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CONNECT-CARE, LLC
Financial Statements
for the year ended
December 31, 2002
CONNECT-CARE, LLC
Contents
| | Page | |
|---|---|---|
| Independent Auditors' Report | 2 | |
Balance Sheet | 3 | |
Statement of Operations | 4 | |
Statement of Changes in Members' Deficit | 5 | |
Statement of Cash Flows | 6 | |
Notes to Financial Statements | 7-12 |
To the Board of Managers
Connect-Care, LLC
Alpharetta, Georgia
We have audited the accompanying balance sheet of Connect-Care, LLC as of December 31, 2002, and the related statements of operations, changes in members' deficit and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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 Connect-Care, LLC as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/S/ CHERRY, BEKAERT & HOLLAND, L.L.P.
Atlanta, Georgia
February 27, 2003
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Connect-Care, LLC
Balance Sheet
December 31, 2002
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 23,972 | |||||
| Accounts receivable, net of allowance for doubtful accounts of $137,144 | 982,435 | ||||||
| Prepaid expenses and other current assets | 49,650 | ||||||
| Total current assets | 1,056,057 | ||||||
Property and equipment, net | 44,216 | ||||||
| Total assets | $ | 1,100,273 | |||||
| Liabilities and Members' Deficit | |||||||
| Current liabilities: | |||||||
| Accounts payables and accrued expenses | $ | 529,434 | |||||
| Deferred revenue | 804,948 | ||||||
| Total current liabilities | 1,334,382 | ||||||
Note payable to member | 3,583,660 | ||||||
| Accrued interest | 567,943 | ||||||
| Total liabilities | 5,485,985 | ||||||
| Commitments and contingencies (Note 7) | |||||||
Members' deficit | |||||||
| Common stock, no par; 15,000,000 shares authorized; 15,000,000 shares issued | 1,640,405 | ||||||
| Notes receivable due from employees | (25,706 | ) | |||||
| Accumulated deficit | (6,000,411 | ) | |||||
| Total members' deficit | (4,385,712 | ) | |||||
| Total liabilities and members' deficit | $ | 1,100,273 | |||||
The accompanying notes are an integral part of these financial statements
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Connect-Care, LLC
Statement of Operations
December 31, 2002
| Revenue | ||||||
| Software licenses | $ | 975,744 | ||||
| Professional services | 771,776 | |||||
| Support and maintenance | 917,661 | |||||
| 2,665,181 | ||||||
| Costs and expenses | ||||||
| Cost of revenue: | ||||||
| Software licenses | 155,525 | |||||
| Professional services | 460,553 | |||||
| Support and maintenance | 354,447 | |||||
| Selling and marketing | 444,432 | |||||
| Product development | 265,998 | |||||
| General and administrative | 980,744 | |||||
| 2,661,699 | ||||||
| Income from operations | 3,482 | |||||
| Interest expense | 206,001 | |||||
| Net loss | $ | (202,519 | ) | |||
The accompanying notes are an integral part of these financial statements
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Connect-Care, LLC
Statement of Changes in Members' Deficit
December 31, 2002
| | Shares | Common Stock | Notes Receivable from Employees | Accumulated Deficit | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2001 | 14,359,100 | $ | 1,579,687 | $ | (23,894 | ) | $ | (5,797,892 | ) | $ | (4,242,099 | ) | |||
| Share repurchase adjustment | 640,900 | 58,906 | — | — | 58,906 | ||||||||||
| Accrued interest on note receivable | — | 1,812 | (1,812 | ) | — | — | |||||||||
| Net loss | — | — | — | (202,519 | ) | (202,519 | ) | ||||||||
| Balance, December 31, 2002 | 15,000,000 | $ | 1,640,405 | $ | (25,706 | ) | $ | (6,000,411 | ) | $ | (4,385,712 | ) | |||
The accompanying notes are an integral part of these financial statements.
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Connect-Care, LLC
Statement of Cash Flows
December 31, 2002
| Cash flows from operating activities: | |||||||
| Net loss | $ | (202,519 | ) | ||||
| Adjustments to reconcile net loss to net cash provided by operating activities | |||||||
| Depreciation | 43,984 | ||||||
| Bad debt expense | 53,476 | ||||||
| Changes in assets and liabilities: | |||||||
| (Increase) decrease in accounts receivable | (404,690 | ) | |||||
| (Increase) decrease in prepaid expenses and other current assets | 10,321 | ||||||
| Increase (decrease) in accounts payable and other accrued expenses | 250,435 | ||||||
| Increase in deferred revenue | 210,981 | ||||||
| Increase in accrued interest | 204,187 | ||||||
| Net cash provided by operating activities | 166,175 | ||||||
Cash flows from investing activities: | |||||||
| Purchases of property and equipment, net | (9,727 | ) | |||||
Cash flows from financing activities: | |||||||
| Advances from member | 65,000 | ||||||
| Repayment of advances from member | (396,295 | ) | |||||
| Net cash used in financing activities | (331,295 | ) | |||||
Net decrease in cash and cash equivalents | (174,847 | ) | |||||
Cash and cash equivalents, beginning of period | 198,819 | ||||||
| Cash and cash equivalents, end of period | $ | 23,972 | |||||
The accompanying notes are an integral part of these financial statements
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CONNECT-CARE, LLC
Notes to Financial Statements
December 31, 2002
Note 1—Nature of the business
Connect-Care, LLC formerly ProAmerica, LLC, (the "Company"), a Georgia limited liability company and a wholly-owned subsidiary of Dickens Holdings, LLC (the "Parent"), provides software solutions to assist customers in managing their relationships with customers. In addition, the Company offers system planning, design, and implementation services that tailor the solution to each customer's specifications and a variety of post-implementation services, such as help desk and technical support.
On April 1, 1998, the Company's former parent was acquired. In connection therewith, the shareholders of the former parent formed the Parent for purposes of holding the outstanding shares of the Company. Concurrently, with the incorporation, notes payable to shareholders totaling $1,078,000 and outstanding advances to the former parent of $560,593 were contributed to capital in exchange for 100% of the outstanding common stock issued to the Parent. The formation of the Company was accounted for as a reorganization by related parties and historical cost basis was used as the basis in all assets and liabilities at the date of incorporation.
The accompanying financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has a limited operating history, has substantially incurred losses from operations since its inception and has a net members' deficit. Management's plans with regard to these matters include continued development, marketing and licensing of its products, reduction of expenses, as well as seeking additional financing arrangements. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient license fees from its products or financing on terms acceptable to the Company. The Company's financial statements have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. See Note 9 with respect to subsequent events related to this matter.
Note 2—Summary of significant accounting policies
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 and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ form those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents.
Concentration of credit risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. At December 31, 2002, three customers accounted for 25%, 19%, and 11% of gross accounts receivable. For the year ended December 31, 2002, two customers accounted for approximately 31% of total revenue.
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Property and equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Repairs and maintenance costs are expensed as incurred.
Research and development and software development costs
Costs incurred in the research and development of the Company's products consists principally of compensation and benefits paid to the Company's employees and are expensed as incurred. No software development costs were capitalized during the year ended December 31, 2002.
Revenue recognition
The Company's revenue is derived from primarily three sources: (i) software license revenue, derived primarily from software licenses to resellers and end users, (ii) service revenue, derived primarily from providing support, education and consulting services to end users, and (iii) maintenance revenues derived from a commitment on the part of the Company to provide software patches and version upgrades to existing software as they are released. Revenue from software licenses is recognized upon execution of a contract and completion of delivery obligations, provided that no uncertainties regarding customer acceptance exist and collection of the related receivable is probable. Revenue from support and maintenance services is recognized ratably over the contractual period. Payments for support and maintenance fees are generally made in advance and are nonrefundable. Revenue from education and consulting services is recognized as the related services are performed. When applicable, the Company accrues for material estimated warranty costs at the time revenue is recognized.
Revenues from contracts with multiple element arrangements, such as those including installation and integration services, are recognized as each element is earned based on objective evidence of the relative fair value of each element and when there are no undelivered elements essential to the functionality of the delivered elements.
Deferred revenue includes amounts received and/or invoiced that do not meet the Company's revenue recognition criteria as of the balance sheet date, such as advanced billings for support and maintenance.
The Company presents accounts receivable at the amount of the net sale, and provides for an allowance for doubtful accounts based on an evaluation of the collectibility of specific receivable accounts at the reporting date. This evaluation includes such matters as past-due status and prior history with the customer.
Accounting for stock-based compensation
Employee stock awards under the Company's compensation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations, utilizing the intrinsic value method. The Company provides the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and the related interpretations. Stock-based awards to non-employees are accounted for under the provisions of SFAS No. 123.
In March 2001, the Company established the ProAmerica Systems, LLC Option Plan (the "Plan") for its employees and key persons, as defined by the Plan. The Plan is administered by the compensation committee of the Board of Managers. The granting of stock options is at the sole discretion of the compensation committee of the Board of Managers. A maximum of 196,400 non-voting stock options may be granted under the Plan. The exercise price of the stock options is
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equal to the fair market value of the Company's common stock at the date of grant. Generally, stock options vest and become exercisable ratably over a three-year period; however, no stock options shall be exercisable prior to the occurrence of a triggering event, as defined by the Plan, which includes among other events a change in controlling ownership as defined by the Plan, or an initial public offering of the Company's common stock. Stock options contingent on the occurrence of future events are accounted for under variable accounting with compensation expense being recorded at the date of the triggering event to the extent fair value on that date exceeds the exercise price of the option. No accounting is performed on these contingent stock options until a triggering event becomes probable. As of December 31, 2002, a total of 57,500 stock options were outstanding.
No compensation cost has been recognized for employee stock-based compensation in 2001. No stock-based awards were granted prior to 2002, and no cost has been determined to be applicable for proforma disclosures in accordance with SFAS 123.
The following table summarizes the activity of the Company's stock option plan:
| | Year ended December 31, 2002 | |||||
|---|---|---|---|---|---|---|
| | Number of Options | Weighted Average Exercise Price | ||||
| Outstanding—beginning of period | $ | 57,500 | $ | 0.09 | ||
| Granted and cancelled | 0 | |||||
| Outstanding—end of period | $ | 57,500 | ||||
The following table summarizes information about stock options outstanding at December 31, 2002:
| Range of Exercise Price | Number Outstanding | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| $ | 0.09 | 57,500 | 9.8 years | $ | 0.09 | 0 | $ | 0.09 | |||||
Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income," requires a full set of general purpose financial statements to include the reporting of comprehensive income. Comprehensive income is comprised of two components, net income and other comprehensive income. For the year ended December 31, 2002, the Company's comprehensive loss was the same as its net loss.
Income taxes
The Company has elected limited liability corporation status, as defined by the Internal Revenue code, for federal tax reporting purposes. Accordingly, the members include the Company's net income in individual returns, and the Company has made no income tax provision. The Company's tax return and the amounts of allocable profits or losses are subject to examination by taxing authorities. If such examinations result in changes to the Company's profits or losses, the tax liabilities of the Company's members could be changed accordingly.
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Long-lived assets
The Company continually evaluates whether events and circumstances indicate that the remaining carrying amount of an asset may not be recoverable or the remaining useful life may warrant a revision. To make this evaluation, the Company uses an estimate of undiscounted future cash flows over the remaining life of the asset.
New accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations" and Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." These standards require that all business combinations be accounted for using the purchase method and that goodwill and intangible assets with indefinite useful lives should not be amortized but should be tested for impairment at least annually, and they provide guidelines for new disclosure requirements. These standards outline the criteria for initial recognition and measurement of intangibles, assignment of assets and liabilities including goodwill to reporting units and goodwill impairment testing. The provisions of SFAS 141 apply to all business combinations after June 30, 2001. The provisions of SFAS 142 for existing goodwill and other intangible assets are required to be implemented effective January 1, 2002. The adoption of SFAS 141 and SFAS 142 has not had an impact on the Company's financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-lived Assets," which is effective for fiscal years beginning after December 15, 2001. This statement supercedes Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." However, it retains the fundamental provisions of SFAS 121 for the recognition and measurement of the impairment of long-lived assets to be disposed of by sale. The adoption of SFAS 144 has not had an impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullifies Emerging Issues Task Force Issue No. 94-3 and requires that liabilities for costs associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 15, 2002. The Company adopted SFAS 146 for the year-ended December 31, 2002. The adoption of this SFAS has not had an impact on the Company's financial position or results of operations.
Note 3—Property and equipment
| | Estimated Useful Life (Years) | December 31, 2002 | ||||
|---|---|---|---|---|---|---|
| Computer equipment and software | 2-3 | $ | 24,187 | |||
| Furniture and fixtures | 5-7 | 352,785 | ||||
| Leasehold improvements | Life of lease | 8,329 | ||||
| Less: Accumulated depreciation | (341,085 | ) | ||||
| $ | 44,216 | |||||
Depreciation expense for the year ended December 31, 2002 was $43,984.
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Note 4—Common stock
In March 2001, the Company and its member agreed to split the stock of the Company to increase the total amount of common shares outstanding from 100,000 to 15,000,000. Concurrently, the member agreed to sell shares to establish the restricted stock plan (see Note 6) and stock option plan (see note 5) for the Company's employees. The price paid for such shares was based upon an independent valuation of the Company in February 2001. The amount payable by the Company for these shares is due upon the issuance of restricted stock or exercise of an employee stock option to the member of the Company. The total amount payable at December 31, 2002 was $23,894 and is classified in accrued expenses. The shares collected by the Company were recorded as treasury stock. Of the total shares of stock authorized, the ratio of Voting Shares to Non-Voting Shares is 9 to 1. Each share of common stock with voting rights is entitled to one vote. The Company issued shares of its common stock to certain employees under stock purchase agreements, some of which contain repurchase provisions in the event of termination of employment or change of control, as defined in the Plan. Included in common stock as of December 31, 2002 are 259,100 restricted shares subject to repurchase (see Note 5).
Note 5—Restricted share purchase plan
In March 2001, the Company adopted the Restricted Share Purchase Plan (the "Restricted Plan") and reserved 703,600 shares of non-voting common stock for issuance there under. Under the Restricted Plan, the Company's executives may receive grants of restricted stock or options to purchase common stock for a limited period of time at a purchase price per share that is equal to the fair market value of the Company's common stock at the date of grant. The Restricted Plan is administered by the compensation committee of the Board of Managers, and the granting of the restricted shares is at the sole discretion of the Compensation Committee of the Board of Managers. The Company has the right to repurchase shares under the Restricted Plan upon a participant's termination prior to a change in control, as defined by the Restricted Plan, for 12 months following the termination at amount defined by the Restricted Plan. As of December 31, 2002, 259,100 shares have been granted to the Company's executives under the Restricted Plan. The shares issued under this Restricted Plan were purchased by employees utilizing notes issued to the Company. The notes are with recourse and the interest rate on the notes is reset annually to correspond with the prime rate as published by the Wall Street Journal. The notes are payable in full upon the earlier of a change of control, termination of employment or December 31, 2010.
Share redemption agreement
Concurrent with the establishment of the Plan and the Restricted Plan, the Company entered into a share redemption agreement with the Parent (the "Redemption Agreement.") Under the Redemption Agreement, the Company and Parent, the sole member of the Company, agreed that upon the purchase of shares under the Restricted Plan by a Company executive, the Company will redeem the equivalent amount of shares from the Parent to issue to the purchasing shareholder. The shares will be redeemed from the Parent at the equivalent consideration received from the purchasing shareholder, which will equal the then fair market value at the date of grant and redemption.
Note 6—401(k) savings plan
During 1998, the Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Employees may contribute up to 25% of total compensation for each payroll period, subject to 401(k) limitations. Company contributions to the plan may be made at the discretion of the Board of Managers. To date, there were no contributions made to the Plan by the Company.
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Note 7—Commitments and contingencies
The Company leases its office space and certain office equipment under noncancelable operating leases. Total rent expense under these operating leases was approximately $195,000 for the year ended December 31, 2002.
Future minimum lease payments under non-cancelable operating leases at December 31, 2002 are approximately $125,000 for 2003, and $25,000 for 2004.
Royalties
In December 1998, the Company entered into a software reseller agreement with a third party. As of December 31, 2002, the Company is committed to make minimum future royalty payments of $13,450.
Note 8—Related party transactions
The Company has engaged in certain transactions with its Parent. At December 31, 2002, the Company had outstanding advances from the Parent of $3,583,660, which are payable on demand. The Parent had indicated it will not seek payment on the advances before January 1, 2004. The Company did not make any cash payments to the Parent for interest during the years ended December 31, 2002 and 2001.
Note 9—Subsequent Events
Subsequent to December 31, 2002, effective January 1, 2003, the Company elected to convert from a limited liability company to a sub-chapter S Corporation.
Subsequent to December 31, 2002 the Company entered into an agreement to be acquired by another company. The acquisition transaction is expected to be finalized on February 28, 2003 and is a stock acquisition of the Company.
Note 10—Share redemption adjustment
During the year ended December 31, 2002 the Company adjusted the shares presented for redemption under the share redemption plan (see Note 5) to reflect the redeemed shares to be 259,100 shares, consistent with the shares under the restricted stock plan.
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