applicable state securities or "blue sky" laws. The
---------------
"Medix Disclosure Letter" shall mean the Medix disclosure schedules delivered
------------------------
by Medix to the Company currently with the execution and delivered of this
Agreement. The Medix Disclosure Letter shall include references to each
provision of this Agreement to which information contained in the Medix
Disclosure Letter is intended to apply.
Section 6.7. Medix Reports and Financial Statements.
--------------------------------------
(a) Medix has filed all forms, reports, statements and other documents
required to be filed by Medix with the Securities and Exchange Commission
("SEC") since September 30, 2002 (the "Medix Reports"), each of which has
----- -------------
complied in all material respects with the applicable requirements of the
Securities Act, and the rules and regulations promulgated thereunder, and the
Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and
------------
regulations promulgated thereunder, each as in effect on the date so filed.
None of the Medix Reports (including any financial statements or schedules
included or incorporated by reference therein) contained when filed any
untrue statement of a material fact or omitted or omits to state a material
fact required to be stated or incorporated by reference therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(b) All of financial statements of Medix included in the Medix Reports have
been prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto) and fairly present in all material respects the consolidated
financial position of Medix and its subsidiaries at the respective dates
thereof and the consolidated results of its operations and changes in cash
flows for the periods indicated (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
(c) There are no liabilities of Medix or any of its subsidiaries of any
kind whatsoever, whether or not accrued and whether or not contingent or
absolute, that are material to Medix and its subsidiaries, taken as a whole,
other than (i) liabilities disclosed or provided for in the consolidated
balance sheet of Medix and its subsidiaries at September 30, 2002, including
the notes thereto; (ii) liabilities disclosed in the Medix Reports; (iii)
liabilities incurred on behalf of Medix under this Agreement and the
contemplated Merger; and (iv) liabilities incurred in the Ordinary Course of
Business consistent with past practice since September 30, 2002.
Section 6.8. Disclosure.
----------
None of the Merger Documents or other materials referred to herein
furnished to the Company by Medix or the Merger Sub or the Medix Reports,
contain any untrue statement of a material fact or omits to state a material
fact required in order to the make the statements contained herein or
therein, in light of the circumstances in which they were made, not
misleading, and such statements remain true and complete in all material
respects as of the date of this Agreement.
ARTICLE VII.
Conditions to Closing of Each Party
-----------------------------------
The obligations of each party to perform this Agreement are subject to
the following conditions precedent:
Section 7.1. Legal Action.
------------
No temporary restraining order, preliminary injunction, or permanent
injunction or other order preventing the consummation of the transactions
contemplated by the Merger Documents shall have been issued by any Federal,
state or local court or any administrative or regulatory agency or commission
or other governmental authority or agency (domestic or foreign) and remain in
effect. Each party agrees to use its best efforts to have any such order or
injunction lifted.
Section 7.2. Legislation.
-----------
No Federal, state, local or foreign Law shall have been enacted which
prohibits, restricts or delays the consummation of the transactions
contemplated hereby, by the Merger Documents, or any of the conditions to the
consummation of such transactions.
Section 7.3. Escrow Agreement.
----------------
Each of Medix, the Representative (as attorney-in-fact for the Members
pursuant to Section 8.17) and the Escrow Agent shall have executed and
delivered the Escrow Agreement in form and substance reasonably satisfactory
to the parties thereto. The Escrow Agreement shall provide for the release
of shares of Common Stock received as Merger Considerations as follows:
3,000,000 shares on the three month anniversary of the Closing Date, an
additional 2,000,000 shares on the six month anniversary of the Closing Date
and an additional 1,000,000 shares on each three month anniversary of the
Closing Date thereafter with any remaining shares of Common Stock held in the
Escrow Account released 24 months after the Closing Date; (iii) permit,
subject to compliance with applicable Law, including but not limited to, the
Securities Act and state securities and blue sky laws, the unrestricted sale
of shares of Common Stock received by the Members as Contingent Payments as
follows: 1/3 upon receipt, 1/3 on the three month anniversary of the date of
the applicable Qualifying Event and the final 1/3 on the six month
anniversary of the applicable Qualifying Event; and (iv) otherwise be in form
and substance satisfactory to the parties thereto.
Section 7.4. Registration Rights Agreement.
-----------------------------
Medix and the Representative (as attorney-in-fact for the Members
pursuant to Section 8.17) shall have executed and delivered a registration
rights agreement (the "Registration Rights Agreement") which shall (i)
-----------------------------
provide for the registration (and maintenance thereof) of all of the shares
of Common Stock received as Merger Consideration and (ii) permit, subject to
compliance with applicable Law, including but not limited to, the Securities
Act and state securities and blue sky laws, the unrestricted sale of shares
of Common Stock received by the Members as the Initial Merger Consideration
in accordance with the terms and conditions of the Escrow Agreement.
Section 7.5. Employment Agreements.
---------------------
The Company, Medix and each of Burns and Kowitz shall have executed and
delivered an employment agreement in form and substance satisfactory to the
parties thereto (each, an "Employment Agreement" and collectively, the
"Employment Agreements"), and each such Employment Agreement shall be in full
force and effect and an enforceable obligation against the Surviving
Corporation, Burns and Kowitz as of the Closing Date.
ARTICLE VIII.
Conditions to Closing of Medix and the Merger Sub
-------------------------------------------------
The obligation of the Medix and the Merger Sub to pay the Merger
Consideration and perform this Agreement are subject to the following
conditions precedent:
Section 8.1. Company Approval.
-------------------
The Members of the Company by resolutions or consents duly adopted
shall have approved the Merger and the execution, delivery and performance of
the Merger Documents to which it or they are a party, the transactions
contemplated thereby and compliance with the provisions thereof by the
Company and Medix shall have received a certificate signed by the Secretary
of the Company, that such resolutions or consents are in full force and
effect and are all the resolutions adopted in connection with the execution,
delivery and performance of the Merger Documents to which it or they are a
party and the transactions contemplated thereby.
Section 8.2. Key Employees- Employment Agreements.
------------------------------------
Medix, the Company and Burns shall have identified the key employees of
the Company and the Company and each such key employee shall have executed
and delivered employment agreements in form and substance satisfactory to
Medix, and each such employment agreement shall be in full force and effect
and an enforceable obligation against such employee as of the Closing Date.
Section 8.3. Due Diligence.
----------------
Medix and the Merger Sub shall have completed an examination of the
financial, accounting, business and legal records of the Company and such
examination shall be satisfactory to Medix and the Merger Sub and its counsel
in their reasonable discretion.
Section 8.4. Representations and Warranties.
---------------------------------
On the Closing Date, (i) the representations and warranties of the
Company and the Representative contained in this Agreement or the Company
Disclosure Letter delivered pursuant hereto shall be true and correct with
the same effect as though made on and as of the Closing Date and (ii) the
documents and information required to be delivered to Medix or the Merger Sub
by the Company and Burns (in his individual capacity and as the
Representative on behalf of the Members) under the Merger Documents are true
and correct as of the Closing Date with the same effect as though made on and
as of the Closing Date and there have been no amendments, modifications or
changes to such documents or information that have not been disclosed to
Medix or the Merger Sub, and Medix shall have received a certificate signed
by an authorized officer of the Company, as to the Company, to that effect,
and a certificate from Burns, as to Burns, to that effect.
Section 8.5. Performance of Obligations.
-----------------------------
The Company and Burns (in his individual capacity and as Representative
on behalf of the Members) shall have performed all the covenants, agreements
and obligations contained in this Agreement to be performed or complied with
by the Company and Burns on or prior to the Closing Date, and the Medix shall
have received a certificate signed by an authorized officer of the Company,
as to the Company, to that effect, and a certificate from Burns, as to Burns,
to that effect.
Section 8.6. Certified Copies.
-------------------
Medix shall have received such certified copies or other copies of such
documents as it or its counsel may reasonably request, including, but not
limited to, a certificate signed by the Secretary of the Company, dated as of
the Closing Date and certifying: (a) that attached thereto is a true and
complete copy of the articles of organization of the Company, as in effect on
the date of such certification; (b) that attached thereto is a certificate of
existence from the Secretary of State of the State of Ohio, along with
foreign qualifications, from the applicable jurisdictions, both as of a
recent date; (c) that attached thereto is a true and complete copy of the
operating agreement of the Company as in effect on the date of such
certification; (d) that attached thereto is a true and complete copy of the
resolutions or consents authorizing the execution of the Merger Documents and
the transactions contemplated thereby, and such resolutions constitute all
resolutions relating to such transactions and have not been amended or
modified as of the Closing Date; and (e) to the incumbency and specimen
signature of each officer or Manager of the Company executing any of the
Merger Documents, and any certificate or instrument furnished pursuant
thereto.
Section 8.7. Opinion of Counsel.
---------------------
The Purchaser shall have received an opinion of Katz, Teller, Brant and
Hild, counsel for the Company, dated the Closing Date and addressed to the
Purchaser covering matters as to authorization, enforceability and other
matters customary for the transactions contemplated by this Agreement and
otherwise in form reasonably satisfactory to Medix.
Section 8.8. Consents and Approvals.
-------------------------
The Company shall have made all registrations, filings and
applications, given all notices and obtained all governmental or other third
party consents, transfers, approvals , orders, qualifications and waivers
necessary or desirable for the consummation of the transactions contemplated
by the Merger Documents, including but not limited to all consents,
assignments or notices under any contracts or agreements, Office Leases and
Permits (including all state boards of pharmacology) and the Vendor Services
Agreement between Express Scripts, Inc. and the Company, dated July 21, 2002,
the RxHub POC Provider Pilot Participation Agreement between RxHub and the
Company, dated June 28, 2002 and the Point of Care Alliance Agreement between
Medco Health Solutions, Inc., and the Company dated June 28, 2002, and the
Company shall deliver to Medix copies of all such registrations, filings,
applications, notices, consents, transfers, approvals, orders, qualifications
and waivers in form and substance satisfactory to Medix.
Section 8.9. Absence of Changes.
---------------------
No event, occurrence, fact, condition, change, development or effect
shall exist or have occurred or come to exist or been threatened that,
individually or in the aggregate, has had or resulted in or could be expected
to become or result in a material adverse effect on the business, assets,
operations, results, financial condition or prospects of the Company, and
Medix shall have received a certificate signed by an authorized officer of
the Company to that effect.
Section 8.10. Repayment or Conversion of Indebtedness.
------------------------------------------
Except as set forth on Schedule 8.11 of the Company Disclosure Letter,
-------------
all of the Members of the Company shall have converted any loans made to the
Company into Units of the Company prior to the Effective Time and the Company
shall have repaid in full all indebtedness or other obligations for borrowed
money. Medix shall have received evidence of such conversion or repayment in
form and substance satisfactory to Medix, including delivery to Medix of
payoff letters.
Section 8.11. Release of Security Interests.
--------------------------------
Except with respect to Encumbrances securing the indebtedness set forth
in Schedule 3.2 of the Company Disclosure Letter, all Encumbrances relating
-------------
to the assets, properties, interests in assets or properties and rights of
the Company shall have been terminated and released and Medix shall have
received confirmation of release of any security interests, pledges or other
Encumbrances in form and substance satisfactory to Medix.
Section 8.12. General Release.
------------------
Each of the Members of the Company shall have executed and delivered to
Medix a general release in form and substance satisfactory to Medix releasing
Medix, the Surviving Corporation and their respective affiliates, effective
as of the Closing Date, from all liabilities and obligations of any kind
whatsoever, other than liabilities and obligations under this Agreement or
the other Merger Documents.
Section 8.13. Purchaser Approvals.
----------------------
Medix shall have obtained all necessary filings, approvals, consents
and waivers to effect the transactions contemplated by the Merger Documents,
including but not limited to, any approvals, consents or filing under the
Securities Act, the Exchange Act, the rules and regulations under AMEX and
the approval of the stockholders of Medix relating to the execution, delivery
and performance of this Agreement and the Merger.
Section 8.14. Rights of First Refusal.
--------------------------
All rights of first refusal, or similar rights, held by any Person with
respect to the Company, shall have expired without exercise. Medix shall
have received evidence of such expiration in form and substance satisfactory
to Medix.
Section 8.15. Reorganization; Operating Agreement.
------------------------------------
(a) The Company and Way Over the Line, LLC, a limited liability company,
shall have merged or otherwise combined or consolidated their respective
businesses, operations and assets with the Company as the surviving entity.
Medix shall have received evidence of such merger, combination or consolation
in form and substance satisfactory to Medix.
(b) The Company shall have amended and restated its operating agreement
(the "Operating Agreement") in form and substance satisfactory to Medix and
-------------------
such amended and restated Operating Agreement shall be in full force and
effect as of the Effective Time.
Section 8.16. Appointment of Representative.
-----------------------------
Each of the Members shall have appointed Stephen S. Burns as the
representative of the Members (the "Representative"), to act as
--------------
attorney-in-fact and representative for all purposes under the Merger
Documents and the transactions contemplated thereby, with the right in such
capacity to do any and all things and to execute any and all documents in
such Member's place and stead in connection with the Merger Documents and the
transactions contemplated thereby. Medix shall have received evidence of
such appointment in form and substance satisfactory to Medix.
Section 8.17. Investment Letters; Affiliate Letters
-------------------------------------
(a) Each of the Members shall have executed and delivered an investment
letter (the "Investment Letter") in form and substance satisfactory to Medix.
-----------------
(b) Each "affiliate" of the Company as such term is defined under Section
145 of the Securities Act shall and executed and delivered to Medix an
affiliate agreement (the "Affiliate Agreements") in form and substance
--------------------
satisfactory to Medix.
Section 8.18. Kowitz Non-Competition Agreement.
--------------------------------
The Company and Kowitz shall have executed and delivered a
non-competition agreement (the "Non-Competition Agreement") in form and
-------------------------
substance satisfactory to Medix.
Section 8.19. Dissenters' Rights.
------------------
Members holding not less than ninety-five percent (95%) of the
outstanding Units of the Company shall have voted in favor of the Merger and
waived any and all dissenters' rights or rights to demand fair cash value
under the Ohio Statute.
Section 8.20. Voting Agreement.
----------------
Each of Medix, Burns, Kowitz and such other Members as Medix may
determine in its sole discretion shall have executed and delivered a voting
agreement (the "Voting Agreement") and such Voting Agreement shall be in form
----------------
and substance satisfactory to Medix.
Section 8.21. Fairness Opinion.
-----------------
Medix shall have received, at its own cost and expense, an opinion
dated as of the Closing Date from a firm selected by Medix in its sole
discretion to the effect that, as of such date, the Merger is fair to Medix's
stockholders from a financial point of view and such opinion shall not have
been withdrawn.
Section 8.22. Non-Compete Agreements.
-----------------------
The Company and each of Mike Bell, James Shrider, Richard East, Dan
Gibbons, and Martin Rucidlo shall have executed and delivered non-compete and
confidentiality agreements in form and substance satisfactory to Medix, and
each such agreement shall be in full force and effect and an enforceable
obligation against each such person as of the Closing Date.
Section 8.23. Audited Financial Statements.
-----------------------------
Medix shall have obtained, at its own cost and expense, audited
Financial Statements of the Company prior to the Closing Date.
Section 8.24. Acceptance by Counsel.
------------------------
The sufficiency of all agreements, documents and certificates delivered
hereunder and related proceedings shall be reasonably accepted to Moses &
Singer LLP, counsel to Medix and the Merger Sub.
ARTICLE IX.
Conditions to the Closing of the Company and Burns
--------------------------------------------------
The obligation of the Company and Burns to perform this Agreement is
subject to the following conditions precedent:
Section 9.1. Representations and Warranties.
---------------------------------
On the Closing Date, (i) the representations and warranties of Medix
and the Merger Sub contained in this Agreement or the Medix Disclosure Letter
delivered pursuant hereto shall be true and correct with the same effect as
though made on and as of the Closing Date and (ii) the documents and
information required to be delivered to the Company by Medix or the Merger
Sub under the Merger Documents are true and correct as of the Closing Date
with the same effect as though made on and as of the Closing Date and there
have been no amendments, modifications or changes to such documents or
information that have not been disclosed to the Company, and the Company
shall have received a certificate signed by an authorized officer of Medix
and a certificate from an authorized officer of the Merger Sub, as to the
Merger Sub, to that effect.
Section 9.2. Performance of Obligations.
-----------------------------
Each of Medix and the Merger Sub shall have performed all the
covenants, agreements and obligations contained in this Agreement to be
performed or complied with by Medix or the Merger Sub on or prior to the
Closing Date, and the Company shall have received a certificate signed by an
authorized officer of Medix as to Medix, to that effect, and a certificate
from an authorized officer of the Merger Sub, as to the Merger Sub, to that
effect.
Section 9.3. Certified Copies.
-------------------
The Company shall have received such certified copies or other copies
of such documents as it or its counsel may reasonably request, including, but
not limited to, a certificate signed by the Secretary of each of Medix and
the Merger Sub, dated as of the Closing Date and certifying: (a) that
attached thereto is a true and complete copy of the certificate of
incorporation of Medix or the Merger Sub, as the case may be, as in effect on
the date of such certification; (b) that attached thereto is a long-form good
standing certificate from the Secretary of State of Colorado and Delaware, as
applicable; (c) that attached thereto is a true and complete copy of the
by-laws of Medix or the Merger Sub, as the case may be, as in effect on the
date of such certification; (d) that attached thereto is a true and complete
copy of the resolutions authorizing the execution of the Merger Documents and
the transactions contemplated thereby by each of the Board of Directors of
Medix and the Merger Sub and such resolutions constitute all resolutions
relating to such transactions and have not been amended or modified as of the
Closing Date; and (e) to the incumbency and specimen signature of each
officer of Medix or the Merger Sub executing any of the Merger Documents, and
any certificate or instrument furnished pursuant hereto.
Section 9.4. Financing
---------
Medix shall have raised not less than $1 million in additional
financing since October 25, 2002.
Section 9.5. Consents and Approvals.
-----------------------
Each of Medix and the Merger Sub shall have made all applicable
registrations, filings and applications, given all notices and obtained all
governmental, administrative, regulatory or other third party consents,
transfers, approvals, orders, qualifications and waivers necessary or
desirable for the consummation of the transactions contemplated by the Merger
Documents and shall deliver to the Company copies of all such registrations,
filings, applications, notices, consents, transfers, approvals, order
qualifications and waivers in form and substance satisfactory to the Company
and Burns thereto.
Section 9.6. Opinion of Counsel.
---------------------
The Purchaser shall have received an opinion of Moses & Singer LLP,
counsel for Medix and the Merger Sub, dated the Closing Date and addressed to
the Company and the Representative covering matters as to authorization,
enforceability and other matters customary for the transactions contemplated
by this Agreement and otherwise in form reasonably satisfactory to the
Company.
Section 9.7. Absence of Changes.
---------------------
No event, occurrence, fact, condition, change, development or effect
shall exist or have occurred or come to exist or been threatened that,
individually or in the aggregate, has had or resulted in or could be expected
to become or result in a material adverse effect on the business, assets,
operations, results, financial condition or prospects of Medix, and the
Company shall have received a certificate signed by an authorized officer of
Medix to that effect.
Section 9.8. Acceptance by Counsel.
------------------------
The sufficiency of all agreements, documents and certificates delivered
hereunder and related proceedings shall be reasonably acceptable to Katz,
Teller, Brant & Hild, counsel to the Company.
ARTICLE X.
Covenants and Agreements
------------------------
Section 10.1. Filings and Consents.
-----------------------
Each of the Company, Burns, Medix and the Merger Sub shall cooperate
and use their respective best efforts to make all registrations, filings and
applications, to give all notices and to obtain all governmental,
administrative, regulatory or other third party consents, transfers,
approvals, orders, qualifications and waivers necessary or desirable for the
consummation of the transactions contemplated by the Merger Documents and the
applicable party shall deliver to the other party copies of all such
registrations, filings, applications, notices, consents, and waivers.
Section 10.2. Access to Records and Properties of the Company.
------------------------------------------------
From and after the date hereof until the Closing, the Company shall
afford, and Burns shall cause the Company to afford, (a) to Medix and its
authorized representatives, including, but not limited to, its counsel and
accountants, free and full access at all reasonable times to the personnel,
assets, business, properties, books, records (including Tax Returns filed and
in preparation) of the Company in order that Medix may have full opportunity
to make such due diligence investigation as it may desire to make of the
affairs of the Company; and (b) to the accountants of Medix, free and full
access at all reasonable times to the books, data and records of Seeskin,
Paas, Blackburn & Co., the Company's independent certified public
accountants. The investigation contemplated by this Section shall not affect
or otherwise diminish or obviate in any respect any of the representations
and warranties of the Company and Burns contained in this Agreement or the
indemnification obligations pursuant to Article XII.
Section 10.3. Conduct of Business.
----------------------
From the date of this Agreement to the Closing Date, and except as
otherwise contemplated by this Agreement, the Company and Burns covenant and
agree to operate the Company's business, operation and affairs only in the
Ordinary Course of Business and consistent with past practice and use their
best efforts to preserve and maintain the Company's business, assets,
properties, rights, relationships with suppliers, customers, clients,
employees, agents and others having business dealings with the Company.
Without limiting the generality of the foregoing, except as otherwise
contemplated by this Agreement, during the period from the date of this
Agreement to the Closing Date, without the prior written consent of Medix,
the Company will not, and Burns will cause the Company not to:
(a) create, incur or assume any debt, liability or obligation, direct or
indirect, whether accrued, absolute, contingent or otherwise, relating to the
Company, other than in the Ordinary Course of Business and consistent with
past practice, but in no event greater than $5,000;
(b) cause the Company, to assume, guarantee, endorse or otherwise become
responsible (whether directly, indirectly, contingently or otherwise) for the
obligations of, or make any loans or advances to, any other Person, other
than in the Ordinary Course of Business and consistent with past practice,
but in no event greater than $5,000;
(c) waive or release any rights of value relating to the Company, or cause
the Company to cancel, compromise, release or assign any indebtedness owed to
them or any claims held by them, other than in the Ordinary Course of
Business and consistent with past practice, but in no event greater than
$5,000;
(d) transfer, sell, assign or otherwise convey any of the assets,
properties, interests in assets or properties or rights of the Company, other
than in the Ordinary Course of Business and consistent with past practice,
but in no event greater than $5,000;
(e) mortgage, pledge, subject to any lien, claim or charge or otherwise
Encumber any of the assets, properties, interests in assets or properties or
rights of the Company or in any way create or consent to the creation of any
title condition affecting such assets, properties, interests or rights other
than in the Ordinary Course of Business and consistent with past practice,
but in no event greater than $5,000;
(f) with respect to the managers, directors, officers or employees of the
Company:
(i) increase the rate or terms of compensation payable or to become payable
to any of them;
(ii) pay or agree to pay any pension, retirement allowance or other employee
benefit not required or permitted by any existing plan, agreement or
arrangement to any of them;
(iii) commit to any additional pension, profit sharing, bonus, incentive,
deferred compensation, stock purchase, stock option, stock appreciation
right, group insurance, severance pay, retirement or other employee benefit
plan, agreement or arrangement, or increase the rate or terms of any such
plan, agreement or arrangement which now exists, to the extent applicable to
any of them; or
(iv) enter into any employment or severance agreement with or for the
benefit of them;
(g) enter into or terminate any lease or make any change in any lease,
other than in the Ordinary Course of Business and consistent with past
practice, but in no event greater than $5,000;
(h) make or become obligated to make any capital expenditures relating to
the Company or enter into any commitments therefore, other than in the
Ordinary Course of Business and consistent with past practice, but in no
event greater than $5,000;
(i) make any alteration in the manner of keeping the books, accounts or
records of the Company, or in the accounting practices therein reflected,
except as required by applicable Law or GAAP;
(j) the Company shall not (i) change or amend its articles of organization
or operating agreement; (ii) issue any Units or other equity interests in the
Company, or issue or sell any securities convertible into or exchangeable for
or carrying the right to, or options with respect to, or warrants to purchase
or rights to subscribe to, any Units or other equity interests in the Company
or enter into any agreement obligating the Company to undertake any of the
foregoing; or (iii) pay any dividends or distributions with respect to any
membership or other equity interests in the Company;
(k) take any action that would cause any representation or warranty herein
to be untrue; or
(l) commit or agree to take any of the foregoing actions.
Section 10.4. Efforts to Consummate.
------------------------
Subject to the terms and conditions provided herein, the parties hereto
shall use their respective reasonable best efforts to take or cause to be
taken all action and do or cause to be done all things reasonably necessary,
proper or advisable to consummate and make effective, as soon as reasonably
practicable, the transactions contemplated by the Merger Documents,
including, but not limited to, the obtaining of all consents, authorizations,
orders and approvals of any Person, required in connection with the
consummation of the transactions contemplated by the Merger Documents.
Section 10.5. Negotiation With Others.
------------------------
(a) Negotiation. From and after the date hereof, until the earlier of the
-----------
Closing Date or the termination of this Agreement pursuant to Article XI, the
Company, Burns and Kowitz will not, and Burns will cause the Company not to,
directly or indirectly (through representatives, agents or otherwise): (i)
solicit, initiate discussions or engage in negotiations with any Person
(whether such negotiations are initiated by the Company, Burns, Kowitz or
otherwise), concerning the possible acquisition, recapitalization or
reorganization (whether by way of merger, reorganization, purchase of equity
interests, purchase of indebtedness, purchase of assets or otherwise) of the
Company (collectively, a "Transaction"); (ii) provide information with
-----------
respect to the Company to any Person, relating to a Transaction with the
Company; or (iii) enter into any agreement or understanding with any Person,
concerning a Transaction with the Company. If the Company, Burns or Kowitz
receives any unsolicited offer or proposal to enter into negotiations
relating to a Transaction or for any information concerning the Company, or
any of the assets, properties or rights of the Company, the Company, Burns or
Kowitz, as the case may be, shall promptly notify Medix of such offer or
proposal, the identity of the Person making such offer or proposal and the
terms of such offer or proposal (including without limitation, the purchase
price and financing therefore).
(b) Disposition of Securities; Solicitation; Voting. From and after the
-----------------------------------------------
date hereof, each of Burns and Kowitz shall, (i) refrain from transferring,
selling or assigning to any Person or agreeing in any manner to transfer,
sell or assign to any Person or pledge, Encumber, deposit in a voting trust
or grant a proxy with respect to any Units or other securities of the Company
presently or hereafter owned or controlled by Burns or Kowitz; (ii) refrain
from soliciting or entering into any agreement or arrangement with any Person
with respect to any transfer, sale or assignment of any Units or other
securities of the Company; and (iii) vote any Units, including the Units
currently, or hereafter owned or controlled by Burns or Kowitz in favor of
the Merger and the transactions contemplated by the Merger Documents at every
meeting of the Members of the Company called therefore and at every
adjournment thereof (or in connection with any written action in lieu of any
such meeting) and against any other merger, consolidation, sale of assets,
reorganization, recapitalization, liquidation or winding-up of the Company at
every meeting of members of the Company called therefore and at every
adjournment thereof (or in connection with any written action in lieu of any
such meeting). At the request of Medix, Burns and Kowitz shall execute and
deliver such agreements or instruments necessary or desirable to further
effect this Section 10.5(b), including but not limited to irrevocable voting
proxies or a voting agreements.
(c) Breach of Sections 10.5(a) or 10.5(b). The parties hereto recognize
-------------------------------------
and acknowledge that a breach by the Company, Burns or Kowitz, as the case
may be, of Section 10.5(a) or 10.5(b) hereof, respectively, will cause
irreparable and material loss and damage for Medix, the amount of which is
not readily determinable, and that, in addition to any remedy Medix may have
in damages by an action at law, it shall be entitled to the issuance of an
injunction restraining any such breach or any other remedy at law or in
equity for any such breach.
Section 10.6. Supplements to the Company Disclosure Letter.
-----------------------------------------------
From time to time prior to the Closing, the Company and Burns will
promptly supplement or amend the Company Disclosure Letter with respect to
any matter hereafter arising, which, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in the
Company Disclosure Letter. No supplement or amendment of the Company
Disclosure Letter made pursuant to this Section 10.6 shall be deemed to
constitute a cure of any breach of any representation of or warranty made by
the Company and Burns pursuant to this Agreement or constitute a waiver of
any such breach or consent to any such breach by Medix or the Merger Sub.
Section 10.7. Notice of Developments.
-------------------------
The Company and Burns shall give prompt written notice to Medix:
(a) any development adversely affecting the business, assets, properties,
rights, liabilities, financial condition, operations, results of operations,
affairs or future prospects of the Company; and
(b) any development affecting the ability of the Company, Burns, or any
other Member to consummate the transactions contemplated by the Merger
Documents;
provided, however, no disclosure by the Company and Burns pursuant to this
-------- -------
Section 10.7 shall be deemed to supplement or amend the Company Disclosure
Letter hereto or to constitute a cure of any representation of or warranty
made by the Company or Burns pursuant to this Agreement or constitute a
waiver of any such breach or consent to any such breach by Medix.
Section 10.8. Fees and Expenses.
--------------------
Medix and the Members shall bear their own respective fees and expenses
incurred in connection with the preparation for and consummation of the
transactions contemplated by the Merger Documents. Medix shall pay up to a
maximum of One Hundred Thousand Dollars ($100,000) of the Company's fees and
expenses incurred in connection with the preparation for and consummation of
the transactions contemplated by the Merger Documents.
Section 10.9. Required Payments.
--------------------
The Company shall have paid its respective accrued aggregate annual
amounts required under ERISA, the Code and/or by contract to be contributed
to any Assumed Benefit Plans (including any premiums), along with any
interest, penalties or late charges, fully with respect to 2001 and 2002
fiscal years and provision for such amounts are reflected on the Balance
Sheet.
Section 10.10. Non-Compete.
------------
(a) Burns agrees that, during the Non-Compete Period (as defined below), he
shall not engage in any activities or provide any services or products either
on his own behalf or for the benefit or on behalf of any other business
organization or Person (whether as principal, partner, member, officer,
director, stockholder, agent, joint venturer consultant creditor, lender,
guarantor, surety, investor or otherwise) which are in direct or indirect
competition with or similar to the business, products and services of Medix,
the Surviving Corporation or any of their respective direct or indirect,
subsidiaries, divisions, partnerships, limited liability companies, joint
ventures and affiliates, (collectively, the "Group") in the United States or
-----
Canada. Each of Burns and Medix, expressly declares that the territorial and
time limitations contained in this Section are reasonable and are properly
and necessarily required for the adequate protection of the business,
operations, intellectual property and goodwill of Medix and the Surviving
Corporation and are given as an integral part of the Merger, but for which
Medix and the Merger Sub would not have entered into this Agreement. If such
territorial or time limitations, or any portions thereof, are deemed to be
unreasonable by a court of competent jurisdiction, whether due to passage of
time, change of circumstances or otherwise, each of Burns, Medix and the
Surviving Corporation agrees to a reduction of said territorial and/or time
limitations to such areas and/or periods of time as said court shall deem
reasonable. As used herein, the term "Non-Compete Period" means a five (5)
------------------
year period commencing on the Closing Date.
(b) Burns agrees that, during the Non-Compete Period, he will not directly
or indirectly, in one or a series of transactions (i) service, supervise the
service of, recruit, solicit or otherwise induce, persuade or influence any
stockholder, lender, director, officer, employee, sales agent, joint
venturer, investor, lessor, supplier, customer, client, agent, representative
or any other Person which has a business relationship with Medix, Surviving
Corporation or any other member of the Group to discontinue, reduce, or
modify such employment, agency or business relationship with Medix, the
Surviving Corporation or the Group, or (ii) seek to employ, retain or engage
or employ, retain, engage or employ or cause any business organization in
direct or indirect competition with or similar to Medix, the Surviving
Corporation or the Group to seek to employ, retain or engage or employ,
retain, engage or employ any person or agent who is then retained, engaged or
employed by Medix, the Surviving Corporation or any other member of the Group.
(c) The non-competition and non-solicitation provisions contained herein
are in addition to, and not in limitation of, any rights that Medix or the
Surviving Corporation may have by other contract, law or otherwise.
(d) Burns acknowledges that the remedy at law for any breach of this
Section 10.10 may be inadequate. Accordingly, Burns agrees that, upon any
such breach of this Section 10.10, Medix, the Surviving Corporation or any
other member of the Group shall, in addition to all other available remedies
(including, without limitation, seeking an injunction or other equitable
relief), be entitled to injunctive relief without having to prove the
inadequacy of the remedies available at law and without being required to
post bond or other security.
(e) The failure of Medix, the Surviving Corporation or any other member of
the Group at any time to require performance by Burns of any provision
hereunder shall in no way affect the right of Medix, the Surviving
Corporation or any member of the Group thereafter to enforce the same, and
the waiver by Medix, the Surviving Corporation or any member of the Group of
a breach of any provision of this Section 10.10 shall not operate as or be
construed a waiver of any subsequent breach thereof.
(f) Burns acknowledges and agrees that the covenants and restrictions
contained in this Section 10.10 are separate and distinct from any other
contractual obligations the Executive may have with respect to the subject
matter of Section 10.10 and are in connection with the sale by Burns of his
controlling interest in the Company.
(g) Each of Medix, the Surviving Corporation and any other member of the
Group acknowledges and agrees that the remedies for any breach by Burns of
the provisions of this Section 10.10 shall be exclusively against Burns and
shall not constitute a claim against the Company or the Members or constitute
an indemnification claim pursuant to Article 12 of this Agreement.
Section 10.11. Further Assurances.
---------------------
At any time or from time to time after the Closing, Burns (in his
individual capacity and as Representative on behalf of the Members) and the
Company shall, at the request of Medix and without additional consideration,
execute and deliver any further instruments or documents and take any such
further action as Medix may reasonably request in order to consummate the
transactions contemplated in the Merger Documents.
ARTICLE XI.
Termination
-----------
This Agreement may be terminated at any time prior to the Closing, as
follows:
(a) by the mutual written consent of Medix on the one hand, and the Company
and Burns on the other;
(b) on or after the Termination Date (as hereinafter defined) by either the
Company and Burns or Medix, as the case may be, if the conditions set forth
in Articles VII, VIII and IX hereof shall not have been met by the applicable
party;
(c) by Medix, if Medix shall have determined, in its sole discretion, that
the transactions contemplated by the Merger Documents have become inadvisable
or impracticable by reason of the institution of any litigation, proceeding
or investigation to restrain or prohibit the consummation of such
transactions or which questions the validity or legality of the transactions
contemplated by the Merger Documents; or
(d) by Medix, if any Law shall have been enacted which, in its sole
discretion, impairs the conduct or operation of the Company as presently
conducted and as contemplated to be conducted; or
(e) by the Company and Burns or Medix, if the closing price of the Common
Stock on the AMEX is less than $0.50 per share for five (5) consecutive
trading days].
provided, however, that if such termination shall result from the breach of
-------- -------
any representation, warranty, covenant or agreement by any party to this
Agreement, such party shall be fully liable for any and all damages, costs
and expenses (including, but not limited to, reasonable counsel fees)
sustained or incurred by any other party as a result of such breach. As used
herein, the term "Termination Date" shall mean April 1, 2003. Any
----------------
termination pursuant to this Article XII (other than a termination pursuant
to paragraph (a) hereof) shall be effected by written notice from the party
or parties so terminating to the other parties hereto.
ARTICLE XII.
Indemnification
---------------
Section 12.1. Definitions.
------------
As used in this Article XII, the following terms shall have the
following meanings:
(a) "Claim" means a claim, demand, action, suit, proceeding or cause of
-----
action, in each case (i) whether made, occurring or threatened before or
after the Closing Date; (ii) whether or not disclosed or known prior to the
Closing Date; and (iii) whether made by any governmental or
quasi-governmental authority or private Person.
(b) "Losses" shall mean any and all losses, damages, deficiencies, costs,
------
liabilities, expenses (including but not limited to, interest, penalties and
reasonable attorneys', accountants' and other professional fees and
disbursements), payments to avoid penalties (whether in settlement or
otherwise) and assessments, sustained, suffered or incurred by any
Indemnified Person, directly or indirectly whether or not involving any Third
Party Claim (as defined below).
Section 12.2. Indemnification.
-----------------
(a) Burns (in his individual capacity and as Representative on behalf of
the Members pursuant to Section 8.16) shall, and, if this Agreement shall
have been terminated prior to Closing, Burns (in his individual capacity and
as Representative on behalf of the Members pursuant to Section 8.16) and the
Company shall jointly and severally, indemnify, defend and hold harmless
Medix and, if the Closing shall have occurred, the Surviving Corporation and
each of their respective affiliates, shareholders, officers, directors,
employees, and agents, from and against any and all Losses assessed, incurred
or sustained by or against any of them relating to, in connection with or
arising out of (i) any misrepresentation, inaccuracy or breach of any
representation or warranty made by the Company or Burns contained in any
Merger Document, the Company Disclosure Letter or any schedule, certificate
or other writing delivered in connection any of the foregoing; (ii) any
breach or failure of observance or performance of any covenant, agreement or
commitment made by the Company or Burns (in his individual capacity and as
Representative on behalf of the Members pursuant to Section 8.16) in any
Merger Document; (iii) any Taxes relating to periods ending on or before the
Closing Date and any Taxes relating to the Merger Consideration or the
exchange of Units; (iv) any amounts paid to dissenting Members that demand
fair cash value for their Units under the Ohio Statute (to the extent not
otherwise provided for pursuant to Section 3.2 above) or (v) any Claims or
obligations of any kind or nature relating to the Company, the business,
operations or affairs of the Company or any of the assets, properties,
interests in assets or properties or rights of the Company which were
existing at or as of the Closing Date or arising in whole or in part out of
any acts, transactions, conditions, circumstances or facts which occurred or
existed on or prior to the Closing Date, whether or not then known or
knowable.
(b) Medix shall indemnify, defend and hold harmless the Members and Burns,
and if this Agreement shall have been terminated prior to Closing, the
Company and Burns, from and against any and all Losses assessed, incurred or
sustained by or against any of them with respect to or arising out of (i) any
misrepresentation, inaccuracy or breach of any representation or warranty
made by Medix or the Merger Sub contained in any Merger Document, Medix
Disclosure Letter or any schedule, certificate or other writing delivered in
connection any of the foregoing, or (ii) any breach or failure of observance
or performance of any covenant, agreement or commitment made by Medix or the
Merger Sub hereunder.
Section 12.3. Assertion of Claims.
--------------------
No Claim shall be brought against a party (the "Indemnifying Person")
-------------------
under Sections 12.2(a) or 12.2(b) and a party (the "Indemnified Person")
------------------
shall not be entitled to receive any payment with respect thereto, unless the
Indemnified Persons, or any of them, shall have given the Indemnifying
Persons written notice of the existence of any such Claim in accordance with
this 12.3; provided, however, that no delay or failure to give such notice on
-------- -------
the part of the Indemnified Person shall relieve the Indemnifying Persons
from any obligation hereunder unless (and then solely to the extent) the
Indemnifying Person is materially prejudiced thereby. Upon the giving of
such written notice as aforesaid, the Indemnified Persons, or any of them,
shall have the right to commence legal proceedings for the enforcement of
their rights under Sections 12.2(a) or 12.2(b) hereof.
Section 12.4. Notice and Defense of Third Party Claims.
-----------------------------------------
The obligations and liabilities of the Indemnifying Persons with
respect to Claims resulting from the assertion of liability by third parties
(each, a "Third Party Claim") shall be subject to the following terms and
-----------------
conditions:
(a) The Indemnified Persons shall give written notice to the Indemnifying
Persons within fifteen (15) days from the receipt of any Third Party Claim
which might give rise to a Claim by the Indemnified Persons against the
Indemnifying Persons based on the indemnity agreement contained in
Sections 12.2(a) or 12.2(b) hereof, stating the nature and basis of said
Third Party Claim, and the amount of such Claim to the extent known;
provided, however, that no delay or failure to give such notice on the part
-------
of the Indemnified Person shall relieve the Indemnifying Persons from any
obligation hereunder unless (and then solely to the extent) the Indemnifying
Persons is materially prejudiced thereby. Such notice shall be accompanied by
copies of all relevant documentation with respect to such Third Party Claim,
including, but not limited to, any summons, complaint or other pleading,
which may have been served, or written demand, or other document or other
instrument.
(b) Medix and, after the Effective Time, the Surviving Corporation shall
have the sole right and obligation, at their sole expense, to defend against,
negotiate, settle or otherwise deal with any Third Party Claim with respect
to which they are the Indemnified Persons or Indemnifying Persons and to be
represented by counsel of their own choice, and Medix and the Surviving
Corporation will not admit any liability or settle, compromise, pay or
discharge the same without the consent of Burns, which consent shall not be
unreasonably withheld; provided, however, that Burns may participate in any
-------- -------
proceeding with counsel of his choice and at his expense. In the event Medix
and the Surviving Corporation fail to defend against, negotiate, settle or
otherwise deal with such Third Party Claim as provided above in this
Section 12.4, then Burns shall have the right to defend against, negotiate,
settle or otherwise deal with the Third Party Claim in such manner as it
deems appropriate.
Section 12.5. Right of Set-Off.
-----------------
It is expressly acknowledged and agreed that Medix and the Surviving
Corporation may, but shall not be required to, satisfy all or any portion of
any Loss it may have hereunder against the Members by set-off against or
deduction from any Merger Consideration deposited in the Escrow Account
pursuant to and in accordance with the procedures set forth in the Escrow
Agreement.
Section 12.6. Remedies Cumulative.
--------------------
The remedies provided for in this Article XII shall be cumulative and
shall not preclude assertion by any party hereunder of any other rights or
the seeking of any other remedies at law or in equity against any other party.
Section 12.7. Survival of Representations; Limitation on Liability.
-----------------------------------------------------
Notwithstanding anything to the contrary in this Agreement, the
respective obligations and liabilities of the Company and Burns (in his
individual capacity and as Representative on behalf of the Members pursuant
to Section 8.16), on the one hand, and Medix and the Surviving Corporation,
on the other hand, under this Article XII shall be subject to the following
limitations:
(a) The representations and warranties of the Company and Burns (in his
individual capacity and as Representative on behalf of the Members pursuant
to Section 8.16) contained in this Agreement shall survive the Closing until
the second anniversary of the Closing Date (the "Indemnification Expiration
---------------------------
Date") for purposes of this Article XII; provided that Claims relating to
---- --------
(i) Sections 5.1, 5.2, 5.3 and 5.4 shall survive indefinitely and (ii) all
agreements and covenants contained herein shall survive indefinitely until,
by their terms, they are no longer operative.
(b) Neither Medix nor the Surviving Corporation may assert any Claim for
and in no event shall the Company and Burns (in his individual capacity and
as Representative on behalf of the Members pursuant to Section 8.16), have
any liability for, indemnification hereunder, unless the aggregate amount of
the Losses for all such Claims for indemnification asserted against Company
and Burns (in his individual capacity and as Representative on behalf of the
Members pursuant to Section 8.16), exceeds One Hundred Thousand Dollars
($100,000), in which event, the Members shall be liable for all such amounts
in excess of Fifty Thousand Dollars ($50,000).
(c) The aggregate liability of the Members in respect of Section 12.2 shall
not exceed three (3) million shares of Common Stock, but in no event more
than the number of shares of Common Stock held in the Escrow Account.
ARTICLE XIII.
Miscellaneous
-------------
Section 13.1. Parties in Interest.
----------------------
This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the parties hereto and their respective successors and
assigns. Anything contained in the preceding sentence to the contrary
notwithstanding, neither this Agreement nor any of the rights, interests or
obligations, hereunder shall be assigned by the Company or Burns without the
prior written consent of Medix.
Section 13.2. Entire Agreement; Amendments.
-------------------------------
This Agreement and the other writings and agreements referred to herein
or delivered pursuant hereto contain the entire understanding of the parties
with respect to its subject matter, including but not limited to, the Letter
Agreement dated as of October 25, 2002 (the "Letter Agreement"), between the
Company and Medix. This Agreement and such other writings and agreements
referred to herein supersede all prior agreements and understandings between
the parties with respect to their subject matter, including but not limited
to the Letter Agreement. This Agreement may be amended only by a written
instrument duly executed by the parties hereto, and any condition to a
party's obligations hereunder may only be waived in writing by such party.
Section 13.3. Public Disclosure.
--------------------
Each of the parties to this Agreement hereby agrees with the other
parties hereto that, except as may be required to comply with applicable Law,
no press release or similar public announcement or communication will be made
or caused to be made concerning the proposed or intended execution, or the
execution or performance of this Agreement unless specifically approved in
advance and in writing by the Company and Medix. The Company and Medix agree
that any public announcement required by applicable Law shall only be made
after reasonable notice to Medix (in the case of notice by the Company) or to
the Company (in the case of notice by Medix).
Section 13.4. Gender.
---------
Any reference to the masculine gender shall be deemed to include the
feminine and neuter genders unless the context otherwise requires.
Section 13.5. Waivers.
----------
Any party to this Agreement may, by written notice to the other parties
hereto, waive any provision of this Agreement. The waiver by any party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach.
Section 13.6. Notices.
----------
All notices, claims, certificates, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered or if sent by nationally-recognized
overnight courier, by telecopy, or by registered or certified mail, return
receipt requested and postage prepaid, addressed as follows:
if to the Company or Burns:
PocketScript, LLC
4770 Duke Drive, Suite 201
Mason, Ohio 45040
Tel: (513) 701-6001
Fax: (513 701-6076
Attention: Stephen S. Burns
with a copy to:
Katz, Teller, Brant & Hild
2400 Chemed Center
255 East Fifth Street
Cincinnati, Ohio 45202-4724
Tel: (513) 721-4532
Fax: (513) 721-7120
Attention: Robert Brant
if to Medix:
Medix Resources, Inc.
420 Madison Avenue
Suite 1830
New York, New York 10170
Tel: (212) 697-2509
Fax: (212) 681-9817
Attention: Darryl R. Cohen
with a copy to:
Moses & Singer LLP
1301 Avenue of the Americas, 40th Floor
New York, New York 10019
Tel: (212) 554-7800
Fax: (212) 554-7700
Attention: Dean R. Swagert, Jr., Esq.;
or to such other address as the party to whom notice is to be given may have
furnished to the other parties in writing in accordance herewith. Any such
notice or communication shall be deemed to have been received (a) in the case
of personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the
date when sent, (c) in the case of international overnight courier, upon
receipt of confirmation of delivery, (d) in the case of telecopy
transmission, when received, and (e) in the case of mailing, on the third
business day following posting.
Section 13.7. Counterparts.
---------------
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement. Delivery of an
executed counterpart by facsimile shall be equally as effective as delivery
of a manually executed counterpart.
Section 13.8. Headings.
-----------
The section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 13.9. Construction.
---------------
The parties have participated jointly in the negotiation and drafting
of this Agreement. The language used in this Agreement shall be deemed the
language chosen by the parties hereto to express their mutual intent, and no
rule of strict construction shall be applied against any party. In the event
of any ambiguity or question of intent or interpretation, this Agreement
shall be construed as if drafted jointly by the parties and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of
authorship of any provision of this Agreement. Any reference to any Federal,
state, local, or foreign statute or Law shall be deemed also to refer to all
rules and regulations promulgated thereunder, unless the context requires
otherwise. The word "including" shall mean including without limitation.
The parties intend that each representation, warranty and covenant contained
herein shall have independent significance. If any party has breached any
representation, warranty, or covenant contained herein in any respect, the
fact that there exists another representation, warranty, or covenant relating
to the same subject matter (regardless of the relative levels of specificity)
which the party has not breached shall not detract from or mitigate the fact
that such party is in breach of the first representation, warranty, or
covenant.
Section 13.10. Incorporation of Appendices, Exhibits and Schedules.
----------------------------------------------------
The exhibits, appendices and schedules identified or referred to in
this Agreement are incorporated herein by reference and made a part hereof.
Section 13.11. Severability.
-------------
Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any
other situation or in any other jurisdiction.
Section 13.12. Governing Law.
----------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to agreements made and to be
performed within such state without giving effect to the principles of
conflict of laws.
Section 13.13. Arbitration.
--------------
All disputes between the Company (prior to the Effective Time) and
Burns on the one hand and Medix (and after the Effective Time, the Surviving
Corporation) on the other hereunder shall be settled by arbitration before a
panel consisting of three (3) arbitrators pursuant to the commercial
arbitration rules of the American Arbitration Association, in New York, New
York; provided, however, that any award pursuant to such arbitration shall be
-------- -------
accompanied by a written opinion of the arbitrators giving the reasons for
the award. One (1) arbitrator shall be selected by each of Burns, on the one
hand, and Medix, on the other, and the third arbitrator shall be selected by
the other two (2) arbitrators. Any other rules regarding the selection
process shall be made pursuant to the rules of such Association. The award
rendered by the arbitrators shall be conclusive and binding upon the parties
hereto, and judgment upon the award may be entered in any court having
jurisdiction thereof or application may be made to such court for a judicial
acceptance of the award and an order of enforcement. Each party shall pay
its own expenses of arbitration and the expenses of the arbitrators
(including his/her compensation) shall be equally shared; except that if any
matter of dispute raised by a party or any defense or objection thereto was
unreasonable, the arbitrator may assess, as part of his/her award, all or any
part of the arbitration expenses (including reasonable attorneys' fees and
expenses) of the other party and of the arbitrator against the party raising
such unreasonable matter of dispute or defense or objection thereto. Nothing
herein set forth shall prevent Burns on the one hand and Medix on the other
from settling any dispute by mutual agreement at any time.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Merger Agreement on the date first above written.
PS PURCHASE CORP.,
a Delaware corporation
By: S/ Darryl Cohen
--------------------------------------
Name: Darryl Cohen
Title: CEO Medix Resources
MEDIX RESOURCES, INC.,
a Colorado corporation
By: S/ Darryl Cohen
--------------------------------------
Name: Darryl Cohen
Title: CEO Medix Resources
POCKETSCRIPT, LLC,
an Ohio limited liability company
By: S / Stephen S. Burns
------------------------------------
Name: Stephen S. Burns
Title: CEO
Individually and as Representative on
behalf of the Members pursuant to Section
8.16
S / Stephen S. Burns
------------------------------------------
Name: Stephen S. Burns
AGREED AND ACCEPTED:
for purposes of Section 10.5 only
S / Mick Kowitz
----------------------------------------------------------------------------
Name: Mick Kowitz
Table of Contents
Page
ARTICLE I. General.......................................................1
Section 1.1. The Merger..............................................1
Section 1.2. Effective Time; Closing.................................2
Section 1.3. Articles of Organization................................2
Section 1.4. Operating Agreement.....................................2
Section 1.5. Directors, Managers and Officers........................2
Section 1.6. Taking of Necessary Action; Further Assurances..........3
ARTICLE II. Effect of Merger on Capital Stock.............................3
Section 2.1. Merger Consideration....................................3
Section 2.2. Conversion..............................................3
Section 2.3. Exchange of Certificates................................4
Section 2.4. Dividends and Distributions.............................5
Section 2.5. No Liability............................................5
Section 2.6. Withholding Rights......................................6
Section 2.7. Closing of Company Unit Journal.........................6
ARTICLE III. Adjustments to Merger Consideration...........................6
Section 3.1. Closing Balance Sheet...................................6
Section 3.2. Adjustment..............................................6
Section 3.3. Acceptance of Closing Balance Sheet.....................7
Section 3.4. Dispute Resolution......................................7
Section 3.5. Adjusted Initial Merger Consideration...................7
Section 3.6. Payment of Liabilities..................................8
ARTICLE IV. Contingent Consideration......................................8
Section 4.1. Qualifying Events.......................................8
Section 4.2. Maximum Amount of Contingent Payments...................9
Section 4.3. Delivery of Contingent Payments.........................9
ARTICLE V. Representation and Warranties of the Company and Burns........9
Section 5.1. Title - Member..........................................9
Section 5.2. Authority - Burns......................................10
Section 5.3. Organization; Power - Company..........................10
Section 5.4. Authority - Company....................................10
Section 5.5. Qualifications.........................................11
Section 5.6. No Conflict............................................11
Section 5.7. Capitalization.........................................11
Section 5.8. Subsidiaries; Investments..............................12
Section 5.9. Financial Information..................................12
Section 5.10. Absence of Undisclosed Liabilities.....................12
Section 5.11. No Consent or Approval Required........................13
Section 5.12. Changes................................................13
Section 5.13. Contracts..............................................14
Section 5.14. Employee Benefit Plans.................................16
Section 5.15. Labor Relations; Employees.............................18
Section 5.16. Compliance with Laws; Governmental Authorizations......19
Section 5.17. Insurance..............................................19
Section 5.18. Title to Assets........................................20
Section 5.19. Litigation.............................................20
Section 5.20. Related Party Transactions.............................20
Section 5.21. Real Property..........................................21
Section 5.22. Tax Matters............................................22
Section 5.23. Intellectual Property..................................23
Section 5.24. Accounts Receivable; Clients and Vendors...............24
Section 5.25. Guaranties.............................................25
Section 5.26. Environmental Matters..................................25
Section 5.27. Records................................................26
Section 5.28. Bank Accounts; Powers of Attorney......................26
Section 5.29. Brokers and Finders....................................26
Section 5.30. Investment Representations and Warranties..............26
Section 5.31. Disclosure.............................................26
ARTICLE VI. Representations and Warranties of Medix and the Merger
Sub..........................................................26
Section 6.1. Organization; Powers...................................26
Section 6.2. Authority..............................................27
Section 6.3. No Conflict............................................27
Section 6.4. Litigation.............................................27
Section 6.5. No Consent or Approval Required........................28
Section 6.6. Common Stock...........................................28
Section 6.7. Medix Reports and Financial Statements.................28
Section 6.8. Disclosure.............................................29
ARTICLE VII. Conditions to Closing of Each Party..........................29
Section 7.1. Legal Action...........................................29
Section 7.2. Legislation............................................29
Section 7.3. Escrow Agreement.......................................29
Section 7.4. Registration Rights Agreement..........................30
Section 7.5. Employment Agreements..................................30
ARTICLE VIII. Conditions to Closing of Medix and the Merger Sub............30
Section 8.1. Company Approval.......................................30
Section 8.2. Key Employees- Employment Agreements...................31
Section 8.3. Due Diligence..........................................31
Section 8.4. Representations and Warranties.........................31
Section 8.5. Performance of Obligations.............................31
Section 8.6. Certified Copies.......................................31
Section 8.7. Opinion of Counsel.....................................32
Section 8.8. Consents and Approvals.................................32
Section 8.9. Absence of Changes.....................................32
Section 8.10. Repayment or Conversion of Indebtedness................32
Section 8.11. Release of Security Interests..........................33
Section 8.12. General Release........................................33
Section 8.13. Purchaser Approvals....................................33
Section 8.14. Rights of First Refusal................................33
Section 8.15. Reorganization; Operating Agreement....................33
Section 8.16. Appointment of Representative..........................33
Section 8.17. Investment Letters; Affiliate Letters..................34
Section 8.18. Kowitz Non-Competition Agreement.......................34
Section 8.19. Dissenters' Rights.....................................34
Section 8.20. Voting Agreement.......................................34
Section 8.21. Fairness Opinion.......................................34
Section 8.22. Non-Compete Agreements.................................34
Section 8.23. Audited Financial Statements...........................34
Section 8.24. Acceptance by Counsel..................................35
ARTICLE IX. Conditions to the Closing of the Company and Burns...........35
Section 9.1. Representations and Warranties.........................35
Section 9.2. Performance of Obligations.............................35
Section 9.3. Certified Copies.......................................35
Section 9.4. Financing..............................................36
Section 9.5. Consents and Approvals.................................36
Section 9.6. Opinion of Counsel.....................................36
Section 9.7. Absence of Changes.....................................36
Section 9.8. Acceptance by Counsel..................................36
ARTICLE X. Covenants and Agreements.....................................36
Section 10.1. Filings and Consents...................................36
Section 10.2. Access to Records and Properties of the Company........37
Section 10.3. Conduct of Business....................................37
Section 10.4. Efforts to Consummate..................................39
Section 10.5. Negotiation With Others................................39
Section 10.6. Supplements to the Company Disclosure Letter...........40
Section 10.7. Notice of Developments.................................40
Section 10.8. Fees and Expenses......................................40
Section 10.9. Required Payments......................................41
Section 10.10. Non-Compete............................................41
Section 10.11. Further Assurances.....................................42
ARTICLE XI. Termination..................................................42
ARTICLE XII. Indemnification..............................................43
Section 12.1. Definitions............................................43
Section 12.2. Indemnification........................................43
Section 12.3. Assertion of Claims....................................44
Section 12.4. Notice and Defense of Third Party Claims...............44
Section 12.5. Right of Set-Off.......................................45
Section 12.6. Remedies Cumulative....................................45
Section 12.7. Survival of Representations; Limitation on
Liability..............................................45
ARTICLE XIII. Miscellaneous................................................46
Section 13.1. Parties in Interest....................................46
Section 13.2. Entire Agreement; Amendments...........................46
Section 13.3. Public Disclosure......................................46
Section 13.4. Gender.................................................47
Section 13.5. Waivers................................................47
Section 13.6. Notices................................................47
Section 13.7. Counterparts...........................................48
Section 13.8. Headings...............................................48
Section 13.9. Construction...........................................48
Section 13.10. Incorporation of Appendices, Exhibits and Schedules....49
Section 13.11. Severability...........................................49
Section 13.12. Governing Law..........................................49
Section 13.13. Arbitration............................................49
DEFINITIONS
-----------
The following terms used in this Agreement are found in the following
Sections:
Section or
Term Location
---- --------
Accounting Referee 1.11(d)
Acquisition Preamble
Adjusted Closing Date Payment 1.11(e)
Agreement Preamble
AMEX 1.11(b)
Assigned Contracts 1.1(e)
Assignment of Intellectual Property 2.2
Assumed Obligations 1.8
Average Closing Price 1.11(b)
Balance Sheet 2.8(a)
Balance Sheet Date 2.8(a)
Bill of Sale 2.2
Claim 9.1(a)
Closing 1.13
Closing Balance Sheet 1.11(a)
Closing Convertible Preferred Stock 1.10
Closing Date 1.13
Closing Payment Date 1.10
Code 1.1(e)
Common Stock 1.11(b)
Company Preamble
Company Benefit Plan 2.13(a)
Consulting Agreement 5.3
Contingent Convertible Preferred Stock 1.10
Contingent Payments 1.10
Controlling Member Preamble
Convertible Preferred Stock 1.10
Department 2.13(d)
Employee 2.13(a)
Employee Agreement 2.13(a)
Employee Handbook 2.14(h)
Employment Agreement 5.2(a)
Employment Agreements 5.2(a)
Encumbrances 2.17(a)
Environmental Laws 2.25(a)
ERISA 2.13(a)
ERISA Affiliate 2.13(b)
Exchange Act 5.16
Excluded Assets 1.2
Excluded Obligations 1.9
Financial Statements 2.8(a)
GAAP 1.9(g)
Group 7.12(a)
Hazardous Substances 2.25(b)
Indemnified Person 9.3
Indemnifying Person 9.3
Instrument of Assumption 2.2
Intellectual Property 2.22(f)
IRS 2.13(c)
Laws 2.5
Leased Real Property 2.20(b)
Losses 9.1(b)
Medix Preamble
Member 2.3
Members 2.3
Misys 1.12(a)
Non-Compete Period 7.12(a)
Office Leases 1.2(c)
Ordinary Course of Business 1.8(a)
PBGC 2.13(d)
PCBs 2.25(b)
Pension Plan 2.13(f)
Permits 1.1(g)
Pharmaceutical Company 1.12(d)
Primary Obligor 2.24
Merger Documents 2.2
Purchase Price 1.10
Purchased Assets 1.1
Purchaser Preamble
Qualifying Event 1.12
Registrable Securities 7.13(c)
Returns 2.21(a)
RIM 1.12(b)
SEC 7.13(c)
Securities Act 2.29
Tax 2.21(c)
Taxes 2.21(c)
Termination Date 8.1
Third Party Claim 9.4
Transaction 7.5(a)
Transfer Taxes 5.15
Working Capital 1.11(b)
[Form of Proxy Card]
MEDIX RESOURCES, INC.
420 Lexington Ave., Suite 1830
New York, New York 10170
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
_______, 2003
The undersigned hereby appoints each of Darryl Cohen, Patrick Jeffries and Mark
W. Lerner, as proxy and attorney-in-fact for the undersigned, with full power of
substitution, to vote on behalf of the undersigned at a special meeting of the
Company's shareholders to be held on ________, 2003 and at any adjournment(s) or
postponement(s) thereof, all shares of the Common Stock, $.001 par value, of
Medix Resources, Inc. (the "Company") standing in the name of the undersigned or
which the undersigned may be entitled to vote as follows:
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" ITEMS 1, 2, 3 AND 4. In their discretion, the proxies are hereby
authorized to vote upon such other business as may properly come before the
special meeting or any adjournments or postponements thereof, hereby revoking
any proxy or proxies heretofore given by the undersigned. THIS PROXY IS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
1.To approve the Merger Agreement among the Company, its PS Purchase Corp.
subsidiary, PocketScript, LLC and Stephen S. Burns and the merger
described therein.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. To approve 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 125 million to 175 million.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. To approve the reincorporation merger agreement providing for the
merger of the Company into its wholly-owned Delaware subsidiary,
effecting the reincorporation of the Company as a Delaware
corporation.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To approve the proposed 2003 Stock Incentive Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Please sign exactly as name appears at left:
Signature:
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Second Signature (if held jointly):
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Date:
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When shares are held by joint tenants, both must sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in the corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
PLEASE MARK, SIGN, DATE AND MAIL THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Annex B
Escrow Agreement
(to be furnished by amendment)
Annex C
AGREEMENT AND PLAN OF MERGER
OF
MEDIX RESOURCES, INC.
(A Colorado corporation)
INTO
MEDIX RESOURCES, INC.
(A Delaware corporation)
FIRST: Medix Resources, Inc., a corporation organized under the laws of the
State of Colorado (the "Merging Corporation"), shall merge with and into its
wholly-owned subsidiary, Medix Resources, Inc., a corporation organized under
the laws of the State of Delaware (the "Surviving Corporation"), and the
Surviving Corporation shall assume the liabilities and obligations of the
Merging Corporation.
SECOND: The presently issued and outstanding shares of capital stock of the
Merging Corporation shall be converted on a one-for-one basis into shares of the
capital stock, of the same class and series of the Surviving Corporation.
THIRD: The presently issued and outstanding shares of the common stock, $0.001
par value, of the Surviving Corporation, issued to the Merging Corporation,
shall be cancelled.
FOURTH: The authorized capital of the Surviving Corporation shall remain
unchanged following the merger.
FIFTH: The Certificate of Incorporation of the Surviving Corporation, shall
remain the Certificate of Incorporation of the Surviving Corporation.
SIXTH: The by-laws of the Surviving Corporation shall remain the by-laws of the
Surviving Corporation.
SEVENTH: The directors and officers of the Surviving Corporation shall remain
the directors and officers of the Surviving Corporation and shall serve until
their successors are elected and have qualified.
EIGHTH: The officers of each corporation party to the merger shall be and hereby
are authorized to do all acts and things necessary and proper to effect the
merger.
IN WITNESS WHEREOF, the undersigned have executed and delivered this Plan of
Merger as of the _______ day of _______________, 2003.
MEDIX RESOURCES, INC. (a Colorado corporation)
By:
Darryl Cohen
Chief Executive Officer
MEDIX RESOURCES, INC. (a Delaware corporation)
By:
Darryl Cohen
Chief Executive Officer
Annex D
RESTATED CERTIFICATE OF INCORPORATION
OF
MEDIX RESOURCES, INC.
Medix Resources, Inc. (the "Corporation"), a Delaware corporation, hereby
certifies as follows:
1. The name of the Corporation is Medix Resources, Inc.
2. The original certificate of incorporation of the Corporation was filed with
the Secretary of State of Delaware on February 10, 2003.
3. This restated certificate of incorporation of the Corporation has been duly
adopted in accordance with Sections 242 and 245 of the General Corporation
Law of the State of Delaware by the favorable vote of the holders of a
majority of the outstanding stock entitled to vote thereon and a majority
of the outstanding stock of each class entitled to vote thereon as a class.
4. This restated certificate of incorporation amends, restates and integrates
the provisions of the certificate of incorporation of the Corporation.
5. The text of the certificate of incorporation of the Corporation is hereby
amended, restated and integrated to read in its entirety as follows:
ARTICLE I
NAME
The name of the Corporation is Medix Resources, Inc.
ARTICLE II
REGISTERED OFFICE AND AGENT
The address, including street, number, city, and county, of the registered
office of the Corporation in the State of Delaware is 1013 Centre Road, City of
Wilmington 19805, County of New Castle; and the name of the registered agent of
the Corporation in the State of Delaware at such address is Corporation Service
Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
CAPITAL STOCK
Section 1. Classes and Shares Authorized. The total number of shares of
Common Stock that the Corporation shall have authority to issue is One Hundred
Seventy-Five Million (175,000,000) shares of Common Stock, $0.001 par value per
share. The total number of shares of Preferred Stock that the Corporation shall
have authority to issue is Two Million Five Hundred Thousand (2,500,000) shares
of Preferred Stock, $1.00 par value per share.
Section 2. Preferred Stock. Shares of Preferred Stock may be divided into
such series as may be established from time to time by the Board of Directors.
The Board of Directors from time to time may fix and determine the relative
rights and preferences of the shares of any series so established.
Section 3. Common Stock.
(a) After the requirements with respect to preferential dividends on the
Preferred Stock, if any, shall have been met, and after the
corporation shall have complied with all the requirements, if any,
with respect to the setting aside of sums as sinking funds or
redemption or purchase accounts, and subject further to any other
conditions which may be fixed in accordance with the provisions of
Section 2 of this Article IV, then, and not otherwise, the holders of
Common Stock shall be entitled to receive such dividends as may be
declared from time to time by the Board of Directors of the
corporation paid out any funds legally available therefor.
(b) After distribution in full of the preferential amount if any, to be
distributed to the holders of the Preferred Stock in the event of
voluntary or involuntary liquidation, distribution or sale of assets,
dissolution, or winding-up of the corporation, the holders of the
Common Stock shall be entitled to receive all of the remaining assets
of the Corporation, tangible and intangible, of whatever kind
available for distribution to stockholders, ratably in proportion to
the number of shares of the Common Stock held by them respectively.
(c) Except as may otherwise be required by law, each holder of the Common
Stock shall have one vote in respect of each share of the Common Stock
held by him on all matters voted upon by the stockholders.
Section 4. General Provisions. The capital stock of the Corporation may be
issued for money, property, services rendered, labor done, cash advanced to
or on behalf of the Corporation, or for any other assets of value in
accordance with an action of the Board of Directors, whose judgment as to
the value of the assets received in return for said stock shall be
conclusive, and said stock, when issued, shall be fully paid and
nonassessable.
Section 5. 1996 Preferred Stock.
I. Designation and Amount.
378 shares of the authorized shares of Preferred Stock of the Company are
hereby designated "1996 Preferred Stock" (the "1996 Preferred Stock"). All
shares of 1996 Preferred Stock shall rank prior, as to both payment of dividends
and as to distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company, to all of the Company's now or
hereafter issued common stock (the "Common Stock"), and any other series of
capital stock of the Company, other than the 12% Cumulative Convertible
Preferred Stock, that is not, by its terms, senior to or pari passu with the
1996 Preferred Stock, and shall rank junior to the 12% Cumulative Convertible
Preferred Stock of the Company.
II. Dividends.
(1) The registered owners of each share of 1996 Preferred Stock shall be
entitled to receive out of assets of the Company legally available
therefor, dividends at the rate of 10% per annum, calculated on the
amount of the Liquidation Value of such share, which rate shall be 18%
per annum for each day after the 180th day following the issuance of
such share and prior to the date on which a registration statement
under the Securities Act of 1993 (the "Act") registering the Common
Stock of the Company into which such share of 1996 Preferred Stock is
convertible first becomes effective. Dividends shall accrue without
interest and be cumulative and shall be payable to the registered
owners of 1996 Preferred Stock out of assets of the Company legally
available therefore, quarterly in arrears on the last day of each
fiscal quarter of the Company. Dividends shall be payable to
shareholders of record on the fifteenth day immediately preceding such
dividend payment date, or if such day is not a business day, on the
immediately preceding business day.
(2) So long as any share of 1996 Preferred Stock is outstanding, the
Company shall not (a) declare or pay any dividend or make any other
distribution (other than dividends payable solely in Common Stock or
other capital stock ranking junior as to dividend rights to the 1996
Preferred Stock) on the Common Stock or any other class or series of
capital stock of the Company ranking, as to dividends, junior to the
1996 Preferred Stock, or set funds aside therefor, or (b) purchase,
redeem or otherwise acquire any of the Common Stock, or any other
class of capital stock of the Company ranking junior as to dividends
to the 1996 Preferred Stock (other than in exchange for Common Stock
or other class of capital stock ranking junior as to dividends to the
1996 Preferred Stock) or set funds aside therefor.
(3) If at any time any dividend on any capital stock of the Company
ranking senior as to dividends to the 1996 Preferred Stock ("Senior
Dividend Stock") shall be in default, in whole or in part, then no
dividend shall be paid or declared and set apart for payment on the
1996 Preferred Stock unless and until all accrued and unpaid dividends
with respect to the Senior Dividend Stock shall have been paid or
declared and set apart for payment. No dividends shall be paid or
declared and set apart for payment on the 1996 Preferred Stock or on
any capital stock ranking pari passu with the 1996 Preferred Stock in
the payment of dividends (the "Parity Dividend Stock") for any period
unless a pro rata dividend has been, or contemporaneously is, paid or
declared and set apart for payment on the Parity Divided Stock or the
1996 Preferred Stock, as the case may be, so that the amount of
dividends paid or declared and set aside for payment per share on the
1996 Preferred Stock and the Parity Dividend Stock shall in all cases
bear to each other the same ratio that accrued and unpaid dividends
per share on the shares of 1996 Preferred Stock and the Parity
Dividend Stock bear to each other. Notwithstanding the foregoing, the
Company agrees, to the extent that there are funds legally available
therefore, to declare all outstanding Senior Dividend Stock and Party
Dividend Stock as may be necessary to permit the payment of the full
dividends payable with respect to the 1996 Preferred Stock.
(4) Subject to the foregoing provisions, the holders of Common Stock, the
Parity Dividend Stock and each other class of capital stock of the
Company which is junior as to dividends to the 1996 Preferred Stock
shall be entitled to receive, as and when declared by the Board of
Directors out of the remaining assets of the Company legally available
therefor, such dividends (payable in cash, capital shares or
otherwise) as the Board of Directors may from time to time determine.
(5) Any reference to "distribution" contained in this Section II shall not
be deemed to include any distribution made in connection with any
liquidation, dissolution, or winding up of the Company.
III. Liquidation.
(1) In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, then out of the assets of
the Company before any distribution or payment to the holders of the
Common Stock or any other class of capital stock of the Company
ranking junior as to liquidation preferences to the 1996 Preferred
Stock, but after distribution to and subject to the rights of holders
of capital stock of the Company ranking senior as to liquidation
rights to the Preferred Stock, the holders of the 1996 Preferred Stock
shall be paid the Liquidation Value of the 1996 Preferred Stock then
outstanding and the holders of the 1996 Preferred Stock shall be
entitled to no other or further distribution.
(2) The Liquidation Value of the 1996 Preferred Stock shall be $10,000 per
share plus the amount of any dividends which have accrued thereon to
the close of business on the date of such liquidation, dissolution or
winding up and remain unpaid, whether or not such dividends have been
earned or declared.
(3) After payment in full to the holders of (a) any capital stock ranking
senior as to liquidation rights to the 1996 Preferred Stock, (b) the
1996 Preferred Stock and (c) any class of stock hereafter issued that
ranks on a parity as to liquidation rights with the 1996 Preferred
Stock, of the sums which such holders are entitled to receive in such
case, the remaining assets of the Company shall be distributed among
and paid to the holders of the Common Stock and any other class of
capital stock of the Company ranking junior to the 1996 Preferred
Stock.
(4) If the assets of the Company available for distribution to its
shareholders shall be insufficient to permit payment in full to the
holders of the 1996 Preferred Stock and all other series of preferred
shares ranking equally as to liquidation preferences with the 1996
Preferred Stock of sums which such holders are entitled to receive,
then all of the assets available for distribution to such holders
shall be distributed among and paid to such holders ratably in
proportion to the respective amounts that would be payable per share
if such assets were sufficient to permit payment in full.
(5) The consolidation or merger of the Company with any other corporation
or corporations or a sale of all or substantially all of the assets of
the Company shall not be deemed a liquidation, dissolution or winding
up of the Company within the meaning of this Section III.
IV. Redemption.
(1) If on July 1, 1998 (a) a registration statement under the Act registering
the Common Stock of the Company into which the 1996 Preferred Stock is
convertible was not effective or (b) the Common Stock of the Company was
not then traded on a national securities exchange (including NASDAQ
National Market System, the NASDAQ Small Cap Market, the New York Stock
Exchange or the American Stock Exchange, but excluding the NASDAQ Bulletin
Board or other NASDAQ listings), the Company shall, at the written election
of the holder of any outstanding shares of 1996 Preferred Stock received on
or before July 31, 1998, redeem such shares of 1996 Preferred Stock at the
redemption price per share of $10,000 plus any accrued and unpaid paid
dividends thereon, whether or not declared, to the date of redemption.
(2) The redemption price for any shares of 1996 Preferred Stock to be redeemed
hereunder shall be payable in cash, out of funds legally available
therefore, as soon as practicable after July 31, 1998. If the Company has
insufficient funds legally available to pay the redemption price of all of
the shares of 1996 Preferred Stock tendered for redemption, the Company
shall redeem as many shares as it has funds legally available therefore pro
rata among the shareholders tendering 1996 Preferred Stock for redemption
and shall continue to be obligated to redeem the remaining shares tendered
for redemption when and as funds become legally available therefore,
subject to the right of any tendering shareholder to withdraw its election
to have such shares redeemed. Any election to have any shares of 1996
Preferred Stock redeemed pursuant hereto shall be accompanied with the
certificates representing the shares being tendered for redemption.
V. Voting Rights.
The holders of the 1996 Preferred Stock shall have no voting rights except
as required by law.
VI. Conversion; Anti-dilution Provisions.
The holders of the 1996 Preferred Stock shall have no right to convert
their shares into Common Stock.
Section 6. 1999 Series C Convertible Preferred Stock.
I. Designation and Amount.
Two Thousand (2,000) shares of the authorized shares of Preferred Stock of
the Company are hereby designated "1999 Series C Convertible Preferred Stock"
(the "Series C Preferred"). All shares of Series C Preferred shall rank prior,
as to both payment of dividends and as to distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company,
to all of the Company's now or hereafter issued common stock (the "Common
Stock"), and any other series of capital stock of the Company, other than the
1996 Preferred Stock, that is not, by its terms, senior to or pari passu with
the Series C Preferred, and shall rank junior in all respects to the 1996
Preferred Stock.
II. Dividends.
(1) Except as specifically described herein, the registered owners of the
Series C Preferred shall not be entitled to receive any dividends. If a
registration statement under the Securities Act of 1933, as amended (the
"Act"), registering the shares of Common Stock of the Company into which
the Series C Preferred is convertible is not declared effective by March
31, 2000, or if any such registration statement ceases to be effective at
any time prior to the second anniversary of the date on which such
registration statement first becomes effective, the registered owners of
each share of Series C Preferred shall be entitled to receive out of assets
of the Company legally available therefor, dividends for any period during
such two-year period and after March 31, 2000, during which such
registration statement is not effective, at the rate of ten percent (10%)
per annum, for each day during which the registration statement is not
effective. Dividends shall be calculated on the amount of the Liquidation
Value (as set forth below) of each share. Dividends, if any as provided
hereunder, shall accrue without interest and be cumulative and shall be
payable to the registered owners of Series C Preferred out of assets of the
Company legally available therefore, quarterly in arrears on the last day
of each fiscal quarter of the Company. Dividends shall be payable to
shareholders of record on the fifteenth day immediately preceding such
dividend payment date, or if such day is not a business day, on the
immediately preceding business day.
(2) So long as any share of Series C Preferred is outstanding, the Company
shall not (a) declare or pay any dividend or make any other distribution
(other than dividends payable solely in Common Stock or other capital stock
ranking junior as to dividend rights to the Series C Preferred) on the
Common Stock or any other class or series of capital stock of the Company
ranking, as to dividends, junior to the Series C Preferred, or set funds
aside therefor, or (b) purchase, redeem or otherwise acquire, any of the
Common Stock, or any other class of capital stock of the Company ranking
junior as to dividends to the Series C Preferred (other than in exchange
for Common Stock or other class of capital stock ranking junior as to
dividends to the Series C Preferred) or set funds aside therefor.
(3) If at any time any dividend on any capital stock of the Company ranking
senior as to dividends to the Series C Preferred ("Senior Dividend Stock")
shall be in default, in whole or in part, then no dividend shall be paid or
declared and set apart for payment on the Series C Preferred unless and
until all accrued and unpaid dividends with respect to the Senior Dividend
Stock shall have been paid or declared and set apart for payment. No
dividends shall be paid or declared and set apart for payment on the Series
C Preferred or on any capital stock ranking pari passu with the Series C
Preferred in the payment of dividends (the "Parity Dividend Stock") for any
period unless a pro rata dividend has been, or contemporaneously is, paid
or declared and set apart for payment on the Parity Divided Stock or the
Series C Preferred, as the case may be, so that the amount of dividends
paid or declared and set aside for payment per share on the Series C
Preferred and the Parity Dividend Stock shall in all cases bear to each
other the same ratio that accrued and unpaid dividends per share on the
shares of Series C Preferred and the Parity Dividend Stock bear to each
other. Notwithstanding the foregoing, the Company agrees, to the extent
that there are funds legally available therefore, to declare all
outstanding Senior Dividend Stock and Party Dividend Stock as may be
necessary to permit the payment of the full dividends payable with respect
to the Series C Preferred.
(4) Subject to the foregoing provisions, the holders of Common Stock, the
Parity Dividend Stock and each other class of capital stock of the Company
which is junior as to dividends to the Series C Preferred shall be entitled
to receive, as and when declared by the Board of Directors out of the
remaining assets of the Company legally available therefor, such dividends
(payable in cash, capital shares or otherwise) as the Board of Directors
may from time to time determine.
(5) Any reference to "distribution" contained in this Section II shall not be
deemed to include any distribution made in connection with any liquidation,
dissolution, or winding up of the Company.
III. Liquidation.
(1) In the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, then out of the assets of
the Company before any distribution or payment to the holders of the
Common Stock or any other class of capital stock of the Company
ranking junior as to liquidation preferences to the Series C
Preferred, but after distribution to and subject to the rights of
holders of capital stock of the Company ranking senior as to
liquidation rights to the Series C Preferred, the holders of the
shares of Series C Preferred then outstanding shall be paid the
Liquidation Value of the shares of Series C Preferred then outstanding
and such holders shall be entitled to no other or further
distribution.
(2) The Liquidation Value of each share of the Series C Preferred shall be
$1,000 per share plus the amount of any dividends which have accrued
thereon to the close of business on the date of such liquidation,
dissolution or winding up and remain unpaid, whether or not such
dividends have been earned or declared.
(3) After payment in full to the holders of (a) any capital stock ranking
senior as to liquidation rights to the Series C Preferred, (b) the
Series C Preferred and (c) any class of stock hereafter issued that
ranks on a parity as to liquidation rights with the Series C
Preferred, of the sums which such holders are entitled to receive in
such case, the remaining assets of the Company shall be distributed
among and paid to the holders of the Common Stock and any other class
of capital stock of the Company ranking junior to the Series C
Preferred.
(4) If the assets of the Company available for distribution to its
shareholders shall be insufficient to permit payment in full to the
holders of the Series C Preferred and all other series of preferred
shares ranking equally as to liquidation preferences with the Series C
Preferred of sums which such holders are entitled to receive, then all
of the assets available for distribution to such holders shall be
distributed among and paid to such holders ratably in proportion to
the respective amounts that would be payable per share if such assets
were sufficient to permit payment in full.
(5) The consolidation or merger of the Company with any other corporation
or corporations or a sale of all or substantially all of the assets of
the Company shall not be deemed a liquidation, dissolution or winding
up of the Company within the meaning of this Section III.
IV. Redemption.
(1) If on March 31, 2000 a registration statement under the Act
registering the Common Stock of the Company into which the Series C
Preferred is convertible was not effective, the Company shall, at the
written election of the registered owner of any outstanding shares of
Series C Preferred received on or before March 31, 2000, redeem such
shares of Series C Preferred at the redemption price per share of
$1,000 plus any accrued and unpaid dividends thereon, whether or not
declared, to the date of redemption.
(2) The redemption price for any shares of Series C Preferred to be
redeemed hereunder shall be payable in cash, out of funds legally
available therefore, as soon as practicable after March 31, 2000. If
the Company has insufficient funds legally available to pay the
redemption price of all of the shares of Series C Preferred tendered
for redemption, the Company shall redeem as many shares as it has
legally available therefore pro rata among the shareholders tendering
Series C Preferred for redemption and shall continue to be obligated
to redeem the remaining shares tendered for redemption when and as
funds become legally available therefore, subject to the right of any
tendering shareholder to withdraw its election to have such shares
redeemed. Any election to have any shares of Series C Preferred
redeemed pursuant hereto shall be accompanied with the certificates
representing the shares being tendered for redemption.
(3) At the option of the Company, the shares of the Series C Preferred may
be redeemed by the Company, in whole or in part, at any time, at a
redemption price of $1,000 per share, plus any accrued and unpaid
dividends thereon, whether or not declared, to the date of redemption,
if the holders of the shares to be redeemed are given at least thirty
(30) days notice of such redemption in writing.
V. Voting Rights.
The holders of the Series C Preferred shall have no voting rights except as
required by law.
VI. Conversion; Anti-Dilution Provisions.
The holders of the Series C Preferred shall have no right to convert their
shares into Common Stock.
ARTICLE V
VOTING
Cumulative voting in the election of directors is no authorized.
ARTICLE VI
PREEMPTIVE RIGHTS
Shareholders of the corporation shall not have preemptive rights to acquire
unissued or treasury shares of the corporation or securities convertible into
such shares or carrying a right to subscribe to or acquire such shares.
ARTICLE VII
BOARD OF DIRECTORS
Section 1. Board of Directors; Number. The governing board of the
corporation shall be known as the Board of Directors, and the number of
directors may from time to time be increased or decreased in such manner as
shall be provided in the Bylaws of the corporation, provided that the number of
directors shall not be reduced to less than three unless the outstanding shares
are held of record by fewer than three shareholders in which case there need
only be as many directors as there are shareholders.
Section 2. Classification of Directors. The Board of Directors shall be
divided into three classes, Class 1, Class 2, and Class 3, each class to be as
nearly equal in number as possible. The term of office of Class 1 directors
shall expire at the first annual meeting of shareholders following their
election, that of Class 2 directors shall expire at the second annual meeting
following their election, and the Class 3 directors shall expire at the third
annual meeting following their election. At each annual meeting after such
classification, a number of directors equal to the number of the class whose
term expires at the time of such meeting shall be elected to hold office until
the third succeeding annual meeting. No classification of directors shall be
effective prior to the first annual meeting of shareholders. Notwithstanding the
foregoing and except as otherwise required by law, whenever the holders of any
one or more series of Preferred Stock shall have the right, voting separately as
a class to elect one or more directors of the Company, the terms of the director
or directors elected by such holders shall expire at the next succeeding annual
meeting of shareholders.
Section 3. Nomination of Directors.
(a) Nominations for the election of directors may be made by the Board of
Directors, by a committee of the Board of Directors, or by any
shareholder entitled to vote for the election of directors.
Nominations by shareholders shall be made by notice in writing,
delivered or mailed by first class United States mail, postage
prepaid, to the Secretary of the Corporation, not less than 14 days
nor more than 50 days prior to any meeting of the shareholders called
for the election of directors; provided, however, that if less than 21
days' notice of the meeting is given to shareholders, such written
notice shall be delivered or mailed, as prescribed, to the Secretary
of the Corporation not later than the close of the seventh day
following the day on which notice of the meeting was mailed to
shareholders.
(b) Each notice under subsection (a) shall set forth (i) the name, age,
business address and, if known, residence address of each nominee
proposed in such notice, (ii) the principal occupation or employment
of each such nominee, and (iii) the number of shares of stock of the
Corporation which are beneficially owned by each such nominee.
(c) The chairman of the shareholders' meeting, may, if the facts warrant,
determine and declare to the meting that a nomination was not made in
accordance with the foregoing procedure, and if he should so
determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 4. Certain Powers of the Board of Directors. In furtherance and not
in limitation of the powers conferred by statute, the Board of Directors is
expressly authorized:
(a) to manage and govern the corporation by majority vote of members
present at any regular or special meeting at which a quorum shall be
present, to make, alter, or amend the Bylaws of the corporation at any
regular or special meeting, to fix the amount to be reserved as
working capital over and above its capital stock paid in, to authorize
and cause to be executed mortgages and liens upon the real and
personal property of the corporation, and to designate one or more
committees, such committee to consist of two or more of the directors
of the corporation, which, to the extent provided in the resolution or
in the Bylaws of the corporation, shall have and may exercise the
powers of the Board of Directors in the management of the business and
affairs of the corporation (such committee or committees shall have
such name or names as may be stated in the Bylaws of the corporation
or as may be determined from time to time to time by resolutions
adopted by the Board of Directors);
(b) to sell, lease, exchange, or otherwise dispose of all or substantially
all of the property and assets of the corporation in the ordinary
course of its business upon such terms and conditions as the Board of
Directors may determine with out vote or consent of the shareholders;
(c) to sell, pledge, lease, exchange, liquidate, or otherwise dispose of
all or substantially all of the property or assets of the corporation,
including its goodwill, if not in the ordinary course of its business,
upon such terms and conditions as the Board of Directors may
determine; provided, however, that such transaction shall be
authorized or ratified by the written consent of the holders of all of
the shares entitled to vote thereon; and provided, further, that any
such transaction with any substantial shareholder or affiliate of the
corporation shall be authorized or ratified by the affirmative vote of
the holders of at least two-thirds of the shares entitled to vote
thereon at a shareholders' meeting duly called for that purpose,
unless such transaction is with any subsidiary of the corporation or
is approved by the affirmative vote of a majority or the continuing
directors of the corporation, or is authorized or ratified by the
written consent of the holders of all of the shares entitled to vote
thereon;
(d) to merge, consolidate, or exchange all of the issued or outstanding
shares of one or more classes of the corporation upon such terms and
conditions as the Board of Directors may authorize; provided, however,
that such merger, consolidation or exchange shall be approved or
ratified by the affirmative vote of the holders of at least a majority
of the shares entitled to vote thereon at a shareholders' meeting duly
called for that purpose, or authorized or ratified by the written
consent of the holders of all of the shares entitled to vote thereon;
and provided, further, that any such merger, consolidation, or
exchange with any substantial shareholder or affiliate of the
corporation shall be authorized or ratified by the affirmative vote of
the holders of at least two-thirds of the shares entitled to vote
thereon at a shareholders' meeting duly called for that purpose,
unless such merger, consolidation, or exchange is with any subsidiary
of the corporation or is approved by the affirmative vote of a
majority of the continuing directors of the corporation, or is
authorized or ratified by the written consent of the holders of all of
the shares entitled to vote thereon; and
(e) to distribute to the shareholders of the corporation without the
approval of the shareholders, in partial liquidation, out of stated
capital or capital surplus of the corporation, a portion of the
corporation's assets, in cash or in property, so long as the partial
liquidation is in compliance with applicable law.
(f) as used in this Section 5, the following terms shall have the
following meanings:
(i) an "affiliate" shall mean any person or entity which is an
affiliate within the meaning of Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as
amended:
(ii) a "continuing director" shall mean a director who was elected
before the substantial shareholder or affiliates of the
corporation which is to be a party to a proposed transaction
within the scope of subsections (c) and (d) of this Section 5
became such a substantial shareholder of affiliate of the
corporation, as the case may be, or is designated at or prior to
his first election or appointment to the Board of Directors by
the affirmative vote of a majority of the Board of Directors who
are continuing directors;
(iii)a "subsidiary" shall mean any corporation in which the
corporation owns the majority of each class of equity security;
and
(iv) a "substantial shareholder" shall mean any person or entity which
is the beneficial owner, within the meaning of Rule 13d-3 of the
General Rules and Regulations under the Securities Exchange Act
of 1934, as amended, of 10% or more of the outstanding capital
stock of the corporation.
ARTICLE VIII
CONFLICTS OF INTEREST
Section 1. Related Party Transactions.
(a) No contract or transaction between the corporation and one or more of
its directors, or between the corporation and any other corporation,
partnership, association, or other organization in which one or more
of its directors or officers are directors or officers or have a
financial interest shall be void or voidable solely for that reason or
solely because the director or officer is present at or participates
in the meeting of the Board of Directors or committee thereof which
authorizes, approves, or ratifies the contract or transaction or
solely because his or their votes are counted for such purpose if:
(i) the material facts as to his relationship of interest and as to
the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board or committee
in good faith authorizes, approves, or ratifies the contract or
transaction by the affirmative vote of the majority of the
disinterested directors, even though the disinterested directors
are less than a quorum; or
(ii) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or
transaction is specifically authorized, approved, or ratified in
good faith by a vote of the shareholders; or
(iii)the contract or transaction is fair as to the corporation as of
the time it is authorized, approved, or ratified by the Board of
Directors, a committee thereof, or the shareholders.
(b) Common or disinterested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes, approves, or ratifies the contract or
transaction.
Section 2. Corporate Opportunities. The officers, directors, and other
members of management of the corporation shall be subject to the doctrine of
corporate opportunities only insofar as it applies to business opportunities in
which the corporation has expressed an interest as determined form time to time
by resolution of the Board of Directors. When such areas of interest are
delineated, all such business opportunities within such areas of interest which
come to the attention of the officers, directors, and other members of
management of the corporation shall be disclosed promptly to the corporation and
made available to it. The Board of Directors may reject any business opportunity
presented to it, and thereafter any officer, director, or other member of
management may avail himself of such opportunity. Until such time as the
corporation, through its Board of Directors, has designated an area of interest,
the officers, directors, and other members of management of the corporation
shall be free to engage in such areas of interest or their own. The provisions
hereof shall not limit the rights of any officer, director, or other member of
management of the corporation to continue a business existing prior to the time
that such area of interest is designated by the corporation, nor shall they be
construed to release any employee of the corporation (other than an officer,
director, or member of management) from any duties which such employee may have
to the corporation.
ARTICLE IX
LIABILITY OF DIRECTORS
A director of the corporation shall not be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended. Any amendment, modification or repeal
of the foregoing sentence shall not adversely affect any right or protection of
a director of the corporation hereunder in respect of any act or omission
occurring prior to the time of such amendment, modification or repeal.
ARTICLE X
INDEMNIFICATION
For purposes of this Article X, a "Proper Person" means any person who was
or is a party or is threatened to be made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, and whether formal or informal, by reason of the fact that he is
or was a director, officer, employee, fiduciary or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
partner, trustee, employee, fiduciary or agent of any foreign or domestic profit
or nonprofit corporation or of any partnership, joint venture, trust, profit or
nonprofit unincorporated association, limited liability company, or other
enterprise or employee benefit plan. The corporation shall indemnify any Proper
Person against reasonably incurred expenses (including attorneys' fees),
judgments, penalties, fines (including any excise tax assessed with respect to
an employee benefit plan) and amounts paid in settlement reasonably incurred by
him in connection with such action, suit or proceeding if it is determined by
the groups set forth in Section 4 of this Article that he conducted himself in
good faith and that he reasonably believed (1) in the case of conduct in his
official capacity with the corporation, that his conduct was in the
corporation's best interests, or (ii) in all other cases (except criminal
cases), that his conduct was at least not opposed to the corporation's best
interests, or (iii) in the case of any criminal proceeding, that he had no
reasonable cause to believe his conduct was unlawful. A Proper Person will be
deemed to be acting in his official capacity while acting as a director,
officer, employee or agent on behalf of this corporation and not while acting on
this corporation's behalf for some other entity.
No indemnification shall be made under this Article X to a Proper Person
with respect to any claim, issue or matter in connection with a proceeding by or
in the right of a corporation in which the Proper Person was adjudged liable to
the corporation or in connection with any proceeding charging that the Proper
Person derived an improper personal benefit, whether or not involving action in
an official capacity, in which he was adjudged liable on the basis that he
derived an improper personal benefit. Further, indemnification under this
Section in connection with a proceeding brought by or in the right of the
corporation shall be limited to reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding.
The corporation shall indemnify any Proper Person who was wholly
successful, on the merits or otherwise, in defense of any action, suit, or
proceeding as to which he was entitled to indemnification under this Article X
against expenses (including attorneys' fees) reasonably incurred by him in
connection with the proceeding without the necessity of any action by the
corporation other than the determination in good faith that the defense has been
wholly successful.
The termination of any action, suit or proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its equivalent
shall not of itself create a presumption that the person seeking indemnification
did not meet the standards of conduct described in his Article X Entry of
judgment by consent as part of a settlement shall not be deemed an adjudication
of liability.
Except where there is a right to indemnification as set forth in this
Article or where indemnification is ordered by a court, any indemnification
shall be made by the corporation only as authorized in the specific case upon a
determination by a proper group that indemnification of the Proper Person is
permissible under the circumstances because he has met the applicable standards
of conduct set forth in this Article. This determination shall be made by the
board of directors by a majority vote of those present at a meeting at which a
quorum is present, which quorum shall consist of directors not parties to the
proceeding ("Quorum"). If a Quorum cannot be obtained, the determination shall
be made by a majority vote of a committee of the board of directors not parties
to the proceeding, except that directors who are parties to the proceeding may
participate in the designation of directors for the committee. If a Quorum of
the board of directors cannot be obtained and the committee cannot be
established, or even if a Quorum is obtained or the committee is designated and
a majority of the directors constituting such Quorum or committee so directs,
the determination shall be made by (1) independent legal counsel selected by a
vote of the board of directors or the committee in the manner specified in this
paragraph, or, if a Quorum of the full board of directors cannot be obtained and
a committee cannot be established, by independent legal counsel selected by a
majority vote of the full board (including directors who are parties to the
action) or (ii) a vote of the shareholders.
Any Proper Person may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction for mandatory
indemnification under this Article, including indemnification for reasonable
expenses incurred to obtain court-ordered indemnification. If the court
determines that such Proper Person is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances, whether or not he met
the standards of conduct set forth in this Article or was adjudged liable in the
proceeding, the court may order such indemnification as the court deems proper
except that if the Proper Person has been adjudged liable, indemnification shall
be limited to reasonable expenses incurred in connection with the proceeding and
reasonable expenses incurred to obtain court-ordered indemnification.
Reasonable expenses (including attorneys' fees) incurred in defending an
action, suit or proceeding as described in Section 1 may be paid by the
corporation to any Proper Person in advance of the final disposition of such
action, suit or proceeding upon receipt of (1) a written affirmation of such
Proper Person's good faith belief that he has met the standards of conduct
prescribed by this Article X (ii) a written undertaking, executed personally or
on the Proper Person's behalf, to repay such advances if it is ultimately
determined that he did not meet the prescribed standards of conduct (the
undertaking shall be an unlimited general obligation of the Proper Person but
need not be secured and may be accepted without reference to financial ability
to make repayment), and (iii) a determination is made by the proper group (as
described in this Article X) that the facts as then known to the group would not
preclude indemnification. Determination and authorization of payments shall be
made in the same manner specified in this Article X.
ARTICLE XI
ARRANGEMENTS WITH CREDITORS
Whenever a compromise or arrangement is proposed by the corporation between
it and its creditors or any class of them, an/or between the corporation and its
shareholders or any class of them, any court of equitable jurisdiction may on
summary application by the corporation or by a majority of its shareholders, or
on the application of any receiver or receivers appointed for the corporation,
or on the application of trustees in dissolution, order a meeting of the
creditors or class of creditors and/or of the shareholders or class of
shareholders of the corporation, as the case may be, to be notified in such
manner as the court decides. If a majority in number representing at least three
fourths in the dollar amount owed to the creditors or class of creditors and/or
the holders of the majority of the stock or class of stock of the corporation,
as the case may be, agrees to any compromise or arrangement and/or to any
reorganization of the corporations as a consequence of such compromise or
arrangement, then said compromise or arrangement and/or said reorganization
shall, if sanctioned by the court to which the application has been made, be
binding upon all the creditors or class of creditors and/or on all the
shareholders or class of shareholders of the corporation, as the case may be,
and also on the corporation.
ARTICLE XII
SHAREHOLDERS' MEETINGS
Shareholders' meetings may be held at such time and place as may be stated
or fixed in accordance with the Bylaws. At all shareholders' meetings, one third
of all shares entitled to vote shall constitute a quorum.
ARTICLE XIII
DISSOLUTION
Section 1. Procedure. The corporation shall be dissolved upon the
affirmative vote of the holders of at least a majority of the shares entitled to
vote thereon at a meeting duly called for that purpose, or when authorized or
ratified by the written consent of the holders of all of the shares entitled to
vote thereon.
Section 2. Revocation. The corporation shall revoke voluntary dissolution
proceedings upon the affirmative vote of the holders of at least a majority of
the shares entitled to vote at a meeting duly called for that purpose, or when
authorized or ratified by the written consent of the holders of all of the
shares entitled to vote thereon.
ARTICLE XIV
MISCELLANEOUS
Meetings of stockholders may be held within or without the State of
Delaware as the By-laws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-laws of the corporation. The election of
directors need not be by written ballot unless the By-laws so provide. The Board
of Directors of the corporation is authorized and empowered from time to time in
its discretion to make, alter, amend or repeal the By-laws of the corporation.
Notwithstanding anything herein to the contrary, the number of authorized
shares of Common Stock may be increased or decreased (but not below the number
of shares thereof then outstanding) by the affirmative vote of the holders of a
majority in voting power of the outstanding stock of the corporation entitled to
vote generally irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Medix Resources, Inc. has caused this certificate to be
signed by Mark Lerner, its Executive Vice President and Chief Financial Officer,
on the __ day of __, 2003.
----------------------------------
Mark Lerner,
Executive Vice President and Chief Financial
Officer
Annex E
-------------------------------------------
BYLAWS
OF
MEDIX RESOURCES, INC.
A Delaware Corporation
-------------------------------------------
TABLE OF CONTENTS
-----------------
ARTICLE I Offices
ARTICLE II Shareholders
Section 1. Annual Meeting
Section 2. Special Meetings
Section 3. Place of Meeting
Section 4. Notice of Meeting
Section 5. Fixing of Record Date
Section 6. Voting Lists
Section 7. Recognition Procedure for Beneficial Owners
Section 8. Quorum and planner of Acting
Section 9. Proxies
Section 10. Voting Shares
Section 11. Corporation's Acceptance of Votes
Section 12. Informal Action by Shareholders
Section 13. Meetings by Telecommunication
ARTICLE III Board of Directors
Section 1. General Powers
Section 2. Number, Qualification and Tenure
Section 3. Vacancies
Section 4. Regular Meetings
Section 5. Special Meetings
Section 6. Notice
Section 7. Quorum
Section 8. Manner of Acting
Section 9. Compensation
Section 10. Presumption of Assent
Section 11. Committee
Section 12. Informal Action by Directors
Section 13. Telephonic Meetings
Section 14. Standard of Care
ARTICLE IV Officers and Agents
Section 1. General
Section 2. Appointment and Term of Office
Section 3. Resignation and Removal
Section 4. Vacancies
Section 5. President
Section 6. Vice Presidents
Section 7. Secretary
Section 8. Treasurer
ARTICLE V Stock
Section 1. Certificates
Section 2. Consideration for Shares
Section 3. Lost Certificates
Section 4. Transfer of Shares
Section 5. Transfer Agent, Registrars and Paving Agents
ARTICLE VI Indemnification of Certain Persons
Section 1. Indemnification
Section 2. Right to Indemnification
Section 3. Effect of Termination of Action
Section 4. Groups Authorized to Make Indemnification Determination
Section 5. Court-Ordered Indemnification
Section 6. Advance of Expenses
ARTICLE VII Provision of Insurance
ARTICLE VIII Miscellaneous
Section 1. Seal
Section 2. Fiscal Year
Section 3. Amendments
Section 4. Gender
Section 5. Conflicts
Section 6. Definitions
BY-LAWS
-------
OF
--
MEDIX RESOURCES, INC.
---------------------
...... (a Delaware corporation)
ARTICLE I
Offices
The principal office of the corporation shall be designated from time
to time by the corporation and may be within or outside of Delaware.
The corporation may have such other offices, either within or outside
Delaware, as the board of directors may designate or as the business of the
corporation may require from time to time.
The registered office of the corporation required by the Delaware
General Corporation Law to be maintained in Delaware may be, but need not be,
identical with the principal office, and the address of the registered office
may be changed from time to time by the board of directors.
ARTICLE II
Shareholders
Section 1. Annual Meeting. The annual meeting of the shareholders shall be
held on the date and at a time fixed by the board of directors of the
corporation (or by the president in the absence of action by the board of
directors).
Section 2. Special Meetings. Unless otherwise prescribed by statute,
special meetings of the shareholders may be called for any purpose by the
president or by the board of directors. The president shall call a special
meeting of the shareholders if the corporation receives one or more written
demands for the meeting, stating the purpose or purposes for which it is to
be held, signed and dated by holders of shares representing at least ten
percent of all the votes entitled to be cast on any issue proposed to be
considered at the meeting.
Section 3. Place of Meeting. The board of directors may designate any
place, either within or outside Delaware, as the place for any annual meeting
or any special meeting called by the board of directors. A waiver of notice
signed by all shareholders entitled to vote at a meeting may designate any
place, either within or outside Delaware, as the place for such meeting. If
no designation is made, or if a special meeting is called other than by the
board, the place of meeting shall be the principal office of the corporation.
Section 4. Notice of Meeting. Written notice stating the place, date, and
hour of the meeting shall be given not less than ten nor more than sixty days
before the date of the meeting, except that (i) if the number of authorized
shares is to be increased, at least thirty days' notice shall be given, or
(ii) any other longer notice period is required by the Delaware General
Corporation Law. Notice of a special meeting need not include a description
of the purpose or purposes of the meeting except the purpose or purposes
shall be stated with respect to (i) an amendment to the certificate of
incorporation of the corporation: (ii) a merger or share exchange in which
the corporation is a party and, with respect to a share exchange, in which
the corporation's shares will be acquired, (iii) a sale, lease, exchange or
other disposition, other than in the usual and regular course of business, of
all or substantially all of the property of the corporation or of another
entity which this corporation controls, in each case with or without the
goodwill, (iv) a dissolution of the corporation, or (v) any other purpose for
which a statement of purpose is required by the Delaware General Corporation
Law. Notice shall be given personally or by mail, private carrier,
telegraph, teletype, electronically transmitted facsimile or other form of
wire or wireless communication by or at the direction of the president, the
secretary, or the officer or persons calling the meeting, to each shareholder
of record entitled to vote at such meeting. If mailed and if in a
comprehensible form, such notice shall be deemed to be given and effective
when deposited in the United States mail, addressed to the shareholder at his
address as it appears in the corporation's current record of shareholders,
with postage prepaid. If notice is given other than by mail, and provided
that such notice is in a comprehensible form, the notice is given and
effective on the date received by the shareholder.
If requested by the person or persons lawfully calling such meeting,
the secretary shall give notice thereof at corporate expense. No notice need
be sent to any shareholder if three successive notices mailed to the last
known address of such shareholder have been returned as undeliverable until
such time as another address for such shareholder is made known to the
corporation by such shareholder. In order to be entitled to receive notice
of any meeting, a shareholder shall advise the corporation in writing of any
change in such shareholder's mailing address as shown on the corporation's
books and records.
When a meeting is adjourned to another date, time or place, notice need
not be given of the new date, time or place if the new date, time or place of
such meeting is announced before adjournment at the meeting at which the
adjournment is taken. At the adjourned meeting the corporation may transact
any business, which may have been transacted at the original meeting. If the
adjournment is for more than 30 days, or if a new record date is fixed for
the adjourned meeting, a new notice of the adjourned meeting shall be given
to each shareholder of record entitled to vote at the meeting as of the new
record date.
A shareholder may waive notice of a meeting before or after the time
and date of the meeting by a writing signed by such shareholder. Such waiver
shall be delivered to the corporation for filing with the corporate records.
Further, by attending a meeting either in person or by proxy, a shareholder
waives objection to lack of notice or defective notice of the meeting unless
the shareholder objects at the beginning of the meeting to the holding of the
meeting or the transaction of business at the meeting because of lack of
notice or defective notice. By attending the meeting, the shareholder also
waives any objection to consideration at the meeting of a particular matter
not within the purpose or purposes described in the meeting notice unless the
shareholder objects to considering the matter when it is presented.
Section 5. Fixing of Record Date. For the purpose of determining
shareholders entitled to (i) notice of or vote at any meeting of shareholders
or any adjournment thereof, (ii) receive distributions or share dividends, or
(iii) demand a special meeting, or to make a determination of shareholders
for any other proper purpose, the board of directors may fix a future date as
the record date for any such determination of shareholders, such date in any
case to be not more than sixty days, and, in case of a meeting of
shareholders, not less than ten days, prior to the date on which the
particular action requiring such determination of shareholders is to be
taken. If no record date is fixed by the directors, the record date shall be
the date on which notice of the meeting is mailed to shareholders, or the
date on which the resolution of the board of directors providing for a
distribution is adopted, as the case may be. When a determination of
shareholders entitled to vote at any meeting of shareholders is made as
provided in this Section, such determination shall apply to any adjournment
thereof unless the board of directors fixes a new record date, which it must
do if the meeting is adjourned to a date more than 30 days after use dire
fixed for the original meeting.
Notwithstanding the above, the record date for determining the
shareholders entitled to take action without a meeting or entitled to be
given notice of action so taken shall be the date a writing upon which the
action is taken is first received by the corporation. The record date for
determining shareholders entitled to demand a special meeting shall be the
date of the earliest of any of the demands pursuant to which the meeting is
called.
Section 6. Voting Lists. The secretary shall make, at the earlier of ten
days before each meeting of shareholders or two business days after notice of
the meeting has been given, a complete list of the shareholders entitled to
be given notice of such meeting or any adjournment thereof. The list shall
be arranged by voting groups and within each voting group by class or series
of shares, shall be in alphabetical order within each class or series, and
shall show the address of and the number of shares of each class or series
held by each shareholder. For the period beginning the earlier of ten days
prior to the meeting or two business days after notice of the meeting is
given and continuing through the meeting and any adjournment thereof, this
list shall be kept on file at the principal office of the corporation, or at
a place (which shall be identified in the notice) in the city where the
meeting will be held. Such list shall be available for inspection on written
demand by any shareholder (including for the purpose of this Section 6 any
holder of voting trust certificates) or his agent or attorney during regular
business hours and during the period available for inspection. The original
stock transfer books shall be prima facie evidence as to the shareholders
entitled to examine such list or to vote at any meeting of shareholders.
Any shareholder, his agent or attorney may copy the list during regular
business hours and during the period it is available for inspection, provided
(i) the demand is for a purpose reasonably related to the demanding
shareholder's interest as a shareholder, (ii) the shareholder describes with
reasonable particularity the purpose and the records the shareholder desires
to inspect, (iii) the records are directly connected with the described
purpose, and (iv) the shareholder pays a reasonable charge covering the costs
of labor and material for such copies, not to exceed the estimated cost of
production and reproduction.
Section 7. Recognition Procedure for Beneficial Owners. The board of
directors may adopt by resolution a procedure whereby a shareholder of the
corporation may certify in writing to the corporation that all or a portion
of the shares registered in the name of such shareholder are held for the
account of a specified person or persons. The resolution may set forth (1)
the types of nominees to which it applies, (ii) the rights or privileges that
the corporation will recognize in a beneficial owner, which may include
rights and privileges other than voting, (iii) the form of certification and
the information to be contained therein, (iv) if the certification is with
respect to a record date, the tine within which the certification must be
received by the corporation, (v) the period for which the nominee's use of
the procedure is effective, and (vi) such other provisions with respect to
the procedure as the board deems necessary or desirable. Upon receipt by the
corporation of a certificate complying with the procedure established by the
board of directors, the persons specified in the certification shall be
deemed, for the purpose or purposes set forth in the certification, to be the
registered holders of the number of shares specified in place of the
shareholder making the certification.
Section 8. Quorum and Manner of Acting. One-third of the votes entitled to
be cast on a matter by a voting group shall constitute a quorum of that
voting group for action on the matter. If less than one-third of such votes
are represented at a meeting, a majority of the votes so represented may
adjourn the meeting from time to time without further notice, for a period
not to exceed 30 days for any one adjournment. If a quorum is present at
such adjourned meeting, any business may be transacted which might have been
transacted at the meeting as originally noticed. The shareholders present at
a duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum, unless the meeting is adjourned and a new record date is set for the
adjourned meeting.
Section 9. Proxies. At all meetings of shareholders, a shareholder may vote
by proxy by signing an appointment form or similar writing, either personally
or by his duly authorized attorney-in-fact. A shareholder may also appoint a
proxy by transmitting or authorizing the transmission of a telegram,
teletype, or other electronic transmission providing a written statement of
the appointment to the proxy, a proxy solicitor, proxy support service
organization, or other person duly authorized by the proxy to receive
appointments as agent for the proxy, or to the corporation. The transmitted
appointment shall set forth or be transmitted with written evidence from
which it can be determined that the shareholder transmitted or authorized the
transmission of the appointment. The proxy appointment form or similar
writing, shall be filed with the secretary of the corporation before or at
the time of the meeting. The appointment of a proxy is effective when
received by the corporation and is valid for eleven months unless a different
period is expressly provided in the appointment form or similar writing.
Any complete copy, including an electronically transmitted facsimile,
of an appointment of a proxy may be substituted for or used in lieu of the
original appointment for any purpose for which the original appointment could
be used.
Revocation of a proxy does not affect the right of the corporation to
accept the proxy's authority unless (1) the corporation had notice that the
appointment was coupled with an interest and notice that such interest is
extinguished is received by the secretary or other officer or agent
authorized to tabulate votes before the proxy exercises his authority under
the appointment, or (ii) other notice of the revocation of the appointment is
received by the secretary or other officer or agent authorized to tabulate
votes before the proxy exercises his authority under the appointment. Other
notice of revocation may, in the discretion of the corporation, be deemed to
include the appearance at a shareholders' meeting of the shareholder who
granted the proxy and his voting in person on any matter subject to a vote at
such meeting.
The death or incapacity of the shareholder appointing a proxy does not
affect the right of the corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the secretary or other
officer or agent authorized to tabulate votes before the proxy exercises his
authority under the appointment.
The corporation shall not be required to recognize an appointment made
irrevocable if it has received a writing revoking the appointment signed by
the shareholder (including a shareholder who is a successor to the
shareholder who granted the proxy) either personally or by his
attorney-in-fact, notwithstanding that the revocation may be a breach of an
obligation of the shareholder to another person not to revoke the appointment.
Subject to Section 11 and any express limitation on the proxy's
authority appearing on the appointment form, the corporation is entitled to
accept the proxy's vote or other action as that of the shareholder making the
appointment.
Section 10. Voting Shares. Each outstanding share, regardless of class,
shall be entitled to one vote, and each fractional share shall be entitled to
a corresponding fractional vote on each matter submitted to a vote at a
meeting of shareholders, except to the extent that the voting rights of the
shares of any class or classes are limited or denied by the certificate of
incorporation as permitted by the Delaware General Corporation Law.
Cumulative voting shall not be permitted in the election of directors or for
any other purpose.
Section 11. Corporation's Acceptance of Votes. If the name signed on a vote,
consent, waiver, proxy appointment, or proxy appointment revocation
corresponds to the name of a shareholder, the corporation, if acting in good
faith, is entitled to accept the vote, consent, waiver, proxy appointment or
proxy appointment revocation and give it effect as the act of the
shareholder. If the name signed on a vote, consent, waiver, proxy
appointment or proxy appointment revocation does not correspond to the name
of a shareholder, the corporation, if acting in good faith, is nevertheless
entitled to accept the vote, consent, waiver, proxy appointment or proxy
appointment revocation and to give it effect as the act of the shareholder if:
(i) the shareholder is an entity and the name signed purports to be that of
an officer or agent of the entity;
(ii) the name signed purports to be that of an administrator, executor,
guardian or conservator representing the shareholder and, if the corporation
requests, evidence of fiduciary status acceptable to the corporation has been
presented with respect to the vote, consent, waiver, proxy appointment or
proxy appointment revocation;
(iii) the name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the corporation requests, evidence of
this status acceptable to the corporation has been presented with respect to
the vote, consent, waiver, proxy appointment or proxy appointment revocation;
(iv) the name signed purports to be that of a pledgee, beneficial owner or
attorney-in-fact of the shareholder and, if the corporation requests,
evidence acceptable to the corporation of the signatory's authority to sign
for the shareholder has been presented with respect to the vote, consent,
waiver, proxy appointment or proxy appointment revocation;
(v) two or more persons are the shareholder as co-tenants or fiduciaries
and the name signed purports to be the name of at least one of the co-tenants
or fiduciaries, and the person signing appears to be acting on behalf of all
the co-tenants or fiduciaries; or
(vi) the acceptance of the vote, consent, waiver, proxy appointment or proxy
appointment revocation is otherwise proper under rules established by the
corporation that are not inconsistent with this Section 11.
The corporation is entitled to reject a vote, consent, waiver, proxy
appointment or proxy appointment revocation if the secretary or other officer
or agent authorized to tabulate votes, acting in good faith, has reasonable
basis for doubt about the validity of the signature on it or about the
signatory's authority to sign for the shareholder.
Neither the corporation nor its officers nor any agent who accepts or
rejects a vote, consent, waiver, proxy appointment or proxy appointment
revocation in good faith and in accordance with the standards of this Section
is liable in damages for the consequences of the acceptance or rejection.
Section 12. Informal Action by Shareholders. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if a written consent (or counterparts thereof) that sets forth the
action so taken is signed by all of the shareholders entitled to vote with
respect to the subject matter thereof and received by the corporation. Such
consent shall have the same force and effect as a unanimous vote of the
shareholders and may be stated as such in any document. Action taken under
this Section 12 is effective as of the date the last writing necessary to
effect the action is received by the corporation, unless all of the writings
specify a different effective date, in which case such specified date shall
be the effective date for such action. If any shareholder revokes his
consent as provided for herein prior to what would otherwise be the effective
date, the action proposed in the consent shall be invalid. The record date
for determining shareholders entitled to take action without a meeting is the
date the corporation first receives a writing upon which the action is taken.
Any shareholder who has signed a writing describing and consenting to
action taken pursuant to this Section 12 may revoke such consent by a writing
signed by the shareholder describing the action and stating that the
shareholder's prior consent thereto is revoked, if such writing is received
by the corporation before the effectiveness of the action.
Section 13. Meetings by Telecommunication. Any or all of the shareholders
may participate in an annual or special shareholders' meeting by, or the
meeting may be conducted through the use of, any means of communication by
which all persons participating in the meeting may hear each other during the
meeting. A shareholder participating in a meeting by this means is deemed to
be present in person at the meeting.
ARTICLE III
Board of Directors
Section 1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the corporation shall
be managed under the direction of its board of directors, except as otherwise
provided in the Delaware General Corporation Law or the certificate of
incorporation.
Section 2. Number, Qualification and Tenure. The number of the directors
shall be fixed by resolution of the board of directors from time to time and
may be increased or decreased by resolution adopted by the board of directors
from time to time, but no decrease in the number of directors shall have the
effect of shortening the term of any incumbent director. Directors shall be
natural persons at least eighteen years old but need not be residents of the
State of Delaware or shareholders of the corporation. The board of directors
shall be elected at the annual meeting of the shareholders or at a special
meeting called for that purpose. Each director shall be elected to hold
office until the next annual meeting of shareholders and until the director's
successor is elected and qualified.
Section 3. Vacancies. Any director may resign at any time by giving written
notice to the corporation. Such resignation shall take effect at the time
the notice is received by the corporation unless the notice specifies a later
effective date. Unless otherwise specified in the notice of resignation, the
corporation's acceptance of such resignation shall not be necessary to make
it effective. Any vacancy on the board of directors may be filled by the
affirmative vote of a majority of the shareholders or the board of
directors. If the directors remaining in office constitute fewer than a
quorum of the board, the directors may fill the vacancy by the affirmative
vote of a majority of all directors remaining in office. If elected by the
directors, the director shall hold office until the next annual shareholders'
meeting at which directors are elected. If elected by the shareholders, the
director shall hold office for the unexpired term of his predecessor in
office; except that, if the director's predecessor was elected by the
directors to fill a vacancy, the director elected by the shareholders shall
hold office for the unexpired term of the last predecessor elected by the
shareholders.
Section 4. Regular Meetings. A regular meeting of the board of directors
shall be held without notice immediately after and at the same place as the
annual meeting of shareholders. The boars of directors may provide by
resolution the time and place, either within or outside Delaware, for the
holding of additional regular meetings without other notice.
Section 5. Special Meetings. Special meetings of the board of directors may
be called by or at the request of the chairman of the board, the president or
any two directors. The person or persons authorized to call special meetings
of the board of directors may fix any place, either within or outside
Delaware, as the place for holding any special meeting of the board of
directors called by them.
Section 6. Notice. Notice of any special meeting shall be given at least
one day prior to the meeting by written notice either personally delivered or
mailed to each director at his business address, or by notice transmitted by
telegraph, telex, electronically transmitted facsimile or other form of wire
or wireless communication. If mailed, such notice shall be deemed to be
given and to be effective on the earlier of (1) three days after such notice
is deposited in the United States mail, properly addressed, with postage
prepaid, or (ii) the date shown on the return receipt, if mailed by
registered or certified mail return receipt requested. If notice is given by
telex, electronically transmitted facsimile or other similar form of wire or
wireless communication, such notice shall be deemed to be given and to be
effective when sent, and with respect to a telegram, such notice shall be
deemed to be given and to be effective when the telegram is delivered to the
telegraph company. If a director has designated in writing one or more
reasonable addresses or facsimile numbers for delivery of notice to him,
notice sent by mail, telegraph, telex, electronically transmitted facsimile
or other form of wire or wireless communication shall not be deemed to have
been given or to be effective unless sent to such addresses or facsimile
numbers, as the case may be.
A director may waive notice of a meeting before or after the time and
date of the meeting by a writing signed by such director. Such waiver shall
be delivered to the corporation for filing with the corporate records.
Further, a director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless at the beginning of the meeting,
or promptly upon his later arrival, the director objects to holding the
meeting or transacting business at the meeting because of lack of notice or
defective notice and does not thereafter vote for or assent to action taken
at the meeting. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the board of directors need be
specified in the notice or waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by the board
of directors pursuant to Section 2 or, if no number is fixed, a majority of
the number in office immediately before the meeting begins, shall constitute
a quorum for the transaction of business at any meeting of the board of
directors.
If less than such a majority is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice, for a period not to exceed thirty days at any one adjournment.
Section 8. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the
board of directors.
Section 9. Compensation. By resolution of the board of directors, any
director may be paid any one or more of the following: his expenses, if any,
of attendance at meetings, a fixed sum for attendance at each meeting, a
stated salary as director, or such other compensation as the corporation and
the directory may reasonably agree upon. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
Section 10. Presumption of Assent. A director of the corporation who is
present at a meeting of the board of directors or committee of the board at
which action on any corporate matter is taken shall be presumed to have
assented to the action taken unless (1) the director objects at the beginning
of the meeting, or promptly upon his arrival, to the holding of the meeting
or the transaction of business at the meeting and does not thereafter vote
for or assent to any action taken at the meeting, (ii) the director
contemporaneously requests that his dissent or abstention as to any specific
action taken be entered in the minutes of the meeting, or (iii) the director
causes written notice of his dissent or abstention as to any specific action
to be received by the presiding officer of the meeting before its adjournment
or by the corporation promptly after the adjournment of the meeting. A
director may dissent to a specific action at a meeting, while assenting to
others. The right to dissent to a specific action taken at a meeting of the
board of directors or a committee of the board shall not be available to a
director who voted in favor of such action.
Section 11. Committee. By resolution adopted by a majority of all the
directors in office when the action is taken, the board of directors may
designate from among its members an executive committee and one or more other
committees, and appoint one or more members of the board of directors to
serve on them. To the extent provided in the resolution, each committee
shall have all the authority of the board of directors, provided that no
committee shall have any authority over matters, which, under the Delaware
General Corporation Law, may only be considered by the Board of Directors and
not by any committee thereof.
Section 12. Other Sections. Sections 4, 5, 6, 7, 8 and 12 of Article III,
which govern meetings, notice, waiver of notice, quorum, voting requirements
and action without a meeting of the board of directors, shall apply to
committees and their members appointed under this Section 11.
Neither designation of any such committee, the delegation of authority
to such committee, nor any action by such committee pursuant to its authority
shall alone constitute compliance by any member of the board of directors or
a member of the committee in question with his responsibility to conform to
the standard of care set forth in Article III, Section 14 of these bylaws.
Section 13. Informal Action by Directors. Any action required or permitted
to be taken at a meeting of the directors or any committee designated by the
board of directors may be taken without a meeting if a written consent (or
counterparts thereof) that sets forth the action so taken is signed by all of
the directors entitled to vote with respect to the action taken. Such
consent shall have the same force and effect as a unanimous vote of the
directors or committee members and may be stated as such in any document.
Unless the consent specifies a different effective date, action taken under
this Section 12 is effective at the time the last director signs a writing
describing the action taken, unless, before such time, any director has
revoked his consent by a writing signed by the director and received by the
president or the secretary of the corporation.
Section 14. Telephonic Meetings. The board of directors may permit any
directors (or any member of a committee designated by the board) to
participate in a regular or special meeting of the board of directors or a
committee thereof through the use of any means of communication by which all
directors participating in the meeting can hear each other during the
meeting. A director participating in a meeting in this manner is deemed to
be present in person at the meeting.
Section 15. Standard of Care. A director shall perform his duties as a
director, including without limitation his duties as a member of any
committee of the board, in good faith, in a manner he reasonably believes to
be in the best interests of the corporation, and with the care an ordinarily
prudent person in a like position would exercise under similar
circumstances. In performing his duties, a director shall be entitled to
rely on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by
the persons herein designated. However, he shall not be considered to be
acting in good faith if he has knowledge concerning the matter in question
that would cause such reliance to be unwarranted. A director shall not be
liable to the corporation or its shareholders for any action he takes or
omits to take as a director if, in connection with such action or omission,
he performs his duties in compliance with this Section 14.
The designated persons on whom a director is entitled to rely are (1)
one or more officers or employees of the corporation whom the director
reasonably believes to be reliable and competent in the matter presented,
(ii) legal counsel, public accountant, or other person as to matters which
the director reasonably believes to be within such person's professional or
expert competence, or (iii) a committee of the board of directors on which
the director does not serve if the director reasonably believes the committee
merits confidence.
ARTICLE IV
Officers and Agents
Section 1. General. The officers of the corporation shall be a president,
one or more vice presidents, a secretary and a treasurer, each of whom shall
be a natural person eighteen years of age or older. The board of directors
or an officer or officers authorized by the board may appoint such other
officers, assistant officers, committees and agents, including a chairman of
the board, assistant secretaries and assistant treasurers, as they may
consider necessary. The board of directors or the officer or officers
authorized by the board shall from time to time determine the procedure for
the appointment of officers, their term of office, their authority and duties
and their compensation. One person may hold more than one office. In all
cases where the duties of any officer, agent or employee are not prescribed
by the bylaws or by the board of directors, such officer, agent or employee
shall follow the orders and instructions of the president of the corporation.
Section 2. Appointment and Term of Office. The officers of the corporation
shall be appointed by the board of directors at each annual meeting of the
board held after each annual meeting of shareholders. If the appointment of
officers is not made at such meeting or if an officer or officers are to
appointed by another officer or officers of the corporation, such
appointments shall be made as soon thereafter as conveniently may be. Each
officer shall hold office until the first of the following occurs: his
successor shall have been duly appointed and qualified, his death, his
resignation, or his removal in the manner provided in Section 3.
Section 3. Resignation and Removal. An officer may resign at any time by
giving written notice of resignation to the corporation. The resignation is
effective when the notice is received by the corporation unless the notice
specifies a later effective date.
Any officer or agent may be removed at any time with or without cause
by the board of directors or an officer or officers authorized by the board.
Such removal does not affect the contract rights, if any, of the corporation
or of the person so removed. The appointment of an officer or agent shall
not in itself create contract rights.
Section 4. Vacancies. A vacancy in any office, however occurring, may be
filled by the board of directors, or by the officer or officers authorized by
the board, for the unexpired portion of the officer's term. If an officer
resigns and his resignation is made effective at a later date, the board of
directors, or officer or officers authorized by the board, may permit the
officer to remain in office until the effective date and may fill the pending
vacancy before the effective date if the board of directors or officer or
officers authorized by the board provide that the successor shall not take
office until the effective date. In the alternative, the board of directors,
or officer or officers authorized by the board of directors, may remove the
officer at any time before the effective date and may fill the resulting
vacancy.
Section 5. President. Subject to the direction and supervision of the board
of directors, the president shall be the chief executive officer of the
corporation, and shall have general and active control of its affairs and
business and general supervision of its officers, agents and employees.
Unless otherwise directed by the board of directors, the president shall
attend in person or by substitute appointed by him, or shall execute on
behalf of the corporation written instruments appointing a proxy or proxies
to represent the corporation at, all meetings of the stockholders of any
other corporation in which the corporation holds any stock. On behalf of the
corporation, the president may in person or by substitute or by proxy execute
written waivers of notice and consents with respect to any such meetings. At
all such meetings and otherwise, the president in person or by substitute or
proxy, may vote the stock held by the corporation, execute written consents
and other instruments with respect to such stock, and exercise any and all
rights and powers incident to the ownership of said stock, subject to the
instructions, if any, of the board of directors. The president shall have
custody of the treasurer's bond, if any.
Section 6. Vice Presidents. The vice presidents shall assist the president
and shall perform such duties as may be assigned to them by the president or
by the board of directors. In the absence of the president, the vice
president, if any (or, if more than one, the vice presidents in the order
designated by the board of directors, or if the board makes no such
designation, the vice president designated by the president, or if neither
the board nor the president makes any such designation, the senior vice
president as determined by first election to that office), shall have the
powers and perform the duties of the president.
Section 7. Secretary. The secretary shall (1) prepare and maintain as
permanent records the minutes of the proceedings of the shareholders and the
board of directors, a record of all actions taken by the shareholders or
board of directors without a meeting, a record of all actions taken by a
committee of the board of directors in place of the board of directors on
behalf of the corporation, and a record of all waivers of notice of meetings
of shareholders and of the board of directors or any committee thereof, (ii)
see that all notices are duly given in accordance with the provisions of
these bylaws and as required by law, (iii) serve as custodian of the
corporate records and of the seal of the corporation and affix the seal to
all documents when authorized by the board of directors, (iv) keep at the
corporation's registered office or principal place of business a record
containing the names and addresses of all shareholders in a form that permits
preparation of a list of shareholders arranged by voting group and by class
or series of shares within each voting group, that is alphabetical within
each class or series and that shows the address of, and the number of shares
of such class or series held by, each shareholder, unless such a record
shall be kept at the office of the corporation's transfer agent or registrar,
(v) maintain at the corporation's principal office the originals or copies of
the corporation's certificate of incorporation, bylaws, minutes of all
shareholders' meetings and records of all action taken by shareholders
without a meeting for the past three years, all written communications within
the past three years to shareholders as a group or the holders of any class
or series of shares as a group, a list of the names and business addresses of
the current directors and officers, a copy of the corporation's most recent
corporate report filed with the Secretary of State and financial statements
showing in reasonable detail the corporation's assets and liabilities and
results of operations for the last three years, (vi) have general charge of
the stock transfer books of the corporation, unless the corporation has a
transfer agent, (vii) authenticate records of the corporation, and (viii) in
general, perform all duties incident to the office of secretary and such
other duties as from time to time may be assigned to him by the president or
by the board of directors. Assistant secretaries, if any, shall have the
same duties and powers, subject to supervision by the secretary. The
directors and/or shareholders may however respectively designate a person
other than the secretary or assistant secretary to keep the minutes of their
respective meetings.
Any books, records, or minutes of the corporation may be in written
form or in any form capable of being converted into written form within a
reasonable time.
Section 8. Treasurer. The treasurer shall be the principal financial
officer of the corporation, shall have the care and custody of all funds,
securities, evidences of indebtedness and other personal property of the
corporation and shall deposit the same in accordance with the instructions of
the board of directors. He shall receive and give receipts and acquittances
for money paid in on account of the corporation, and shall pay out of the
corporation's funds on hand all bills, payrolls and other just debts of the
corporation of whatever nature upon maturity. He shall perform all other
duties incident to the office of the treasurer and, upon request of the
board, shall make such reports to it as may be required at any time. He
shall, if required by the board, give the corporation a bond in such sums and
with such sureties as shall be satisfactory to the board, conditioned upon
the faithful performance of his duties and for the restoration to the
corporation of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation. He shall have such other powers and perform such other duties
as may from time to time be prescribed by the board of directors or the
president. The assistant treasurers, if any, shall have the same powers and
duties, subject to the supervision of the treasurer.
The treasurer keep complete books and records of account as required by
the Delaware General Corporation Law, prepare and file all local, state and
federal tax returns, prescribe and maintain an adequate system of internal
audit and prepare and furnish to the president and the board of directors
statements of account showing the financial position of the corporation and
the results of its operations.
ARTICLE V
Stock
Section 1. Certificates. The board of directors shall be authorized to
issue any of its classes of shares with or without certificates. The fact
that the shares are not represented by certificates shall have no effect on
the rights and obligations of shareholders. If the shares are represented by
certificates, such shares shall be represented by consecutively numbered
certificates signed, either manually or by facsimile, in the name of the
corporation by one or more persons designated by the board of directors. In
case any officer who has signed or whose facsimile signature has been placed
upon such certificate shall have ceased to be such officer before such
certificate is issued, such certificate may nonetheless be issued by the
corporation with the same effect as if he were such officer at the date of
its issue. Certificates of stock shall be in such form and shall contain
such information consistent with law as shall be prescribed by the board of
directors. If shares are not represented by certificates, within a
reasonable time following the issue or transfer of such shares, the
corporation shall send the shareholder a complete written statement of all of
the information required to be provided to holders of uncertificated shares
by the Delaware General Corporation Law.
Section 2. Consideration for Shares. Certificated or uncertificated shares
shall not be issued until the shares represented thereby are fully paid. The
board of directors may authorize the issuance of shares for consideration
consisting of any tangible or intangible property or benefit to the
corporation, including cash, promissory notes, services performed or other
securities of the corporation. Future services shall not constitute payment
or partial payment for shares of the corporation. The promissory note of a
subscriber or an affiliate of a subscriber shall not constitute payment or
partial payment for shares of the corporation unless the note is negotiable
and is secured by collateral, other than the shares being purchased, having a
fair market value at least equal to the principal amount of the note. The
corporation may place in escrow shares issued in consideration of a
promissory note, or make other arrangement to restrict transfer of the shares
issued for any such consideration, and may credit the distributions in
respect of the shares against the purchase price until the note is paid, or
the payments are received. If the note is not paid, the shares escrowed or
restricted or the distributions credited may be cancelled in whole or part.
For purposes of this Section 2, "promissory note" means a negotiable
instrument on which there is an obligation to pay independent of collateral
and does not include a non-recourse note.
Section 3. Lost Certificates. In case of the alleged loss, destruction or
mutilation of a certificate of stock, the board of directors may direct the
issuance of a new certificate in lieu thereof upon such terms and conditions
in conformity with law as the board may prescribe. The board of directors
may in its discretion require an affidavit of lost certificate and/or bond in
such form and amount and with such surety as it may determine before issuing
a new certificate.
Section 4. Transfer of Shares. Upon surrender to the corporation or to a
transfer agent of the corporation of a certificate of stock duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, and receipt of such documentary stamps as may be required by law
and evidence of compliance with all applicable securities laws and other
restrictions, the corporation shall issue a new certificate to the person
entitled thereto, and cancel the old certificate. Every such transfer of
stock shall be entered on the stock books of the corporation, which shall be
kept at its principal office or by the person and the place designated by the
board of directors.
Except as otherwise expressly provided in Article 11, Sections 7 and
11, and except for the assertion of dissenters' rights to the extent provided
in the Delaware General Corporation Law, the corporation shall be entitled to
treat the registered holder of any shares of the corporation as the owner
thereof for all purposes, and the corporation shall not be bound to recognize
any equitable or other claim to, or interest in, such shares or rights
deriving from such shares on the part of any person other than the registered
holder, including without limitation any purchaser, assignee or transferee of
such shares or rights deriving from such shares, unless and until such other
person becomes the registered holder of such shares, whether or not the
corporation shall have either actual or constructive notice of the claimed
interest of such other person.
Section 5. Transfer Agent, Registrars and Paving Agents. The board may at
its discretion appoint one or more transfer agents, registrars and agents for
making payment upon any class of stock, bond, debenture or other security of
the corporation. Such agents and registrars may be located either within or
outside Delaware. They shall have such rights and duties and shall be
entitled to such compensation as may be agreed.
ARTICLE VI
Indemnification of Certain Persons
Section 1...General Indemnification. The provisions of this Article
VI and Article VII shall apply except to the extent inconsistent with the
terms of the corporation's certificate of incorporation. For purposes of
Article VI, a "Proper Person" means any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, and whether formal or informal, by reason of the fact that he
is or was a director, officer, employee, fiduciary or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, fiduciary or agent of any
foreign or domestic profit or nonprofit corporation or of any partnership,
joint venture, trust, profit or nonprofit unincorporated association, limited
liability company, or other enterprise or employee benefit plan. The
corporation shall indemnify any Proper Person against reasonably incurred
expenses (including attorneys' fees), judgments, penalties, fines (including
any excise tax assessed with respect to an employee benefit plan) and amounts
paid in settlement reasonably incurred by him in connection with such action,
suit or proceeding if it is determined by the groups set forth in Section 4
of this Article that he conducted himself in good faith and that he
reasonably believed (1) in the case of conduct in his official capacity with
the corporation, that his conduct was in the corporation's best interests, or
(ii) in all other cases (except criminal cases), that his conduct was at
least not opposed to the corporation's best interests, or (iii) in the case
of any criminal proceeding, that he had no reasonable cause to believe his
conduct was unlawful. A Proper Person will be deemed to be acting in his
official capacity while acting as a director, officer, employee or agent on
behalf of this corporation and not while acting on this corporation's behalf
for some other entity.
No indemnification shall be made under this Article VI to a Proper
Person with respect to any claim, issue or matter in connection with a
proceeding by or in the right of a corporation in which the Proper Person was
adjudged liable to the corporation or in connection with any proceeding
charging that the Proper Person derived an improper personal benefit, whether
or not involving action in an official capacity, in which he was adjudged
liable on the basis that he derived an improper personal benefit. Further,
indemnification under this Section in connection with a proceeding brought by
or in the right of the corporation shall be limited to reasonable expenses,
including attorneys' fees, incurred in connection with the proceeding.
Section 1. Right to Indemnification. The corporation shall indemnify any
Proper Person who was wholly successful, on the merits or otherwise, in
defense of any action, suit, or proceeding as to which he was entitled to
indemnification under Section 1 of this Article VI against expenses
(including attorneys' fees) reasonably incurred by him in connection with the
proceeding without the necessity of any action by the corporation other than
the determination in good faith that the defense has been wholly successful.
Section 2. Effect of Termination of Action. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction, or upon a
plea of nolo contendere or its equivalent shall not of itself create a
presumption that the person seeking indemnification did not meet the
standards of conduct described in Section 1 of this Article VI. Entry of
judgment by consent as part of a settlement shall not be deemed an
adjudication of liability, as described in Section 2 of this Article VI.
Section 3. Groups Authorized to Make Indemnification Determination. Except
where there is a right to indemnification as set forth in Section 1 or 2 of
this Article or where indemnification is ordered by a court in Section 5, any
indemnification shall be made by the corporation only as authorized in the
specific case upon a determination by a proper group that indemnification of
the Proper Person is permissible under the circumstances because he has met
the applicable standards of conduct set forth in Section 1 of this Article.
This determination shall be made by the board of directors by a majority vote
of those present at a meeting at which a quorum is present, which quorum
shall consist of directors not parties to the proceeding ("Quorum"). If a
Quorum cannot be obtained, the determination shall be made by a majority vote
of a committee of the board of directors not parties to the proceeding,
except that directors who are parties to the proceeding may participate in
the designation of directors for the committee. If a Quorum of the board of
directors cannot be obtained and the committee cannot be established, or even
if a Quorum is obtained or the committee is designated and a majority of the
directors constituting such Quorum or committee so directs, the determination
shall be made by (1) independent legal counsel selected by a vote of the
board of directors or the committee in the manner specified in this Section
4, or, if a Quorum of the full board of directors cannot be obtained and a
committee cannot be established, by independent legal counsel selected by a
majority vote of the full board (including directors who are parties to the
action) or (ii) a vote of the shareholders.
Section 4. Court-Ordered Indemnification. Any Proper Person may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction for mandatory indemnification under Section 2 of this
Article, including indemnification for reasonable expenses incurred to obtain
court-ordered indemnification. If the court determines that such Proper
Person is fairly and reasonably entitled to indemnification in view of all
the relevant circumstances, whether or not he met the standards of conduct
set forth in Section 1 of this Article or was adjudged liable in the
proceeding, the court may order such indemnification as the court deems
proper except that if the Proper Person has been adjudged liable,
indemnification shall be limited to reasonable expenses incurred in
connection with the proceeding and reasonable expenses incurred to obtain
court-ordered indemnification.
Section 5. Advance of Expenses. Reasonable expenses (including attorneys'
fees) incurred in defending an action, suit or proceeding as described in
Section 1 may be paid by the corporation to any Proper Person in advance of
the final disposition of such action, suit or proceeding upon receipt of (1)
a written affirmation of such Proper Person's good faith belief that he has
met the standards of conduct prescribed by Section 1 of this Article VI, (ii)
a written undertaking, executed personally or on the Proper Person's behalf,
to repay such advances if it is ultimately determined that he did not meet
the prescribed standards of conduct (the undertaking shall be an unlimited
general obligation of the Proper Person but need not be secured and may be
accepted without reference to financial ability to make repayment), and (iii)
a determination is made by the proper group (as described in Section 4 of
this Article VI) that the facts as then known to the group would not preclude
indemnification. Determination and authorization of payments shall be made
in the same manner specified in Section 4 of this Article VI.
ARTICLE VII
Provision of Insurance
By action of the board of directors, notwithstanding any interest of
the directors in the action, the corporation may purchase and maintain
insurance, in such scope and amounts as the board of directors deems
appropriate, on behalf of any person who is or was a director, officer,
employee, fiduciary or agent of the corporation, or who, while a director,
officer, employee, fiduciary or agent of the corporation, is or was serving
at the request of the corporation as a director, officer, partner, trustee,
employee, fiduciary or agent of any other foreign or domestic corporation or
of any partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company or other enterprise or employee
benefit plan, against any liability asserted against, or incurred by, him in
that capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under the provisions of Article VI or applicable law. Any such insurance may
be procured from any insurance company designated by the board of directors
of the corporation, whether such insurance company is formed under the laws
of Delaware or any other jurisdiction of the United States or elsewhere,
including any insurance company in which the corporation has an equity
interest or any other interest, through stock ownership or otherwise.
ARTICLE VIII......
Miscellaneous
Section 1. Seal. The corporate seal of the corporation shall be circular in
form and shall contain the name of the corporation and such other words as
shall be required by law.
Section 2. Fiscal Year. The fiscal year of the corporation shall be as
established by the board of directors.
Section 3. Amendments. The board of directors shall have power, to the
maximum extent permitted by the Delaware General Corporation Law, to make,
amend and repeal the bylaws of the corporation at any regular or special
meeting of the board unless the shareholders, in making, amending or
repealing a particular bylaw, expressly provide that the directors may not
amend or repeal such by law. The shareholders also shall have the power to
make, amend or repeal the bylaws of the corporation at any annual meeting or
at any special meeting called for that purpose.
Section 4. Gender. The masculine gender is used in these bylaws as a matter
of convenience only and shall be interpreted to include the feminine and
neuter genders as the circumstances indicate.
Section 5. Conflicts. In the event of any irreconcilable conflict between
these bylaws and either the corporation's certificate of incorporation or
applicable law, the latter shall control.
Section 6. Definitions. Except as otherwise specifically provided in these
bylaws, all terms used in these bylaws shall have the same definition as in
the Delaware General Corporation Law.
Annex F
MEDIX RESOURCES, INC.
2003 STOCK INCENTIVE PLAN
1. Purposes. This 2003 Stock Incentive Plan (the "Program") is intended to
secure for Medix Resources, Inc. (the "Corporation"), its direct and indirect
present and future subsidiaries, including without limitation any entity which
the Corporation reasonably expects to become a subsidiary (the "Subsidiaries"),
and its shareholders, the benefits arising from ownership of the Corporation's
common stock, par value $.001 per share (the "Common Stock"), by those selected
directors, officers, key employees and consultants of the Corporation and the
Subsidiaries who are most responsible for future growth. The Program is designed
to help attract and retain superior individuals for positions of substantial
responsibility with the Corporation and the Subsidiaries and to provide these
persons with an additional incentive to contribute to the success of the
Corporation and the Subsidiaries.
2. Elements of the Program. In order to maintain flexibility in the award
of benefits, the Program is comprised of four parts -- the Incentive Stock
Incentive Plan ("Incentive Plan"), the Supplemental Stock Incentive Plan
("Supplemental Plan"), the Stock Appreciation Rights Plan ("SAR Plan") and the
Performance Share Plan ("Performance Share Plan"). Copies of the Incentive Plan,
Supplemental Plan, SAR Plan, Performance Share Plan and Non-Employee Director
Stock Incentive Plan are attached hereto as Parts I, II, III, IV and V,
respectively. Each such plan is referred to herein as a "Plan" and all such
plans are collectively referred to herein as the "Plans." The term "Plans" shall
also refer to the Program in its entirety, including the General Provisions. The
grant of an option or other award under one of the Plans shall not be construed
to prohibit the grant of an option or other award under any of the other Plans.
3. Applicability of General Provisions. Unless any of the Plans
specifically indicates to the contrary, all Plans shall be subject to the
general provisions of the Program set forth below under the heading "General
Provisions of the Stock Incentive Plan" (the "General Provisions").
GENERAL PROVISIONS OF THE STOCK INCENTIVE PLAN
Article 1. Administration. The Plans shall be administered by the Board of
Directors of the Corporation (the "Board" or the "Board of Directors") or any
duly created committee appointed by the Board and charged with the
administration of the Plans. To the extent required in order to satisfy the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), such committee shall consist solely of "Outside Directors" (as
defined herein). The Board, or any duly appointed committee, when acting to
administer the Plans, is referred to as the "Plan Administrator". Any action of
the Plan Administrator shall be taken by majority vote at a meeting or by
unanimous written consent of all members without a meeting. No Plan
Administrator or member of the Board of the Corporation shall be liable for any
action or determination made in good faith with respect to the Plans or with
respect to any option or other award granted pursuant to the Plans. For purposes
of the Plans, the term "Outside Director" shall mean a director who (a) is not a
current employee of the Corporation or the Subsidiaries; (b) is not a former
employee of the Corporation or the Subsidiaries who receives compensation for
prior services (other than benefits under a tax-qualified retirement plan)
during the then current taxable year; (c) has not been an officer of the
Corporation or the Subsidiaries; and (d) does not receive remuneration (which
shall be deemed to include any payment in exchange for goods or services) from
the Corporation or the Subsidiaries, either directly or indirectly, in any
capacity other than as a director, except as otherwise permitted under Code
Section 162(m) and the regulations thereunder.
Article 2. Authority of Plan Administrator. Subject to the other provisions
of this Program, and with a view to effecting its purpose, the Plan
Administrator shall have the authority: (a) to construe and interpret the Plans;
(b) to define the terms used herein; (c) to prescribe, amend and rescind rules
and regulations relating to the Plans; (d) to determine the persons to whom
options, stock appreciation rights and performance shares shall be granted under
the Plans; (e) to determine the time or times at which options, stock
appreciation rights and performance shares shall be granted under the Plans; (f)
to determine the number of shares subject to any option or stock appreciation
right under the Plans and the number of shares to be awarded as performance
shares under the Plans as well as the option price, and the duration of each
option, stock appreciation right and performance share, and any other terms and
conditions of options, stock appreciation rights and performance shares; and (g)
to make any other determinations necessary or advisable for the administration
of the Plans and to do everything necessary or appropriate to administer the
Plans. All decisions, determinations and interpretations made by the Plan
Administrator shall be binding and conclusive on all participants in the Plans
and on their legal representatives, heirs and beneficiaries.
Article 3. Maximum Number of Shares Subject to the Plans. The maximum
aggregate number of shares issuable pursuant to the Plans shall be [_______]1
shares of Common Stock. No one person participating in the Plans may receive
options or other awards for more than 750,0002 shares of Common Stock in any
calendar year. All such shares may be issued under any of the Plans which is
part of the Program. If any of the options (including incentive stock options)
or stock appreciation rights granted under the Plans expire or terminate for any
reason before they have been exercised in full, the unissued shares subject to
those expired or terminated options and/or stock appreciation rights shall again
be available for purposes of the Program. If the performance objectives
associated with the grant of any performance shares are not achieved within the
specified performance objective period or if the performance share grant
terminates for any reason before the performance objective date arrives, the
shares of Common Stock associated with such performance shares shall again be
available for the purposes of the Plans. Any shares of Common Stock delivered
pursuant to the Plans may consist, in whole or in part, of authorized and
unissued shares or treasury shares.
Article 4. Eligibility and Participation. All directors (including
non-employee directors), officers, employees and consultants of the Corporation
and the Subsidiaries shall be eligible to participate in the Plans, except that
only employees shall be eligible to participate in the Incentive Plan. The term
"employee" shall include any person who has agreed to become an employee and the
term "consultant" shall include any person who has agreed to become a
consultant.
Article 5. Effective Date and Term of the Program. The Program shall become
effective immediately upon approval of the Program by the Board of Directors of
the Corporation, subject to approval of the Program by the shareholders of the
Corporation within twelve months after the date of approval of the Program by
the Board of Directors. The Program shall continue in effect for a term of ten
years from the date that the Program is adopted by the Board of Directors,
unless sooner terminated by the Board of Directors of the Corporation.
Article 6. Adjustments. In the event that the outstanding shares of Common
Stock of the Corporation are hereafter increased, decreased, changed into or
exchanged for a different number or kind of shares or securities through merger,
consolidation, combination, exchange of shares, other reorganization,
recapitalization, reclassification, stock dividend, stock split or reverse stock
split (an "Adjustment Event"), an appropriate and proportionate adjustment shall
be made by the Plan Administrator in the maximum number and kind of shares as to
which options, stock appreciation rights and performance shares may be granted
under the Plans A corresponding adjustment changing the number or kind of shares
allocated to unexercised options, stock appreciation rights and performance
shares, or portions thereof, which shall have been granted prior to any such
Adjustment Event shall likewise be made. Any such adjustment in outstanding
options or stock appreciation rights shall be made without change in the
aggregate purchase price applicable to the unexercised portion of the option or
stock appreciation right but with a corresponding adjustment in the price for
each share or other unit of any security covered by the option or stock
appreciation right. In making any adjustment pursuant to this Article 6, any
fractional shares shall be disregarded.
Article 7. Termination and Amendment of Plans and Awards. No options, stock
appreciation rights or performance shares shall be granted under any of the
Plans after the termination of such Plan. The Plan Administrator may at any time
amend or revise the terms of any of the Plans or of any outstanding option,
stock appreciation right or performance share issued under such Plan, provided,
however, that (a) any shareholder approval required by applicable law or
regulation (including without limitation Section 422 of the Code) shall be
obtained and (b) no amendment, suspension or termination of any of the Plans or
of any outstanding option, stock appreciation right or performance share shall,
without the consent of the person who has received such option or other award,
impair any of that person's rights or obligations under such option or other
award.
Article 8. Privileges of Stock Ownership. Notwithstanding the exercise of
any option granted pursuant to the terms of the Plans or the achievement of any
performance objective specified in any performance share granted pursuant to the
terms of the Performance Share Plan, no person shall have any of the rights or
privileges of a shareholder of the Corporation in respect of any shares of stock
issuable upon the exercise of his or her option or achievement of his or her
performance objective until certificates representing the shares of Common Stock
covered thereby have been issued and delivered. No adjustment shall be made for
dividends or any other distributions for which the record date is prior to the
date on which any stock certificate is issued pursuant to the Plans.
Article 9. Reservation of Shares of Common Stock. During the term of the
Program, the Corporation will at all times reserve and keep available such
number of shares of its Common Stock as shall be sufficient to satisfy the
requirements of the Program.
Article 10. Tax Withholding. The exercise of any option, stock appreciation
right or performance share is subject to the condition that, if at any time the
Corporation shall determine, in its discretion, that the satisfaction of
withholding tax or other withholding liabilities under any state or federal law
is necessary or desirable as a condition of, or in connection with, such
exercise or the delivery or purchase of shares pursuant thereto, then, in such
event, the exercise of the option, stock appreciation right or performance share
or the elimination of the risk of forfeiture relating thereto shall not be
effective unless such withholding tax or other withholding liabilities shall
have been satisfied in a manner acceptable to the Corporation.
Article 11. Employment; Service as a Director or Consultant. Nothing in the
Program gives to any person any right to continued employment by the Corporation
or the Subsidiaries or to continued service as a director or consultant of the
Corporation or the Subsidiaries or limits in any way the right of the
Corporation or the Subsidiaries at any time to terminate or alter the terms of
that employment or service.
Article 12. Investment Letter; Lock-Up Agreement; Restrictions on
Obligation of the Corporation to Issue Securities; Restrictive Legend. Any
person acquiring or receiving Common Stock or other securities of the
Corporation pursuant to the Plans, as a condition precedent to receiving the
shares of Common Stock or other securities, may be required by the Plan
Administrator to submit a letter to the Corporation (a) stating that the shares
of Common Stock or other securities are being acquired for investment and not
with a view to the distribution thereof and (b) providing other assurances
determined by the Corporation to be necessary or appropriate in order to assure
that the issuance of such shares is exempt from any applicable securities
registration requirements. The Corporation shall not be obligated to sell or
issue any shares of Common Stock or other securities pursuant to the Plans
unless, on the date of sale and issuance thereof, the shares of Common Stock or
other securities are either registered under the Securities Act of 1933, as
amended, and all applicable state securities laws, or exempt from registration
thereunder. All shares of Common Stock and other securities issued pursuant to
the Plans shall, if determined to be necessary by the Plan Administrator, bear a
restrictive legend summarizing any restrictions on transferability applicable
thereto, including those imposed by federal and state securities laws.
Article 13. Covenant Against Competition. The Plan Administrator shall have
the right to condition the award to an employee of the Corporation or the
Subsidiaries of any option, stock appreciation right or performance share under
the Plans upon the recipient's execution and delivery to the Corporation of an
agreement not to compete with the Corporation and its Subsidiaries during the
recipient's employment and for such period thereafter as shall be determined by
the Plan Administrator. Such covenant against competition shall be in a form
satisfactory to the Plan Administrator.
Article 14. Rights Upon Termination of Employment, Service as a Consultant
or Service as a Director. Notwithstanding any other provision of the Plans, any
benefit granted to an individual who has agreed to become an employee of, or
consultant to, the Corporation or any Subsidiary or to become an employee of or
consultant to any entity which the Corporation reasonably expects to become a
Subsidiary, shall immediately terminate if the Plan Administrator determines, in
its sole discretion, that such person or entity, as the case may be, will not
become such employee, consultant or Subsidiary. If a recipient ceases to be
employed by or to provide services as a consultant or director to the
Corporation or any Subsidiary, or a corporation or a parent or subsidiary of
such corporation issuing or assuming a stock option in a transaction to which
Section 424(a) of the Code applies:
(a) because of termination by the Company or a Subsidiary without
cause, all options and stock appreciation rights may be exercised, to the
extent exercisable on the date of termination, until 90 days after the date
on which the employment or service terminated, but in any event not later
than the date on which the option or stock appreciation right would
otherwise terminate pursuant to the Plans, and all Naked Rights (as defined
in the Stock Appreciation Rights Plan) not payable on the date of
termination and all performance share awards still subject to the
achievement of performance objectives shall terminate immediately;
(b) because of termination by the Company or a Subsidiary for cause,
all options and other awards shall lapse immediately on the date of such
termination;
(c) because of voluntary termination at the election of the recipient,
all options and stock appreciation rights may be exercised, to the extent
exercisable on the date of termination, until 30 days after the date on
which the employment or service terminated, but in any event not later than
the date on which the option or stock appreciation right would otherwise
terminate pursuant to the Plans, and all Naked Rights (as defined in the
Stock Appreciation Rights Plan) not payable on the date of termination and
all performance share awards still subject to the achievement of
performance objectives shall terminate immediately; and
(d) because of death or disability, all options and stock appreciation
rights may be exercised, to the extent exercisable on the date of
termination, until twelve months after the date on which the employment or
service terminated, but in any event not later than the date on which the
option or stock appreciation right would otherwise terminate pursuant to
the Plans, and all other awards (including all Naked Rights and performance
shares still subject to the achievement of performance objectives) shall
terminate immediately.
No exercise permitted by this Article 14 shall entitle an optionee or his or her
personal representative, executor or administrator to exercise any portion of
any option or stock appreciation right beyond the extent to which such option or
stock appreciation right is exercisable pursuant to the Program on the date the
recipient's employment or service terminates.
Article 15. Non-Transferability. Options and other awards granted under the
Plans may not be sold, pledged, assigned or transferred in any manner by the
recipient otherwise than by will or by the laws of descent and distribution and
shall be exercisable (a) during the recipient's lifetime only by the recipient
and (b) after the recipient's death only by the recipient's executor,
administrator or personal representative, provided, however, that the Plan
Administrator may permit the recipient of a supplemental option granted pursuant
to Part II of the Program to transfer such options to a family member or a
trust, limited liability company or partnership created for the benefit of
family members, subject to such conditions as the Plan Administrator shall
determine to be appropriate. In the case of such a transfer, the transferee's
rights and obligations with respect to the applicable options shall be
determined by reference to the recipient and the recipient's rights and
obligations with respect to the applicable options had no transfer been made.
The recipient shall remain obligated pursuant to Articles 10 and 12 hereunder if
required by applicable law.
Article 16. Change in Control.3 All options granted pursuant to the Plans
shall become fully exercisable upon the occurrence of a Change in Control Event.
As used in the Plans, a "Change in Control Event" shall be deemed to have
occurred if any of the following events occur:
(a) the consummation of any consolidation or merger of the Corporation
in which the Corporation is not the continuing or surviving corporation or
pursuant to which shares of the Common Stock would be converted into cash,
securities or other property, other than (i) a merger of the Corporation in
which the holders of the shares of Common Stock immediately prior to the
merger own more than fifty percent (50%) of the common stock of the
surviving corporation immediately after the merger; or
(b) the consummation of any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Corporation, other than to a
subsidiary or affiliate; or
(c) an approval by the shareholders of the Corporation of any plan or
proposal for the liquidation or dissolution of the Corporation; or
(d) any action pursuant to which any person (as such term is defined
in Section 13(d) of the Exchange Act), corporation or other entity (other
than any person who owns more than ten percent (10%) of the outstanding
Common Stock on the date of adoption of this Program by the Board of
Directors, the Corporation or any benefit plan sponsored by the Corporation
or any of its subsidiaries) shall become the "beneficial owner" (as such
term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of shares of capital stock entitled to vote generally for the
election of directors of the Corporation ("Voting Securities") representing
more than fifty (50%) percent of the combined voting power of the
Corporation's then outstanding Voting Securities (calculated as provided in
Rule 13d-3(d) in the case of rights to acquire any such securities),
unless, prior to such person so becoming such beneficial owner, the Board
shall determine that such person so becoming such beneficial owner shall
not constitute a Change in Control.
Article 17. Merger or Asset Sale. For purposes of the Plans, a merger or
consolidation which would constitute a Change in Control Event pursuant to
Article 16 and a sale of assets which would constitute a Change in Control Event
pursuant to Article 16 are hereinafter referred to as "Article 17 Events". In
the event of an Article 17 Event, each outstanding option shall be assumed or an
equivalent benefit shall be substituted by the entity determined by the Board of
Directors of the Corporation to be the successor corporation. However, in the
event that any such successor corporation does not agree in writing, at least 15
days prior to the anticipated date of consummation of such Article 17 Event, to
assume or so substitute each such option, then each option not so assumed or
substituted shall be deemed to be fully vested and exercisable 15 days prior to
the anticipated date of consummation of such Article 17 Event. If an option is
not so assumed or subject to such substitution, the Plan Administrator shall
notify the holder thereof in writing or electronically that (a) such holder's
option shall be fully exercisable until immediately prior to the consummation of
such Article 17 Event and (b) such holder's option shall terminate upon the
consummation of such Article 17 Event. For purposes of this Article 17, an
option shall be considered assumed if, following consummation of the applicable
Article 17 Event, the option confers the right to purchase or receive, for each
share of Common Stock subject to the option immediately prior to the
consummation of such Article 17 Event, the consideration (whether stock, cash or
other securities or property) received in such Article 17 Event by holders of
Common Stock for each share of Common Stock held on the effective date of such
Article 17 Event (and, if holders of Common Stock are offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares of Common Stock); provided, however, that if such
consideration received in such Article 17 Event is not solely common stock of
such successor, the Plan Administrator may, with the consent of such successor
corporation, provide for the consideration to be received in connection with
such option to be solely common stock of such successor equal in fair market
value to the per share consideration received by holders of Common Stock in the
Article 17 Event.
Article 18. Method of Exercise. Any optionee may exercise his or her option
from time to time by giving written notice thereof to the Corporation at its
principal office together with payment in full for the shares of Common Stock to
be purchased. The date of such exercise shall be the date on which the
Corporation receives such notice. Such notice shall state the number of shares
to be purchased. The purchase price of any shares purchased upon the exercise of
any option granted pursuant to the Plans shall be paid in full at the time of
exercise of the option by certified or bank cashier's check payable to the order
of the Corporation or, if permitted by the Plan Administrator, by shares of
Common Stock, provided that such shares have been owned by the optionee for more
than six months on the date of surrender to the Corporation, or by a combination
of a check and shares of Common Stock. The Plan Administrator may, in its sole
discretion, permit an optionee to make "cashless exercise" arrangements, to the
extent permitted by applicable law, and may require optionees to utilize the
services of a single broker selected by the Plan Administrator in connection
with any cashless exercise. No option may be exercised for a fraction of a share
of Common Stock. If any portion of the purchase price is paid in shares Common
Stock, those shares shall be valued at their then Fair Market Value as
determined by the Plan Administrator in accordance with Section 4 of the
Incentive Plan.
Article 19. Ten-Year Limitations. Notwithstanding any other provision of
the Plans, (a) no option or other award may be granted pursuant to the Plans
more than ten years after the date on which the Plans were adopted by the Board
of Directors and (b) any option or award granted under the Plans shall, by its
terms, not be exercisable more than ten years after the date of grant.
Article 20. Sunday or Holiday. In the event that the time for the
performance of any action or the giving of any notice is called for under the
Plans within a period of time which ends or falls on a Sunday or legal holiday,
such period shall be deemed to end or fall on the next day following such Sunday
or legal holiday which is not a Sunday or legal holiday.
Article 21. Applicable Option Plan. In the event that a stock option is
granted pursuant to the Program and the Plan Administrator does not specify
whether such option has been granted pursuant to the Incentive Plan or the
Supplemental Plan, such option shall be deemed to be granted pursuant to the
Supplemental Plan.
PART I
INCENTIVE STOCK INCENTIVE PLAN
The following provisions shall apply with respect to options granted by the
Plan Administrator pursuant to Part I of the Program:
Section 1. General. This Incentive Stock Incentive Plan ("Incentive Plan")
is Part I of the Corporation's Program. The Corporation intends that options
granted pursuant to the provisions of the Incentive Plan will qualify and will
be identified as "incentive stock options" within the meaning of Section 422 of
the Code. Unless any provision herein indicates to the contrary, this Incentive
Plan shall be subject to the General Provisions of the Program.
Section 2. Terms and Conditions. The Plan Administrator may grant incentive
stock options to purchase Common Stock to any employee of the Corporation or its
Subsidiaries. The terms and conditions of options granted under the Incentive
Plan may differ from one another as the Plan Administrator shall, in its
discretion, determine, as long as all options granted under the Incentive Plan
satisfy the requirements of the Incentive Plan.
Section 3. Duration of Options. Each option and all rights thereunder
granted pursuant to the terms of the Incentive Plan shall expire on the date
determined by the Plan Administrator, but in no event shall any option granted
under the Incentive Plan expire later than ten years from the date on which the
option is granted. Notwithstanding the foregoing, any option granted under the
Incentive Plan to any person who owns more than 10% of the combined voting power
of all classes of stock of the Corporation or any Subsidiary shall expire no
later than five years from the date on which the option is granted.
Section 4. Purchase Price. The option price with respect to any option
granted pursuant to the Incentive Plan shall not be less than the Fair Market
Value of the shares on the date of the grant of the option; except that the
option price with respect to any option granted pursuant to the Incentive Plan
to any person who owns more than 10% of the combined voting power of all classes
of stock of the Corporation shall not be less than 110% of the Fair Market Value
of the shares on the date the option is granted. For purposes of the Plans, the
phrase "Fair Market Value" shall mean the fair market value of the Common Stock
on the date of grant of an option or other relevant date. If on such date the
Common Stock is listed on the American Stock Exchange or another stock exchange
or is quoted on the automated quotation system of Nasdaq, the Fair Market Value
shall be the closing sale price (or if such price is unavailable, the average of
the high bid price and the low asked price) of a share Common Stock on such
date. If no such closing sale price or bid and asked prices are available, the
Fair Market Value shall be determined in good faith by the Plan Administrator in
accordance with generally accepted valuation principles and such other factors
as the Plan Administrator reasonably deems relevant.
Section 5. Maximum Amount of Options in Any Calendar Year. The aggregate
Fair Market Value (determined as of the time the option is granted) of the
Common Stock with respect to which incentive stock options are exercisable for
the first time by any employee during any calendar year (under the terms of the
Incentive Plan and all incentive Stock Incentive Plans of the Corporation and
the Subsidiaries) shall not exceed $100,000.
Section 6. Exercise of Options. Unless otherwise provided by the Plan
Administrator at the time of grant or unless the installment provisions set
forth herein are subsequently accelerated pursuant to the General Provisions of
the Program or otherwise by the Plan Administrator with respect to any one or
more previously granted options, incentive stock options may only be exercised
to the following extent during the following periods of time:
Maximum Percentage of
Shares Covered by
Option Which May be
During Purchased
------ --------------------------------
First 12 months after grant 0
First 24 months after grant 25%
First 36 months after grant 50%
First 48 months after grant 75%
Beyond 48 months after grant 100%4
Section 7. Failure to Satisfy Applicable Requirements. To the extent that
an option intended to be granted pursuant to the provisions of this Incentive
Plan fails to satisfy one or more requirements of this Incentive Plan, it shall
be deemed to be a supplemental stock option granted pursuant to the Supplemental
Plan set forth as Part II of the Program.
PART II
SUPPLEMENTAL STOCK INCENTIVE PLAN
The following provisions shall apply with respect to options granted by the
Plan Administrator pursuant to Part II of the Program:
Section 1. General. This Supplemental Stock Incentive Plan ("Supplemental
Plan") is Part II of the Corporation's Program. Any option granted pursuant to
this Supplemental Plan shall not be an incentive stock option as defined in
Section 422 of the Code. Unless any provision herein indicates to the contrary,
this Supplemental Plan shall be subject to the General Provisions of the
Program.
Section 2. Terms and Conditions. The Plan Administrator may grant
supplemental stock options to any person eligible under Article 4 of the General
Provisions. The terms and conditions of options granted under this Supplemental
Plan may differ from one another as the Plan Administrator shall, in its
discretion, determine as long as all options granted under this Supplemental
Plan satisfy the requirements of this Supplemental Plan.
Section 3. Duration of Options. Each option and all rights thereunder
granted pursuant to the terms of this Supplemental Plan shall expire on the date
determined by the Plan Administrator, but in no event shall any option granted
under this Supplemental Plan expire later than ten years from the date on which
the option is granted.
Section 4. Purchase Price. The option price with respect to any option
granted pursuant to this Supplemental Plan shall be determined by the Plan
Administrator at the time of grant. In the absence of such a determination, the
option price of any such option shall equal the Fair Market Value of one share
of Common Stock, as determined pursuant to Part I of this Program.
Section 5. Exercise of Options. Unless otherwise provided by the Plan
Administrator at the time of grant or unless the installment provisions set
forth herein are subsequently accelerated pursuant to the General Provisions of
the Program or otherwise by the Plan Administrator with respect to any one or
more previously granted options, supplemental stock options may only be
exercised to the following extent during the following periods of time:
Maximum Percentage of
Shares Covered by
Option Which May be
During Purchased
------ -------------------------------
First 12 months after grant 0
First 24 months after grant 25%
First 36 months after grant 50%
First 48 months after grant 75%
Beyond 48 months after grant 100%
PART III
STOCK APPRECIATION RIGHTS PLAN
Section 1. General. This Stock Appreciation Rights Plan ("SAR Plan") is
Part III of the Corporation's Program.
Section 2. Terms and Conditions. The Plan Administrator may grant stock
appreciation rights to any person eligible under Article 4 of the General
Provisions. Stock appreciation rights may be granted either in tandem with
supplemental stock options or incentive stock options as described in Section 4
of this SAR Plan or as naked stock appreciation rights as described in Section 5
of this SAR Plan.
Section 3. Mode of Payment. At the discretion of the Plan Administrator,
payments to recipients upon exercise of stock appreciation rights may be made in
(a) cash by bank check, (b) shares of Common Stock having a Fair Market Value
(determined in the manner provided in Section 4 of the Incentive Plan) equal to
the amount of the payment, (c) a note in the amount of the payment containing
such terms as are approved by the Plan Administrator or (d) any combination of
the foregoing in an aggregate amount equal to the amount of the payment.
Section 4. Stock Appreciation Right in Tandem with Supplemental or
Incentive Stock Option. A SAR granted in tandem with a supplemental stock option
or an incentive stock option (in either case, an "Option") shall be on the
following terms and conditions:
(a) Each SAR shall relate to a specific Option or portion of an Option
granted under the Supplemental Stock Incentive Plan or Incentive Stock
Incentive Plan, as the case may be, and may be granted by the Plan
Administrator at the same time that the Option is granted or at any time
thereafter prior to the last day on which the Option may be exercised.
(b) A SAR shall entitle a recipient, upon surrender of the unexpired
related Option, or a portion thereof, to receive from the Corporation an
amount equal to the excess of (i) the Fair Market Value (determined in
accordance with Section 4 of the Incentive Plan) of the shares of Common
Stock which the recipient would have been entitled to purchase on that date
pursuant to the portion of the Option surrendered over (ii) the amount
which the recipient would have been required to pay to purchase such shares
upon exercise of such Option.
(c) A SAR shall be exercisable only for the same number of shares of
Common Stock, and only at the same times, as the Option to which it
relates. SARs shall be subject to such other terms and conditions as the
Plan Administrator may specify.
(d) A SAR shall lapse at such time as the related Option is exercised
or lapses pursuant to the terms of the Program. On exercise of the SAR, the
related Option shall lapse as to the number of shares exercised.
Section 5. Naked Stock Appreciation Right. SARs granted by the Plan
Administrator as naked stock appreciation rights ("Naked Rights") shall be
subject to the following terms and conditions:
(a) The Plan Administrator may award Naked Rights to recipients for
periods not exceeding ten years. Each Naked Right shall represent the right
to receive the excess of the Fair Market Value of one share of Common Stock
(determined in accordance with Section 4 of the Incentive Plan) on the date
of exercise of the Naked Right over the Fair Market Value of one share of
Common Stock (determined in accordance with Section 4 of the Incentive
Plan) on the date the Naked Right was awarded to the recipient.
(b) Unless otherwise provided by the Plan Administrator at the time of
award or unless the installment provisions set forth herein are
subsequently accelerated pursuant to the General Provisions of the Program
or otherwise by the Plan Administrator with respect to any one or more
previously granted Naked Rights, Naked Rights may only be exercised to the
following extent during the following periods of employment or service as a
consultant or director:
Maximum Percentage
of Naked Rights Which
During May Be Exercised
------ ------------------------
First 12 months after award 0%
First 24 months after award 25%
First 36 months after award 50%
First 48 months after award 75%
Beyond 48 months after award 100%
(c) The Naked Rights solely measure and determine the amounts to be
paid to recipients upon exercise as provided in Section 5(a). Naked Rights
do not represent Common Stock or any right to receive Common Stock. The
Corporation shall not hold in trust or otherwise segregate amounts which
may become payable to recipients of Naked Rights; such funds shall be part
of the general funds of the Corporation. Naked Rights shall constitute an
unfunded contingent promise to make future payments to the recipient and
shall not reduce the number of shares of Common Stock available under the
Program.
PART IV
PERFORMANCE SHARE PLAN
Section 1. General. This Performance Share Plan ("Performance Share Plan")
is Part IV of the Corporation's Program. Unless any provision herein indicates
to the contrary, this Performance Share Plan shall be subject to the General
Provisions of the Program.
Section 2. Terms and Conditions. The Plan Administrator may grant
performance shares to any person eligible under Article 4 of the General
Provisions. Each performance share grant shall confer upon the recipient thereof
the right to receive a specified number of shares of Common Stock of the
Corporation contingent upon the achievement of specified performance objectives
within a specified performance objective period including, but not limited to,
the recipient's continued employment or status as a consultant through the
period set forth in Section 5 of this Performance Share Plan. At the time of an
award of a performance share, the Plan Administrator shall specify the
performance objectives, the performance objective period or periods and the
period of duration of the performance share grant. Any performance shares
granted under this Plan shall constitute an unfunded promise to make future
payments to the affected person upon the completion of specified conditions.
Section 3. Mode of Payment. At the discretion of the Plan Administrator,
payments of performance shares may be made in (a) shares of Common Stock, (b) a
check in an amount equal to the Fair Market Value (determined in the manner
provided in Section 4 of the Incentive Plan) of the shares of Common Stock to
which the performance share award relates, (c) a note in the amount specified
above in Section 3(b) containing such terms as are approved by the Plan
Administrator or (d) any combination of the foregoing in the aggregate amount
equal to the amount specified above in Section 3(b).
Section 4. Performance Objective Period. The duration of the period within
which to achieve the performance objectives shall be determined by the Plan
Administrator. The period may not be more than ten years from the date that the
performance share is granted. The Plan Administrator shall determine whether
performance objectives have been met with respect to each applicable performance
objective period. Such determination shall be made promptly after the end of
each applicable performance objective period, but in no event later than 90 days
after the end of each applicable performance objective period. All
determinations by the Plan Administrator with respect to the achievement of
performance objectives shall be final, binding on and conclusive with respect to
each recipient.
Section 5. Vesting of Performance Shares. Unless otherwise provided by the
Plan Administrator at the time of grant or unless the installment provisions set
forth herein are subsequently accelerated pursuant to the General Provisions of
the Program or otherwise by the Plan Administrator with respect to any one or
more previously granted performance shares, the Corporation shall pay to the
recipient on the date set forth in Column 1 below ("Vesting Date") the
percentage of the recipient's performance share award set forth in Column 2
below.
Column 1 Column 2
Vesting Date Percentage
------------ ----------
1 year from Date of Grant 25%
2 years from Date of Grant 25%
3 years from Date of Grant 25%
4 years from Date of Grant 25%
--------
1 To be resolved: the number of shares to be subject to the plan.
2 This is an arbitrary number; the important point is to insert a maximum number
of shares for individual grants.
3 We should discuss whether you want all options to accelerate upon a change in
control.
4 We should discuss whether this vesting schedule is acceptable to you.
MEDIX RESOURCES, INC.
2003 STOCK INCENTIVE PLAN
1. Purposes. This 2003 Stock Incentive Plan (the "Program") is intended to
secure for Medix Resources, Inc. (the "Corporation"), its direct and
indirect present and future subsidiaries, including without limitation any
entity which the Corporation reasonably expects to become a subsidiary (the
"Subsidiaries"), and its shareholders, the benefits arising from ownership
of the Corporation's common stock, par value $.001 per share (the "Common
Stock"), by those selected directors, officers, key employees and
consultants of the Corporation and the Subsidiaries who are most
responsible for future growth. The Program is designed to help attract and
retain superior individuals for positions of substantial responsibility
with the Corporation and the Subsidiaries and to provide these persons with
an additional incentive to contribute to the success of the Corporation and
the Subsidiaries.
2. Elements of the Program. In order to maintain flexibility in the award of
benefits, the Program is comprised of four parts -- the Incentive Stock
Incentive Plan ("Incentive Plan"), the Supplemental Stock Incentive Plan
("Supplemental Plan"), the Stock Appreciation Rights Plan ("SAR Plan") and
the Performance Share Plan ("Performance Share Plan"). Copies of the
Incentive Plan, Supplemental Plan, SAR Plan, Performance Share Plan and
Non-Employee Director Stock Incentive Plan are attached hereto as Parts I,
II, III, IV and V, respectively. Each such plan is referred to herein as a
"Plan" and all such plans are collectively referred to herein as the
"Plans." The term "Plans" shall also refer to the Program in its entirety,
including the General Provisions. The grant of an option or other award
under one of the Plans shall not be construed to prohibit the grant of an
option or other award under any of the other Plans.
3. Applicability of General Provisions. Unless any of the Plans specifically
indicates to the contrary, all Plans shall be subject to the general
provisions of the Program set forth below under the heading "General
Provisions of the Stock Incentive Plan" (the "General Provisions").
GENERAL PROVISIONS OF THE STOCK INCENTIVE PLAN
Article 1. Administration. The Plans shall be administered by the Board of
Directors of the Corporation (the "Board" or the "Board of Directors") or
any duly created committee appointed by the Board and charged with the
administration of the Plans. To the extent required in order to satisfy the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), such committee shall consist solely of "Outside
Directors" (as defined herein). The Board, or any duly appointed committee,
when acting to administer the Plans, is referred to as the "Plan
Administrator". Any action of the Plan Administrator shall be taken by
majority vote at a meeting or by unanimous written consent of all members
without a meeting. No Plan Administrator or member of the Board of the
Corporation shall be liable for any action or determination made in good
faith with respect to the Plans or with respect to any option or other
award granted pursuant to the Plans. For purposes of the Plans, the term
"Outside Director" shall mean a director who (a) is not a current employee
of the Corporation or the Subsidiaries; (b) is not a former employee of the
Corporation or the Subsidiaries who receives compensation for prior
services (other than benefits under a tax-qualified retirement plan) during
the then current taxable year; (c) has not been an officer of the
Corporation or the Subsidiaries; and (d) does not receive remuneration
(which shall be deemed to include any payment in exchange for goods or
services) from the Corporation or the Subsidiaries, either directly or
indirectly, in any capacity other than as a director, except as otherwise
permitted under Code Section 162(m) and the regulations thereunder.
Article 2. Authority of Plan Administrator. Subject to the other provisions of
this Program, and with a view to effecting its purpose, the Plan
Administrator shall have the authority: (a) to construe and interpret the
Plans; (b) to define the terms used herein; (c) to prescribe, amend and
rescind rules and regulations relating to the Plans; (d) to determine the
persons to whom options, stock appreciation rights and performance shares
shall be granted under the Plans; (e) to determine the time or times at
which options, stock appreciation rights and performance shares shall be
granted under the Plans; (f) to determine the number of shares subject to
any option or stock appreciation right under the Plans and the number of
shares to be awarded as performance shares under the Plans as well as the
option price, and the duration of each option, stock appreciation right and
performance share, and any other terms and conditions of options, stock
appreciation rights and performance shares; and (g) to make any other
determinations necessary or advisable for the administration of the Plans
and to do everything necessary or appropriate to administer the Plans. All
decisions, determinations and interpretations made by the Plan
Administrator shall be binding and conclusive on all participants in the
Plans and on their legal representatives, heirs and beneficiaries.
Article 3. Maximum Number of Shares Subject to the Plans. The maximum aggregate
number of shares issuable pursuant to the Plans shall be 10,000,000 shares
of Common Stock. No one person participating in the Plans may receive
options or other awards for more than 4,000,000 shares of Common Stock in
any calendar year. All such shares may be issued under any of the Plans
which is part of the Program. If any of the options (including incentive
stock options) or stock appreciation rights granted under the Plans expire
or terminate for any reason before they have been exercised in full, the
unissued shares subject to those expired or terminated options and/or stock
appreciation rights shall again be available for purposes of the Program.
If the performance objectives associated with the grant of any performance
shares are not achieved within the specified performance objective period
or if the performance share grant terminates for any reason before the
performance objective date arrives, the shares of Common Stock associated
with such performance shares shall again be available for the purposes of
the Plans. Any shares of Common Stock delivered pursuant to the Plans may
consist, in whole or in part, of authorized and unissued shares or treasury
shares.
Article 4. Eligibility and Participation. All directors (including non-employee
directors), officers, employees and consultants of the Corporation and the
Subsidiaries shall be eligible to participate in the Plans, except that
only employees shall be eligible to participate in the Incentive Plan. The
term "employee" shall include any person who has agreed to become an
employee and the term "consultant" shall include any person who has agreed
to become a consultant.
Article 5. Effective Date and Term of the Program. The Program shall become
effective immediately upon approval of the Program by the Board of
Directors of the Corporation, subject to approval of the Program by the
shareholders of the Corporation within twelve months after the date of
approval of the Program by the Board of Directors. The Program shall
continue in effect for a term of ten years from the date that the Program
is adopted by the Board of Directors, unless sooner terminated by the Board
of Directors of the Corporation.
Article 6. Adjustments. In the event that the outstanding shares of Common
Stock of the Corporation are hereafter increased, decreased, changed into or
exchanged for a different number or kind of shares or securities through merger,
consolidation, combination, exchange of shares, other reorganization,
recapitalization, reclassification, stock dividend, stock split or reverse stock
split (an "Adjustment Event"), an appropriate and proportionate adjustment shall
be made by the Plan Administrator in the maximum number and kind of shares as to
which options, stock appreciation rights and performance shares may be granted
under the Plans A corresponding adjustment changing the number or kind of shares
allocated to unexercised options, stock appreciation rights and performance
shares, or portions thereof, which shall have been granted prior to any such
Adjustment Event shall likewise be made. Any such adjustment in outstanding
options or stock appreciation rights shall be made without change in the
aggregate purchase price applicable to the unexercised portion of the option or
stock appreciation right but with a corresponding adjustment in the price for
each share or other unit of any security covered by the option or stock
appreciation right. In making any adjustment pursuant to this Article 6, any
fractional shares shall be disregarded.
Article 7. Termination and Amendment of Plans and Awards. No options, stock
appreciation rights or performance shares shall be granted under any of the
Plans after the termination of such Plan. The Plan Administrator may at any
time amend or revise the terms of any of the Plans or of any outstanding
option, stock appreciation right or performance share issued under such
Plan, provided, however, that (a) any shareholder approval required by
applicable law or regulation (including without limitation Section 422 of
the Code) shall be obtained and (b) no amendment, suspension or termination
of any of the Plans or of any outstanding option, stock appreciation right
or performance share shall, without the consent of the person who has
received such option or other award, impair any of that person's rights or
obligations under such option or other award.
Article 8. Privileges of Stock Ownership. Notwithstanding the exercise of any
option granted pursuant to the terms of the Plans or the achievement of any
performance objective specified in any performance share granted pursuant
to the terms of the Performance Share Plan, no person shall have any of the
rights or privileges of a shareholder of the Corporation in respect of any
shares of stock issuable upon the exercise of his or her option or
achievement of his or her performance objective until certificates
representing the shares of Common Stock covered thereby have been issued
and delivered. No adjustment shall be made for dividends or any other
distributions for which the record date is prior to the date on which any
stock certificate is issued pursuant to the Plans.
Article 9. Reservation of Shares of Common Stock. During the term of the
Program, the Corporation will at all times reserve and keep available such
number of shares of its Common Stock as shall be sufficient to satisfy the
requirements of the Program.
Article 10. Tax Withholding. The exercise of any option, stock appreciation
right or performance share is subject to the condition that, if at any time
the Corporation shall determine, in its discretion, that the satisfaction
of withholding tax or other withholding liabilities under any state or
federal law is necessary or desirable as a condition of, or in connection
with, such exercise or the delivery or purchase of shares pursuant thereto,
then, in such event, the exercise of the option, stock appreciation right
or performance share or the elimination of the risk of forfeiture relating
thereto shall not be effective unless such withholding tax or other
withholding liabilities shall have been satisfied in a manner acceptable to
the Corporation.
Article 11. Employment; Service as a Director or Consultant. Nothing in the
Program gives to any person any right to continued employment by the
Corporation or the Subsidiaries or to continued service as a director or
consultant of the Corporation or the Subsidiaries or limits in any way the
right of the Corporation or the Subsidiaries at any time to terminate or
alter the terms of that employment or service.
Article 12. Investment Letter; Lock-Up Agreement; Restrictions on Obligation of
the Corporation to Issue Securities; Restrictive Legend. Any person
acquiring or receiving Common Stock or other securities of the Corporation
pursuant to the Plans, as a condition precedent to receiving the shares of
Common Stock or other securities, may be required by the Plan Administrator
to submit a letter to the Corporation (a) stating that the shares of Common
Stock or other securities are being acquired for investment and not with a
view to the distribution thereof and (b) providing other assurances
determined by the Corporation to be necessary or appropriate in order to
assure that the issuance of such shares is exempt from any applicable
securities registration requirements. The Corporation shall not be
obligated to sell or issue any shares of Common Stock or other securities
pursuant to the Plans unless, on the date of sale and issuance thereof, the
shares of Common Stock or other securities are either registered under the
Securities Act of 1933, as amended, and all applicable state securities
laws, or exempt from registration thereunder. All shares of Common Stock
and other securities issued pursuant to the Plans shall, if determined to
be necessary by the Plan Administrator, bear a restrictive legend
summarizing any restrictions on transferability applicable thereto,
including those imposed by federal and state securities laws.
Article 13. Covenant Against Competition. The Plan Administrator shall have the
right to condition the award to an employee of the Corporation or the
Subsidiaries of any option, stock appreciation right or performance share
under the Plans upon the recipient's execution and delivery to the
Corporation of an agreement not to compete with the Corporation and its
Subsidiaries during the recipient's employment and for such period
thereafter as shall be determined by the Plan Administrator. Such covenant
against competition shall be in a form satisfactory to the Plan
Administrator.
Article 14. Rights Upon Termination of Employment, Service as a Consultant or
Service as a Director. Notwithstanding any other provision of the Plans,
any benefit granted to an individual who has agreed to become an employee
of, or consultant to, the Corporation or any Subsidiary or to become an
employee of or consultant to any entity which the Corporation reasonably
expects to become a Subsidiary, shall immediately terminate if the Plan
Administrator determines, in its sole discretion, that such person or
entity, as the case may be, will not become such employee, consultant or
Subsidiary. If a recipient ceases to be employed by or to provide services
as a consultant or director to the Corporation or any Subsidiary, or a
corporation or a parent or subsidiary of such corporation issuing or
assuming a stock option in a transaction to which Section 424(a) of the
Code applies:
(a) because of termination by the Company or a Subsidiary without cause,
all options and stock appreciation rights may be exercised, to the
extent exercisable on the date of termination, until 90 days after the
date on which the employment or service terminated, but in any event
not later than the date on which the option or stock appreciation
right would otherwise terminate pursuant to the Plans, and all Naked
Rights (as defined in the Stock Appreciation Rights Plan) not payable
on the date of termination and all performance share awards still
subject to the achievement of performance objectives shall terminate
immediately;
(b) because of termination by the Company or a Subsidiary for cause, all
options and other awards shall lapse immediately on the date of such
termination;
(c) because of voluntary termination at the election of the recipient, all
options and stock appreciation rights may be exercised, to the extent
exercisable on the date of termination, until 30 days after the date
on which the employment or service terminated, but in any event not
later than the date on which the option or stock appreciation right
would otherwise terminate pursuant to the Plans, and all Naked Rights
(as defined in the Stock Appreciation Rights Plan) not payable on the
date of termination and all performance share awards still subject to
the achievement of performance objectives shall terminate immediately;
and
(d) because of death or disability, all options and stock appreciation
rights may be exercised, to the extent exercisable on the date of
termination, until twelve months after the date on which the
employment or service terminated, but in any event not later than the
date on which the option or stock appreciation right would otherwise
terminate pursuant to the Plans, and all other awards (including all
Naked Rights and performance shares still subject to the achievement
of performance objectives) shall terminate immediately.
No exercise permitted by this Article 14 shall entitle an optionee or his or her
personal representative, executor or administrator to exercise any portion of
any option or stock appreciation right beyond the extent to which such option or
stock appreciation right is exercisable pursuant to the Program on the date the
recipient's employment or service terminates.
Article 15. Non-Transferability. Options and other awards granted under the
Plans may not be sold, pledged, assigned or transferred in any manner by
the recipient otherwise than by will or by the laws of descent and
distribution and shall be exercisable (a) during the recipient's lifetime
only by the recipient and (b) after the recipient's death only by the
recipient's executor, administrator or personal representative, provided,
however, that the Plan Administrator may permit the recipient of a
supplemental option granted pursuant to Part II of the Program to transfer
such options to a family member or a trust, limited liability company or
partnership created for the benefit of family members, subject to such
conditions as the Plan Administrator shall determine to be appropriate. In
the case of such a transfer, the transferee's rights and obligations with
respect to the applicable options shall be determined by reference to the
recipient and the recipient's rights and obligations with respect to the
applicable options had no transfer been made. The recipient shall remain
obligated pursuant to Articles 10 and 12 hereunder if required by
applicable law.
Article 16. Change in Control. All options granted pursuant to the Plans shall
become fully exercisable upon the occurrence of a Change in Control Event.
As used in the Plans, a "Change in Control Event" shall be deemed to have
occurred if any of the following events occur:
(a) the consummation of any consolidation or merger of the Corporation in
which the Corporation is not the continuing or surviving corporation
or pursuant to which shares of the Common Stock would be converted
into cash, securities or other property, other than (i) a merger of
the Corporation in which the holders of the shares of Common Stock
immediately prior to the merger own more than fifty percent (50%) of
the common stock of the surviving corporation immediately after the
merger; or
(b) the consummation of any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Corporation, other than to a
subsidiary or affiliate; or
(c) an approval by the shareholders of the Corporation of any plan or
proposal for the liquidation or dissolution of the Corporation; or
(d) any action pursuant to which any person (as such term is defined in
Section 13(d) of the Exchange Act), corporation or other entity (other
than any person who owns more than ten percent (10%) of the
outstanding Common Stock on the date of adoption of this Program by
the Board of Directors, the Corporation or any benefit plan sponsored
by the Corporation or any of its subsidiaries) shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of shares of capital stock
entitled to vote generally for the election of directors of the
Corporation ("Voting Securities") representing more than fifty (50%)
percent of the combined voting power of the Corporation's then
outstanding Voting Securities (calculated as provided in Rule 13d-3(d)
in the case of rights to acquire any such securities), unless, prior
to such person so becoming such beneficial owner, the Board shall
determine that such person so becoming such beneficial owner shall not
constitute a Change in Control.
Article 17. Merger or Asset Sale. For purposes of the Plans, a merger or
consolidation which would constitute a Change in Control Event pursuant to
Article 16 and a sale of assets which would constitute a Change in Control
Event pursuant to Article 16 are hereinafter referred to as "Article 17
Events". In the event of an Article 17 Event, each outstanding option shall
be assumed or an equivalent benefit shall be substituted by the entity
determined by the Board of Directors of the Corporation to be the successor
corporation. However, in the event that any such successor corporation does
not agree in writing, at least 15 days prior to the anticipated date of
consummation of such Article 17 Event, to assume or so substitute each such
option, then each option not so assumed or substituted shall be deemed to
be fully vested and exercisable 15 days prior to the anticipated date of
consummation of such Article 17 Event. If an option is not so assumed or
subject to such substitution, the Plan Administrator shall notify the
holder thereof in writing or electronically that (a) such holder's option
shall be fully exercisable until immediately prior to the consummation of
such Article 17 Event and (b) such holder's option shall terminate upon the
consummation of such Article 17 Event. For purposes of this Article 17, an
option shall be considered assumed if, following consummation of the
applicable Article 17 Event, the option confers the right to purchase or
receive, for each share of Common Stock subject to the option immediately
prior to the consummation of such Article 17 Event, the consideration
(whether stock, cash or other securities or property) received in such
Article 17 Event by holders of Common Stock for each share of Common Stock
held on the effective date of such Article 17 Event (and, if holders of
Common Stock are offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding shares
of Common Stock); provided, however, that if such consideration received in
such Article 17 Event is not solely common stock of such successor, the
Plan Administrator may, with the consent of such successor corporation,
provide for the consideration to be received in connection with such option
to be solely common stock of such successor equal in fair market value to
the per share consideration received by holders of Common Stock in the
Article 17 Event.
Article 18. Method of Exercise. Any optionee may exercise his or her option from
time to time by giving written notice thereof to the Corporation at its
principal office together with payment in full for the shares of Common
Stock to be purchased. The date of such exercise shall be the date on which
the Corporation receives such notice. Such notice shall state the number of
shares to be purchased. The purchase price of any shares purchased upon the
exercise of any option granted pursuant to the Plans shall be paid in full
at the time of exercise of the option by certified or bank cashier's check
payable to the order of the Corporation or, if permitted by the Plan
Administrator, by shares of Common Stock, provided that such shares have
been owned by the optionee for more than six months on the date of
surrender to the Corporation, or by a combination of a check and shares of
Common Stock. The Plan Administrator may, in its sole discretion, permit an
optionee to make "cashless exercise" arrangements, to the extent permitted
by applicable law, and may require optionees to utilize the services of a
single broker selected by the Plan Administrator in connection with any
cashless exercise. No option may be exercised for a fraction of a share of
Common Stock. If any portion of the purchase price is paid in shares Common
Stock, those shares shall be valued at their then Fair Market Value as
determined by the Plan Administrator in accordance with Section 4 of the
Incentive Plan.
Article 19. Ten-Year Limitations. Notwithstanding any other provision of the
Plans, (a) no option or other award may be granted pursuant to the Plans
more than ten years after the date on which the Plans were adopted by the
Board of Directors and (b) any option or award granted under the Plans
shall, by its terms, not be exercisable more than ten years after the date
of grant.
Article 20. Sunday or Holiday. In the event that the time for the performance of
any action or the giving of any notice is called for under the Plans within
a period of time which ends or falls on a Sunday or legal holiday, such
period shall be deemed to end or fall on the next day following such Sunday
or legal holiday which is not a Sunday or legal holiday.
Article 21. Applicable Option Plan. In the event that a stock option is granted
pursuant to the Program and the Plan Administrator does not specify whether
such option has been granted pursuant to the Incentive Plan or the
Supplemental Plan, such option shall be deemed to be granted pursuant to
the Supplemental Plan.
PART I
INCENTIVE STOCK INCENTIVE PLAN
The following provisions shall apply with respect to options granted by the
Plan Administrator pursuant to Part I of the Program:
Section 1. General. This Incentive Stock Incentive Plan ("Incentive Plan") is
Part I of the Corporation's Program. The Corporation intends that options
granted pursuant to the provisions of the Incentive Plan will qualify and
will be identified as "incentive stock options" within the meaning of
Section 422 of the Code. Unless any provision herein indicates to the
contrary, this Incentive Plan shall be subject to the General Provisions of
the Program.
Section 2. Terms and Conditions. The Plan Administrator may grant incentive
stock options to purchase Common Stock to any employee of the Corporation
or its Subsidiaries. The terms and conditions of options granted under the
Incentive Plan may differ from one another as the Plan Administrator shall,
in its discretion, determine, as long as all options granted under the
Incentive Plan satisfy the requirements of the Incentive Plan.
Section 3. Duration of Options. Each option and all rights thereunder granted
pursuant to the terms of the Incentive Plan shall expire on the date
determined by the Plan Administrator, but in no event shall any option
granted under the Incentive Plan expire later than ten years from the date
on which the option is granted. Notwithstanding the foregoing, any option
granted under the Incentive Plan to any person who owns more than 10% of
the combined voting power of all classes of stock of the Corporation or any
Subsidiary shall expire no later than five years from the date on which the
option is granted.
Section 4. Purchase Price. The option price with respect to any option granted
pursuant to the Incentive Plan shall not be less than the Fair Market Value
of the shares on the date of the grant of the option; except that the
option price with respect to any option granted pursuant to the Incentive
Plan to any person who owns more than 10% of the combined voting power of
all classes of stock of the Corporation shall not be less than 110% of the
Fair Market Value of the shares on the date the option is granted. For
purposes of the Plans, the phrase "Fair Market Value" shall mean the fair
market value of the Common Stock on the date of grant of an option or other
relevant date. If on such date the Common Stock is listed on the American
Stock Exchange or another stock exchange or is quoted on the automated
quotation system of Nasdaq, the Fair Market Value shall be the closing sale
price (or if such price is unavailable, the average of the high bid price
and the low asked price) of a share Common Stock on such date. If no such
closing sale price or bid and asked prices are available, the Fair Market
Value shall be determined in good faith by the Plan Administrator in
accordance with generally accepted valuation principles and such other
factors as the Plan Administrator reasonably deems relevant.
Section 5. Maximum Amount of Options in Any Calendar Year. The aggregate Fair
Market Value (determined as of the time the option is granted) of the
Common Stock with respect to which incentive stock options are exercisable
for the first time by any employee during any calendar year (under the
terms of the Incentive Plan and all incentive Stock Incentive Plans of the
Corporation and the Subsidiaries) shall not exceed $100,000.
Section 6. Exercise of Options. Unless otherwise provided by the Plan
Administrator at the time of grant or unless the installment provisions set
forth herein are subsequently accelerated pursuant to the General
Provisions of the Program or otherwise by the Plan Administrator with
respect to any one or more previously granted options, incentive stock
options may only be exercised to the following extent during the following
periods of time:
Maximum Percentage of
Shares Covered by
Option Which May be
During Purchased
------ --------------------------------
First 12 months after grant 0
First 24 months after grant 25%
First 36 months after grant 50%
First 48 months after grant 75%
Beyond 48 months after grant 100%
Section 7. Failure to Satisfy Applicable Requirements. To the extent that an
option intended to be granted pursuant to the provisions of this Incentive
Plan fails to satisfy one or more requirements of this Incentive Plan, it
shall be deemed to be a supplemental stock option granted pursuant to the
Supplemental Plan set forth as Part II of the Program.
PART II
SUPPLEMENTAL STOCK INCENTIVE PLAN
The following provisions shall apply with respect to options granted by the
Plan Administrator pursuant to Part II of the Program:
Section 1. General. This Supplemental Stock Incentive Plan ("Supplemental Plan")
is Part II of the Corporation's Program. Any option granted pursuant to
this Supplemental Plan shall not be an incentive stock option as defined in
Section 422 of the Code. Unless any provision herein indicates to the
contrary, this Supplemental Plan shall be subject to the General Provisions
of the Program.
Section 2. Terms and Conditions. The Plan Administrator may grant supplemental
stock options to any person eligible under Article 4 of the General
Provisions. The terms and conditions of options granted under this
Supplemental Plan may differ from one another as the Plan Administrator
shall, in its discretion, determine as long as all options granted under
this Supplemental Plan satisfy the requirements of this Supplemental Plan.
Section 3. Duration of Options. Each option and all rights thereunder granted
pursuant to the terms of this Supplemental Plan shall expire on the date
determined by the Plan Administrator, but in no event shall any option
granted under this Supplemental Plan expire later than ten years from the
date on which the option is granted.
Section 4. Purchase Price. The option price with respect to any option granted
pursuant to this Supplemental Plan shall be determined by the Plan
Administrator at the time of grant. In the absence of such a determination,
the option price of any such option shall equal the Fair Market Value of
one share of Common Stock, as determined pursuant to Part I of this
Program.
Section 5. Exercise of Options. Unless otherwise provided by the Plan
Administrator at the time of grant or unless the installment provisions set
forth herein are subsequently accelerated pursuant to the General
Provisions of the Program or otherwise by the Plan Administrator with
respect to any one or more previously granted options, supplemental stock
options may only be exercised to the following extent during the following
periods of time:
Maximum Percentage of
Shares Covered by
Option Which May be
During Purchased
------ ------------------------------
First 12 months after grant 0
First 24 months after grant 25%
First 36 months after grant 50%
First 48 months after grant 75%
Beyond 48 months after grant 100%
PART III
STOCK APPRECIATION RIGHTS PLAN
Section 1. General. This Stock Appreciation Rights Plan ("SAR Plan") is Part III
of the Corporation's Program.
Section 2. Terms and Conditions. The Plan Administrator may grant stock
appreciation rights to any person eligible under Article 4 of the General
Provisions. Stock appreciation rights may be granted either in tandem with
supplemental stock options or incentive stock options as described in
Section 4 of this SAR Plan or as naked stock appreciation rights as
described in Section 5 of this SAR Plan.
Section 3. Mode of Payment. At the discretion of the Plan Administrator,
payments to recipients upon exercise of stock appreciation rights may be
made in (a) cash by bank check, (b) shares of Common Stock having a Fair
Market Value (determined in the manner provided in Section 4 of the
Incentive Plan) equal to the amount of the payment, (c) a note in the
amount of the payment containing such terms as are approved by the Plan
Administrator or (d) any combination of the foregoing in an aggregate
amount equal to the amount of the payment.
Section 4. Stock Appreciation Right in Tandem with Supplemental or Incentive
Stock Option. A SAR granted in tandem with a supplemental stock option or
an incentive stock option (in either case, an "Option") shall be on the
following terms and conditions:
(a) Each SAR shall relate to a specific Option or portion of an Option
granted under the Supplemental Stock Incentive Plan or Incentive Stock
Incentive Plan, as the case may be, and may be granted by the Plan
Administrator at the same time that the Option is granted or at any
time thereafter prior to the last day on which the Option may be
exercised.
(b) A SAR shall entitle a recipient, upon surrender of the unexpired
related Option, or a portion thereof, to receive from the Corporation
an amount equal to the excess of (i) the Fair Market Value (determined
in accordance with Section 4 of the Incentive Plan) of the shares of
Common Stock which the recipient would have been entitled to purchase
on that date pursuant to the portion of the Option surrendered over
(ii) the amount which the recipient would have been required to pay to
purchase such shares upon exercise of such Option.
(c) A SAR shall be exercisable only for the same number of shares of
Common Stock, and only at the same times, as the Option to which it
relates. SARs shall be subject to such other terms and conditions as
the Plan Administrator may specify.
(d) A SAR shall lapse at such time as the related Option is exercised or
lapses pursuant to the terms of the Program. On exercise of the SAR,
the related Option shall lapse as to the number of shares exercised.
Section 5. Naked Stock Appreciation Right. SARs granted by the Plan
Administrator as naked stock appreciation rights ("Naked Rights") shall be
subject to the following terms and conditions:
(a) The Plan Administrator may award Naked Rights to recipients for
periods not exceeding ten years. Each Naked Right shall represent the
right to receive the excess of the Fair Market Value of one share of
Common Stock (determined in accordance with Section 4 of the Incentive
Plan) on the date of exercise of the Naked Right over the Fair Market
Value of one share of Common Stock (determined in accordance with
Section 4 of the Incentive Plan) on the date the Naked Right was
awarded to the recipient.
(b) Unless otherwise provided by the Plan Administrator at the time of
award or unless the installment provisions set forth herein are
subsequently accelerated pursuant to the General Provisions of the
Program or otherwise by the Plan Administrator with respect to any one
or more previously granted Naked Rights, Naked Rights may only be
exercised to the following extent during the following periods of
employment or service as a consultant or director:
Maximum Percentage
of Naked Rights Which
During May Be Exercised
------ ------------------------
First 12 months after award 0%
First 24 months after award 25%
First 36 months after award 50%
First 48 months after award 75%
Beyond 48 months after award 100%
(c) The Naked Rights solely measure and determine the amounts to be paid
to recipients upon exercise as provided in Section 5(a). Naked Rights
do not represent Common Stock or any right to receive Common Stock.
The Corporation shall not hold in trust or otherwise segregate amounts
which may become payable to recipients of Naked Rights; such funds
shall be part of the general funds of the Corporation. Naked Rights
shall constitute an unfunded contingent promise to make future
payments to the recipient and shall not reduce the number of shares of
Common Stock available under the Program.
PART IV
PERFORMANCE SHARE PLAN
Section 1. General. This Performance Share Plan ("Performance Share Plan") is
Part IV of the Corporation's Program. Unless any provision herein indicates
to the contrary, this Performance Share Plan shall be subject to the
General Provisions of the Program.
Section 2. Terms and Conditions. The Plan Administrator may grant performance
shares to any person eligible under Article 4 of the General Provisions.
Each performance share grant shall confer upon the recipient thereof the
right to receive a specified number of shares of Common Stock of the
Corporation contingent upon the achievement of specified performance
objectives within a specified performance objective period including, but
not limited to, the recipient's continued employment or status as a
consultant through the period set forth in Section 5 of this Performance
Share Plan. At the time of an award of a performance share, the Plan
Administrator shall specify the performance objectives, the performance
objective period or periods and the period of duration of the performance
share grant. Any performance shares granted under this Plan shall
constitute an unfunded promise to make future payments to the affected
person upon the completion of specified conditions.
Section 3. Mode of Payment. At the discretion of the Plan Administrator,
payments of performance shares may be made in (a) shares of Common Stock,
(b) a check in an amount equal to the Fair Market Value (determined in the
manner provided in Section 4 of the Incentive Plan) of the shares of Common
Stock to which the performance share award relates, (c) a note in the
amount specified above in Section 3(b) containing such terms as are
approved by the Plan Administrator or (d) any combination of the foregoing
in the aggregate amount equal to the amount specified above in Section
3(b).
Section 4. Performance Objective Period. The duration of the period within which
to achieve the performance objectives shall be determined by the Plan
Administrator. The period may not be more than ten years from the date that
the performance share is granted. The Plan Administrator shall determine
whether performance objectives have been met with respect to each
applicable performance objective period. Such determination shall be made
promptly after the end of each applicable performance objective period, but
in no event later than 90 days after the end of each applicable performance
objective period. All determinations by the Plan Administrator with respect
to the achievement of performance objectives shall be final, binding on and
conclusive with respect to each recipient.
Section 5. Vesting of Performance Shares. Unless otherwise provided by the Plan
Administrator at the time of grant or unless the installment provisions set
forth herein are subsequently accelerated pursuant to the General
Provisions of the Program or otherwise by the Plan Administrator with
respect to any one or more previously granted performance shares, the
Corporation shall pay to the recipient on the date set forth in Column 1
below ("Vesting Date") the percentage of the recipient's performance share
award set forth in Column 2 below.
Column 1 Column 2
Vesting Date Percentage
------------ ----------
1 year from Date of Grant 25%
2 years from Date of Grant 25%
3 years from Date of Grant 25%
4 years from Date of Grant 25%