Exhibit 99.2
Combined Financial Statements
National Healthcare Resources, Inc. and Affiliate
Year ended December 31, 2000
National Healthcare Resources, Inc. and Affiliate
Combined Financial Statements
Year ended December 31, 2000
Contents
Report of Independent Auditors .................................. 1
Combined Balance Sheet .......................................... 2
Combined Statement of Operations ................................ 3
Combined Statement of Common Shareholders' Equity ............... 4
Combined Statement of Cash Flows ................................ 5
Notes to Combined Financial Statements .......................... 6
Report of Independent Auditors
The Board of Directors and Shareholders
National Healthcare Resources, Inc. and Affiliate
We have audited the accompanying combined balance sheet of National Healthcare
Resources, Inc. and Affiliate (the "Company") as of December 31, 2000, and the
related combined statements of operations, common shareholders' equity, 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. 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 combined financial position of National Healthcare
Resources, Inc. and Affiliate at December 31, 2000, and the combined results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Melville, New York
June 22, 2001
National Healthcare Resources, Inc. and Affiliate
Combined Balance Sheet
December 31, 2000
Assets
Current assets:
Cash $ 7,198,242
Fees receivable, net of allowance for doubtful accounts of $1,815,000 20,767,534
Prepaid expenses 1,484,291
Income taxes receivable and prepaid income taxes 2,925,699
Deferred income taxes 296,000
-------------
Total current assets 32,671,766
Fixed assets, net of accumulated depreciation and amortization 17,477,743
Excess of purchase price over net tangible assets acquired, net of accumulated amortization of $6,622,000 80,361,283
Security deposits and other assets, net of accumulated amortization of $1,012,000 484,828
-------------
Total assets $ 130,995,620
=============
Liabilities and shareholders' equity
Current liabilities:
Due to the former holders of Class D stock $ 3,800,000
Accounts payable 2,149,640
Physician fees payable 2,378,229
Provider network payable 2,655,782
Payroll and related liabilities 1,877,980
Insurance claims payable 978,809
Accrued expenses 2,857,871
Other liabilities 43,308
Interest payable 575,004
-------------
Total current liabilities 17,316,623
Deferred income taxes 4,284,000
Long-term debt 56,983,968
Other liabilities 1,099,350
Fair value of interest rate derivative (Note 2) 1,039,646
Commitments and contingencies (Notes 6 and 11)
Redeemable common stock: (Note 2)
Class A convertible, redeemable common stock, $.01 par value, 125,000 shares authorized, issued
and outstanding (liquidation preference of $12,500,000) 12,442,775
Class B convertible, redeemable common stock, $.01 par value, 70,000 shares
authorized, issued and outstanding (liquidation preference of $7,000,000) 6,981,281
Class C nonvoting, redeemable common stock, $.01 par value, 50,000 shares authorized,
issued and outstanding (liquidation preference of $6,958,348) 5,862,581
Class E convertible, redeemable common stock, $.01 par value, 210,000 shares authorized, 183,228
shares issued and outstanding (liquidation preference of $18,322,800) 18,199,366
Class F convertible, redeemable nonvoting common stock, $.01 par value, 210,000 shares authorized,
26,772 shares issued and outstanding (liquidation preference of $2,677,200) 2,659,243
Common shareholders' equity:
Common stock, $.01 par value; 20,000,000 shares authorized, 4,208,732 shares issued and outstanding in 2000 42,087
Nonvoting common stock, $.01 par value, 3,474,286 shares authorized, no shares issued and outstanding --
Common stock, no par value, 200 shares authorized, 1 share issued and outstanding 10
Additional paid-in capital 10,609,608
Accumulated deficit (6,524,918)
-------------
Total common shareholders' equity 4,126,787
-------------
Total liabilities and common shareholders' equity $ 130,995,620
=============
See accompanying notes
2
National Healthcare Resources, Inc. and Affiliate
Combined Statement of Operations
Year ended December 31, 2000
Revenues
Professional services $ 75,061,799
Claims management 52,276,461
Provider networks 14,100,729
-------------
Total revenues 141,438,989
Operating expenses
Cost of services 63,956,875
Salaries and benefits 32,372,403
Outside services 1,000,154
Other operating expenses 16,851,575
Selling and administrative expenses 11,254,478
Technology initiative 3,458,243
Depreciation and amortization of fixed assets 4,550,944
Amortization of intangible assets 2,483,045
-------------
Total operating expenses 135,927,717
-------------
5,511,272
Other income (expense):
Interest income 334,835
Interest expense (4,898,767)
Loss on change in fair value of interest rate derivative (1,039,646)
-------------
Net other expense (5,603,578)
-------------
Loss before provision for income taxes (92,306)
Provision for income taxes 455,000
-------------
Net loss (547,306)
Accretion of Class A common stock to redemption value 12,717
Accretion of Class B common stock to redemption value 3,404
Accretion of Class C common stock to redemption value 150,730
Accretion of Class D common stock to redemption value 194,495
Accretion of Class E common stock to redemption value 47,781
Accretion of Class F common stock to redemption value 6,950
Class C common stock dividends 500,004
-------------
Net loss applicable to common shareholders $ (1,463,387)
=============
See accompanying notes.
3
National Healthcare Resources, Inc. and Affiliate
Combined Statement of Common Shareholders' Equity
Year ended December 31, 2000
NHRMS Common Additional
Common Common Paid-in Accumulated
stock stock Capital deficit Total
----------------------------------------------------------------------
Balance at December 31, 1999 $ 39,692 $ 10 $ 8,935,587 $(5,061,531) $ 3,913,758
Issuance of 64,885 common shares--voting in connection with
the purchase of Resolve Rehabilitation Consulting, Inc.
649 - 453,546 - 454,195
Issuance of 174,603 common shares--voting in connection with
the purchase of Claim Resolution Technologies, Inc. 1,746 - 1,220,475 - 1,222,221
Net loss applicable to common shareholders for the
year ended December 31, 2000 - - - (1,463,387) (1,463,387)
----------------------------------------------------------------------
Balance at December 31, 2000 $ 42,087 $ 10 $ 10,609,608 $(6,524,918) $ 4,126,787
======================================================================
See accompanying notes.
4
National Healthcare Resources, Inc. and Affiliate
Combined Statement of Cash Flows
Year ended December 31, 2000
Cash flow from operating activities
Net loss $ (547,306)
Adjustments to reconcile net loss to cash flows provided by
operating activities:
Loss on change in fair value of interest rate derivative 1,039,646
Depreciation and amortization 6,747,524
Amortization of deferred financing cost 286,465
Provision for doubtful accounts 525,243
Provision for deferred income taxes 2,648,521
Changes in operating assets and liabilities, net of effects of
acquisitions:
Fees receivable (4,292,171)
Prepaid expenses (793,032)
Income taxes receivable and prepaid income taxes (2,887,863)
Accounts payable and accrued liabilities (422,022)
Other liabilities 476,064
Interest payable 97,027
----------------
Cash flows provided by operating activities 2,878,096
Cash flow from investing activities
Purchase of Baseline, Resolve and CRT (2,990,410)
Payments of notes payable in connection with acquisition (214,207)
Fixed assets purchased (10,194,676)
Other assets 29,385
----------------
Cash flows used in investing activities (13,369,908)
Cash flow from financing activities
Proceeds from note payable to bank 8,000,000
Payment of long-term obligations (173,622)
----------------
Cash flows provided by financing activities 7,826,378
----------------
Decrease in cash (2,665,434)
Cash at beginning of year 9,863,676
----------------
Cash at end of year $ 7,198,242
================
Supplemental disclosure of cash flow information
Cash paid for income taxes, net of refunds received $ 828,000
================
Cash paid for interest $ 4,770,000
================
See accompanying notes.
5
National Healthcare Resources, Inc. and Affiliate
Notes to Combined Financial Statements
December 31, 2000
1. Description of Business
Organization and Basis of Presentation
National Healthcare Resources, Inc. ("NHR" or the "Company"), is a leading
provider of outsourced claims management services to payers of workers'
compensation, automobile-related injury insurance, and disability insurance
claims. The Company offers a model for managing the cost and care resulting from
work-related injuries, automobile accidents, and general health-related events
that cause absence in the workplace. Claims adjusters (typically working within
insurance carriers and third party administrators) access these services to
facilitate the recovery of the injured person, expedite the injured person's
return to work, and control the costs associated with the claim. The services
the Company provides are to facilitate an employee's return to work following a
work place injury or expedited recovery after an automobile injury. As a result,
the Company is able to assist insurance companies and self-insured corporations
to manage their all-in workers' compensation and automobile-related injury
insurance claim costs.
NHR provides independent medical examinations in New York through NHR Medical
Services, P.C. ("NHRMS") in compliance with State Department of Health
regulations. NHRMS is owned by several physicians who act as medical advisors to
NHR and hold stock options on NHR's common shares.
The combined financial statements include the accounts of NHR and its
subsidiaries, all of which are wholly-owned, and the accounts of NHRMS
(collectively, the "Company"). NHR manages all business affairs of NHRMS under a
management agreement dated February 1, 1994, as amended, which provides NHR with
a continuing security interest in all assets of NHRMS. During 1998, NHRMS
extended the term of the management agreement to January 1, 2009, with a further
ten-year extension at either parties' option. All significant intercompany
balances and transactions have been eliminated in combination.
Concentrations of Credit Risk
Revenues from one customer aggregated approximately $34 million in 2000.
Accounts receivable consists primarily of amounts due from insurance companies.
The customer referred to above represents approximately 15% of the Company's
accounts receivable at December 31, 2000.
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash, trade receivables and interest rate
derivatives. The Company places its cash and cash equivalents with high quality
financial institutions. Substantially all cash and cash equivalents are held at
two financial institutions at December 31, 2000.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Receivables generally are
due within 30 days. Credit losses relating to customers have been consistently
within management's expectations.
The Company does not believe there is significant risk of non-performance by the
counterparty to the interest rate derivative because the counterparty is a
financial institution of high credit standing.
2. Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
6
National Healthcare Resources, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
Revenue Recognition
Fee revenue for professional services is recognized when the physician has
performed the contracted service and prepared a report to the customer. The
corresponding liability to pay the physician for such services is also
recognized at that time. Fee revenue for claims management is recognized when
provided. Fee revenue for provider networks is recognized when service has been
provided.
Fixed Assets
Fixed assets are recorded at cost and are depreciated over the estimated useful
lives of the assets (three to seven years) using the straight-line method,
except for leasehold improvements which are amortized over the useful life of
the asset or the life of the lease, whichever is shorter.
Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities approximate their fair
values principally because of the short-term nature of these items. The fair
value of the Company's long-term debt obligations are estimated based on the
current rates offered to the Company for obligations of similar terms and
maturities. Under this method the Company's fair value of long-term debt
obligations was not significantly different than the carrying value at December
31, 2000.
Excess of Purchase Price over Net Tangible Assets Acquired and Amortization
The excess of purchase price over net tangible assets acquired is amortized on a
straight-line basis over 40 years.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
Income Taxes
Income taxes are determined under the liability method as required by Statement
of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income
Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined
based upon differences between financial reporting and the income tax basis of
assets and liabilities.
Impairment of Long-Lived Assets
The Company complies with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed.
Stock-Based Compensation
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." The standard defines a fair value method of accounting for the
issuance of stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such
7
National Healthcare Resources, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
transactions under APB Opinion No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income as if the Company had applied the new method of
accounting. The Company has elected to continue to account for such transactions
under APB No. 25 and provide the necessary pro forma information required under
SFAS No. 123.
Capitalized Software and Web Site Development Costs
The Company follows the provisions of Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and Emerging Issues Task Force ("EITF") 00-2, "Accounting for Web
Site Development Costs." The SOP and EITF require capitalization of certain
costs incurred in connection with developing or obtaining internal use software
and web site development costs. The Company capitalized approximately $5,141,000
of such costs during 2000.
Technology Initiative
The Company commenced a technology initiative in 2000 to create a proprietary
web-based technology platform on which the Company intends to operate its
integrated services program. Product research and design expenses which are
required to be expensed in accordance with SOP 98-1 and EITF 00-2, are presented
in the accompanying combined statements of operations under the classification
"technology initiative".
Recent Accounting Developments
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended,
which is required to be adopted for all fiscal years beginning after June 15,
2000. SFAS No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value.
If the derivative is a hedge that is eligible for special accounting, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Currently, the Company's only exposure to derivatives are interest rate swap
transactions (see Note 7) which are currently recorded at fair value with any
change recognized in earnings. Therefore, the Company does not believe that SFAS
No. 133 will have a significant impact on the earnings and financial position of
the Company. The Company will adopt the Statement as required for the year
ending December 31, 2001.
Business Combinations and Intangible Assets
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
8
3. Shareholders' Equity
Capital Stock
In two stages (July 31, 1998 and August 27, 1998), the Company sold a total of
60,095 shares of Class E convertible, redeemable common ("Class E") stock for
$100 per share. Class E stock is convertible into common stock at a conversion
price of $8 per share. If at any time NHR completes a firm commitment
underwritten public offering in which gross proceeds to the Company are at least
$40,000,000, NHR will convert the outstanding shares of Class E stock at a
conversion price of $9.50 per share to common stock. Class E stock outstanding
at January 15, 2005 or earlier upon the election of the shareholder in the event
there has been a "Qualifying merger or Asset Sale" (as defined) is subject to a
mandatory redemption. Shares of Class E stock will be redeemed at $100 per
share, plus any accrued but unpaid dividends. The Class E stock includes a
liquidation preference whereby, upon liquidation, dissolution or winding up of
NHR, holders of such stock are entitled to $100 per share, plus any accrued but
unpaid dividends. Holders of the Class E stock are entitled to one vote of each
share of common stock into which the Class E stock is convertible.
In two stages (July 31, 1998 and August 27, 1998), the Company sold a total of
149,905 shares of Class F Nonvoting convertible, redeemable common ("Class F")
for $100 per share. Class F stock is convertible into Class E common stock on a
share-for-share basis or nonvoting common stock at a conversion price of $8 per
share. If at any time NHR completes a firm commitment underwritten public
offering in which gross proceeds to the Company are at least $40,000,000, NHR
will convert the outstanding shares of Class F stock at a conversion price of
$9.50 per share to common stock. Class F stock outstanding at January 15, 2005
or earlier upon the election of the shareholder in the event there has been a
"Qualifying merger or Asset Sale" (as defined) is subject to a mandatory
redemption. Shares of Class F stock will be redeemed at $100 per share, plus any
accrued but unpaid dividends. The Class F stock includes a liquidation
preference whereby, upon liquidation, dissolution or winding up of NHR, holders
of such stock are entitled to $100 per share, plus any accrued but unpaid
dividends.
During August 1999, certain shareholders of the Class F stock converted 123,133
shares into Class E stock on a share-for-share basis.
In two stages (July 31, 1998 and August 27, 1998), the Company sold a total
489,372 shares of nonvoting common stock for $7 per share. Holders of the
nonvoting common stock have the right to convert to shares of common stock on a
share-for-share basis. The Company also sold 113,620 shares of common stock for
$7 per share in 1998.
During August 1999, the shareholders of the nonvoting common stock converted the
shares into common stock, from the treasury, on a share-for-share basis.
On August 20, 1998, the Company purchased 849,286 shares of its common stock for
$7 per share (the "Treasury Shares"). Subsequently, the Company sold 246,294
Treasury Shares for $7.00 per share and issued 212,719 in connection with the
additional consideration related to the MedFacts, Ltd. acquisition (see Note 9).
During January and April 1999, the Company issued 82,222 and 168,889 Treasury
Shares, respectively, in connection with the acquisition of Ellis and
Associates, Inc. and Resolve Rehabilitation Consulting, Inc., respectively (see
Note 9).
On January 28, 1997, the Company sold a total of 50,000 shares of Class C
nonvoting redeemable common ("Class C") stock for $100 per share, to existing
shareholders. Each share of Class C stock has 14 shares of NHR's common stock
attached. Holders of the Class C stock are entitled to a $10 per share annual
dividend. If at any time, prior to January 15, 2007, NHR completes a firm
commitment underwritten public offering in which gross proceeds to the Company
are at least $40,000,000, NHR will redeem that number of outstanding shares of
Class C stock, which shall have an aggregate liquidation preference equal to 25%
of the gross proceeds of the public offering. Class C stock outstanding at
January 15, 2007 is subject to a mandatory redemption. Shares of Class C stock
will be redeemed at $100 per share, plus any accrued but unpaid dividends. The
Class C stock includes a liquidation preference whereby, upon liquidation,
dissolution or winding up of NHR, holders of such stock are entitled to $100 per
share, plus any accrued but unpaid dividends.
1
On October 30, 1997, the Company issued 38,314 shares of Class D convertible,
redeemable common ("Class D") stock valued at $79 per share. Class D stock is
convertible into common stock at a rate of one share of Class D stock for
approximately 11.1 shares of common stock. Class D stock outstanding at October
31, 2000 is subject to redemption at the option of the holder if the common
stock is not traded publicly or if the price has never exceeded $9 per share.
The Class D stock includes a liquidation preference whereby, upon liquidation,
dissolution or winding up of NHR, holders of such stock are entitled to $100 per
share, plus any accrued but unpaid dividends. Holders of the Class D stock are
entitled to one vote for each share of common stock into which the Class D stock
is convertible.
On November 1, 2000, the holders of the Class D stock issued a notice to the
Company requesting the redemption of all of the outstanding shares of Class D
for a total redemption price of $3,800,000 in accordance with the provisions of
the Class D stock with a due date within sixty days subsequent to the redemption
date or January 2, 2001. On January 12, 2001, the Company entered into an
agreement with the holders of the Class D stock for the payment of $3,800,000.
On the date of the agreement, $1,900,000 was paid to holders with the remaining
$1,900,000 to be paid in five equal installments of $380,000 on the last day of
each month beginning February 28, 2001 plus interest of 12% per annum. The
amount due of $3,800,000 has been classified as a current liability at December
31, 2000 in the accompanying combined balance sheets.
On January 29, 1996, the Company authorized and sold an additional 5,000 shares
of Class A convertible, redeemable common ("Class A") stock for $500,000. Class
A stock is convertible into common stock at a rate of one share of Class A stock
for approximately 27.8 shares of common stock. The Class A stock automatically
converts in the event of a "Qualified Public Offering" (as defined) and is
subject to a mandatory redemption on July 15, 2005 at a price equal to $100 per
share plus accrued but unpaid dividends. Additionally, the Class A stock
includes a liquidation preference whereby, upon liquidation, dissolution or
winding up of NHR, holders of such stock are entitled to $100 per share, plus
any accrued but unpaid dividends. Holders of Class A stock are entitled to
three-tenths of a vote for each share of common stock into which the Class A
stock is convertible.
On June 30, 1996, NHR authorized and issued 70,000 shares of Class B
convertible, redeemable common ("Class B") stock, at $100 per share. This stock
was sold to existing common and Class A stockholders of record as of that date
and converts into common stock at a rate of one share of Class B stock to 16
shares of common stock. The Class B stock automatically converts in the event of
a "Qualified Public Offering" (as defined) and is subject to a mandatory
redemption on July 15, 2006 at a price equal to $100 per share of Class B stock
plus accrued but unpaid dividends. Additionally, the Class B stock includes a
liquidation preference whereby, upon liquidation, dissolution or winding up of
NHR, holders of such stock are entitled to $100 per share, plus any accrued but
unpaid dividends. Holders of the Class B stock are entitled to one vote for each
share of common stock into which the Class B is convertible.
Classes A, B, D, E and F stock do not accrue dividends at a fixed rate; however,
if the Company declares dividends on its common stock, it must declare dividends
on the Class A, B, D, E and F stock equal to the dividends each class would
receive if converted to common stock. There were no dividends declared in 2000,
and there are no dividends in arrears at December 31, 2000 for Classes A, B, D,
E and F common stock.
Maturities of redeemable common stock are as follows:
Year ending December 31:
2005 $ 33,500,000
Thereafter 12,917,173
-------------------
$ 46,417,173
===================
Stock Option Plan
The Company's 1995 Stock Option Plan has authorized the grant of qualified and
nonqualified stock options to employees and directors for up to 5,700,000
shares, as amended in 2000, of the Company's common stock. All options granted
during 2000 are exercisable for a period of up to ten years from the date of the
grant at an exercise
2
price not less than the fair market value of the stock on the date of the grant,
and vest ratably over a period of three to five years of continued employment.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options granted under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes value option pricing model with the following weighted-average
assumptions for 2000: a risk-free interest rate of 6.3%; no dividend yield; a
volatility factor of the expected market price of the Company's stock of 44.4%;
and an weighted-average expected life of six years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. For the year ended
December 31, 2000, pro forma net loss applicable to common shareholders was
$7,500,387.
A summary of the Company's stock option activity, and related information for
the year ended December 31, 2000 is as follows:
Weighted-
Average
Options (000) Exercise Price
-----------------------------------
Outstanding--beginning of year 1,411 $ 6.54
Granted 3,707 10.20
Cancelled (160) 5.14
Exercised - -
----------------
Outstanding--end of year 4,958 9.32
================
Exercisable at end of year 852 $ 6.26
The following summarizes information about stock options issued during 2000:
Weighted- Weighted-
Average Average
Fair Value Exercise Price
-----------------------------------
Exercise price of the stock option is: $3.98 $ 6.00
Less than the fair value 3.67 7.00
Equal to the fair value 2.60 11.90
Greater than the fair value
3
The following summarizes information about stock options outstanding and
exercisable as of December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------------------ ------------------------------------------
Weighted-
Number Average Number
Outstanding at Remaining Outstanding at Weighted-
December Range of Contractual December Average
31, 2000 (000) Exercise Price Life 31, 2000 (000) Exercise Price
--------------------------------------------------------------------------------------------------
251 $ 3.60 4.2 235 3.60
2,326 $6.00 - 9.00 8.5 617 7.27
2,381 $12.00 9.4 - -
---------------- --------------
4,958 852
================ ==============
In conjunction with the Company's credit facility, the Company issued to the
Bank a warrant to purchase 92,591 shares of common stock at $6.25 per share
during 1996. The warrant expires July 2006 and may be exercised in whole or in
part at any time prior to expiration.
Shares of common stock reserved for future issuance as of December 31, 2000 are
as follows:
Stock options 5,670,000
Class A stock conversion 3,475,000
Class B stock conversion 1,120,000
Class E stock conversion 2,290,350
Class F stock conversion 334,650
Warrant issued to the Bank 92,591
--------------
12,982,591
==============
4. Fixed Assets
Fixed assets consist of the following at December 31, 2000:
Computer software $ 10,034,866
Office furniture 3,348,277
Computer equipment 10,760,814
Telephone equipment 1,378,509
Leasehold improvements 927,974
Vehicles 183,068
--------------
26,633,508
Less accumulated depreciation and
amortization 9,155,765
--------------
Net fixed assets $ 17,477,743
==============
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5. Income Taxes
The provision for income taxes for the year ended December 31, 2000 is as
follows:
Current:
Federal $(1,681,000)
State and local (513,000)
-----------
(2,194,000)
Deferred:
Federal 1,984,000
State and local 665,000
-----------
2,649,000
-----------
$ 455,000
===========
The following is a reconciliation of income tax computed at the Federal
statutory rate to the provision for taxes for the year ended December 31, 2000:
Amount Percent
--------------------------------
Tax benefit computed at Federal statutory rate $ (31,000) (34%)
State tax expense, net of Federal benefit 64,000 69%
Expenses not deductible for income tax purposes:
Amortization of excess of purchase price over net
tangible assets acquired and other 422,000 458%
--------------------------------
$ 455,000 493%
================================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2000 are
approximately as follows:
Deferred tax assets:
Accounts receivable reserve $ 328,000
Deferred rent 46,000
Other 64,000
Fair value of interest rate derivative 416,000
----------
Total deferred tax assets 854,000
----------
Deferred tax liabilities:
Amortization 2,080,000
Cash basis to accrual basis 38,000
Depreciation 257,000
Capitalized software 2,427,000
Other 40,000
----------
Total deferred tax liabilities 4,842,000
----------
Net deferred tax liability $3,988,000
==========
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6. Operating Lease Obligations
The Company leases equipment ranging in terms from one to five years, the last
to expire in December 2002. Equipment rental expense approximated $841,000 and
$613,000 for 2000 and 1999, respectively.
The Company leases office space in the states in which it operates. The
remaining lease terms for these locations range from one month to 11 years, the
last expiring in May 2012. Certain leases contain renewal options. Increases in
real estate taxes and operating costs are built into annual rent escalations.
Rent expense, excluding equipment rental, recorded on a straight-line basis over
the full terms of the leases was approximately $5,959,000 for 2000.
Future minimum lease payments under the above leases, excluding real estate
taxes and operating cost escalations, are as follows:
Year ending December 31:
2001 $ 5,522,000
2002 4,863,000
2003 3,611,000
2004 2,826,000
2005 2,582,000
Thereafter 11,012,000
-----------
Total minimum lease payments $30,416,000
===========
7. Debt
Revolving Credit Facility
The Company has a Revolving Credit Facility, as amended, (the "Facility"), with
four financial institutions under which it has $86,000,000 available as of
December 31, 2000. The Facility, at the election of the Company bears interest
at the LIBOR rate or the higher of the bank's prime rate or .5% above the
federal funds rate, plus the applicable margin based on a financial ratio. The
interest ranged from 7.687% to 9.125% during 2000 and 7.0% to 8.14% during 1999.
The Facility requires periodic interest only payments and was due to expire on
September 30, 2001. The Facility requires the Company to pay a service fee on
the unused portion of the total balance at a rate based on a financial ratio.
The Facility is secured by all assets of the Company. The Company is required to
maintain certain defined financial ratios.
In connection with prior amendments, the Company was required to pay a facility
fee of $155,000. This facility fee was recorded as a deferred financing cost and
is included in other assets in the accompanying balance sheets. The asset is
being amortized over the remaining life of the Facility.
In June 2000, the Company entered into a three-year interest rate swap with a
bank to exchange floating rate for fixed rate interest payments between 6.5% and
8.0% to hedge against interest rate changes on $23,583,968 of the Company's
outstanding balance under its Facility. The Company provides protection to meet
actual exposures and does not speculate in derivatives. If the variable rate
falls between 6.5% - 8.0%, interest is charged at the variable rate. If the
variable rate falls below 6.5%, the Company pays the spread and if the variable
rate exceeds 8.0%, the bank pays the spread. The net effect of the spread is
reflected as an adjustment to interest expense in the period incurred. The other
party to the interest rate swap agreement exposes the Company to credit loss in
the event of nonperformance, although the Company does not anticipate such
nonperformance. At the end of the three-year term, the other party to the
interest rate swap agreement has the option, for one day, to fix the interest
rate at 7.11% for an additional two years. At December 31, 2000, the Company has
recorded a liability for the fair value of the interest rate derivative of
$1,039,646 and a loss on the change in the fair value of the interest rate
derivative of $1,039,646 in the accompanying statement of operations.
As of December 31, 2000, $56,983,968 was outstanding under the Facility. In
addition, as of December 31, 2000 and 1999, letters of credit amounting to
approximately $1,185,000 were outstanding which relate to security deposits on
operating leases. The landlords may draw upon the letter of credit if a default
has occurred, as defined in
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the leases. The letters of credit are for one year and automatically renew each
year of the lease terms. The letters of credit bear interest at 2.375%.
On May 31, 2001, the Facility was further amended to reduce the amount available
under the Facility, change the financial ratio covenants, extend the Maturity
date and modify the repayment terms. The amount currently available under the
Facility which includes the revolving loans and letters of credit is
$61,000,000. The maturity date was extended to March 31, 2002. Under the amended
repayment terms, if the Company receives gross cash proceeds from the issuance
of any debt or equity securities of less than $25,000,000, the Company shall
prepay the revolving loans such that the Facility shall be permanently reduced
to $50,000,000. If the Company receives gross cash proceeds from the issuance of
any debt or equity securities of $25,000,000 or more, the Company shall prepay
the revolving loans such that the Facility shall be permanently reduced to
$48,000,000.
8. Defined Contribution Plan
The Company sponsors a defined contribution 401(k) savings plan, (the "Plan").
The Plan covers all employees who at the beginning of any quarter, have
completed one year of service and are at least 21 years of age. Company
contributions to the plan are at the discretion of management. Participants may
make voluntary contributions to the plan up to 15% of their compensation.
The Company's matching contributions amounted to approximately $628,000 for the
year ended December 31, 2000.
9. Acquisitions
On April 1, 1999, the Company acquired the assets and assumed certain
liabilities of Resolve Rehabilitation Consulting, Inc. ("Resolve") located in
Owings Mills, Maryland. Resolve services a customer base in Maryland, Washington
D.C., Virginia, North and South Carolina, Tennessee and Georgia. The purchase
price, including acquisition costs, was $2,455,000 in cash plus 168,889 shares
of $.01 par value common stock, valued at approximately $1,182,000. The excess
of cost over the net assets acquired amounted to approximately $3,465,000. The
purchase agreement provides for additional consideration to be paid by the
Company if certain profitability goals are met. The value of any subsequently
issued shares and cash have been allocated to cost in excess of fair value of
net assets acquired. During 2000, the Company paid additional consideration of
approximately $2,595,000 in cash and issued 64,885 shares of $.01 par value
common stock valued at approximately $454,000.
On August 1, 1999, the Company acquired the stock of Metracomp, Inc.
("Metracomp") located in Tampa, Florida. The purchase price, including
acquisition costs, was $18,080,000 in cash. In connection with the acquisition
of Metracomp, the Company recorded a liability in accordance with EITF 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination",
of approximately $265,000 related to the merging of duplicate facilities and
employee severance. The liability includes $200,000 for lease abandonment
losses. During 2000, the Company vacated office space in Dallas, Texas, Tampa,
Florida and Golden Valley, Minnesota and during 1999 vacated office space in
Vienna, Virginia, New York, New York and Pittsburgh, Pennsylvania. The Company
paid approximately $200,000 relating to the closing of these offices. The
accrual represented an estimate of the cost of the office space during the
period from the date the Company vacates to the date of the end of the lease or
sublease. The liability also included $65,000 for employee severance
arrangements which were paid through December 31, 1999. The excess of cost over
the net assets acquired amounted to approximately $12,345,000.
On March 1, 2000, the Company acquired certain assets and assumed certain
liabilities of the independent medical examination division of Baseline Medical,
Inc. ("Baseline") located in New York, New York. The purchase price, including
acquisition costs, was $295,000 in cash. The excess of cost over the net assets
acquired amounted to $295,000.
During May 1999, the Company purchased 8% of the common stock of Claim
Resolution Technologies, Inc. ("CRT"), located in Needham, Massachusetts for
$448,460, including acquisition costs of $48,460. On December 27, 2000, the
Company acquired substantially all of the assets and assumed certain liabilities
of CRT. CRT is engaged in the business of providing expert systems and
associated services to facilitate the handling of claims by
property and casualty insurers in an efficient and cost effective manner. The
purchase price, including acquisition
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costs, was $100,000 in cash plus 174,603 shares of $.01 par value common stock,
valued at approximately $1,222,000. The excess of cost over the net assets
acquired amounted to approximately $1,397,000.
These acquisitions have been accounted for by the purchase method and the
results of operations of the acquired businesses are included in the
accompanying combined statements of income from the dates of acquisition.
10. Litigation
The Company is a party to litigation which arises in the ordinary course of
business. The Company believes that these actions will not have a material
adverse effect on the Company's financial position or results of operations.
11. Government Regulation
The health-care industry is highly regulated by numerous laws, regulations,
approvals and licensing requirements at the federal, state and local levels.
Regulatory authorities have very broad discretion to interpret and enforce these
laws and promulgate corresponding regulation. The Company believes that its
operations under agreements pursuant to which it is currently providing services
are in material compliance with these laws and regulations. However, there can
be no assurance that a court or regulatory authority will not determine that the
Company's operations violate applicable laws or regulations. If the Company's
interpretation of the relevant laws and regulations is inaccurate, the Company's
business and its prospects could be materially and adversely affected. The
following are among the laws and regulations that affect the Company's
operations and development activities: corporate practice of medicine; fee
splitting; anti-referral laws; anti-kickback laws; certificates of need;
No-Fault insurance; workers' compensation; and proposed health care reform
legislation.
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