EXHIBIT 2.2
MEDUNITE INC.
REPORT AND FINANCIAL STATEMENTS
DECEMBER 31, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MedUnite Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of MedUnite Inc. at December
31, 2001 and the results of its operations and its cash flows for the year ended
December 31, 2001 and for the period from June 9, 2000 (inception) through
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audits 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred a net loss of
$40,399,000 and generated negative cash flows from operations of $33,482,000
during 2001, and at December 31, 2001 had an accumulated deficit of $53,607,000.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 1 to the financial statements. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Diego, California
December 17, 2002
MEDUNITE INC.
BALANCE SHEET
December 31, 2001
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 8,614,000
Investment in derivative securities --
Accounts receivable, net of allowances of $729,000 2,833,000
Prepaid expenses and other current assets 712,000
------------
Total current assets 12,159,000
Property and equipment, net 22,286,000
Intangible assets, net 14,779,000
Other assets, including $825,000 of restricted cash
at December 31, 2001 1,011,000
------------
Total assets $ 50,235,000
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 3,465,000
Accrued expenses 7,614,000
Current portion of capital lease obligations 201,000
------------
Total current liabilities 11,280,000
Notes payable 3,505,000
Deferred compensation 2,158,000
Capital lease obligations, less current portion 366,000
Other long-term liabilities 1,134,000
------------
Total liabilities 18,443,000
------------
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock, $0.001 par value, 137,000,000 shares authorized:
Series A preferred stock, 87,000,000 authorized, 85,270,402
issued and outstanding; liquidation value of $85,270,000 85,000
Common stock, $0.001 par value, 297,000,000 shares authorized:
Class A common stock, 210,000,000 authorized, zero shares
issued and outstanding --
Class B common stock, 87,000,000 authorized, zero shares
issued and outstanding --
Additional paid-in capital 85,314,000
Accumulated deficit (53,607,000)
------------
Total stockholders' equity 31,792,000
------------
Total liabilities and stockholders' equity $ 50,235,000
============
The accompanying notes are an integral part of these
financial statements.
-2-
MEDUNITE INC.
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2001 and for the
Period from June 9, 2000 (Inception) to December 31, 2000
- --------------------------------------------------------------------------------
PERIOD FROM
JUNE 9, 2000
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Revenue $ 7,085,000 $ --
------------ ------------
Operating Expenses
Cost of revenue 4,087,000 --
Engineering and development 27,874,000 2,171,000
Selling, general and administrative 16,617,000 11,730,000
Depreciation and amortization 3,036,000 23,000
------------ ------------
Total operating expenses 51,614,000 13,924,000
------------ ------------
Loss from operations (44,529,000) (13,924,000)
Investment income 4,956,000 905,000
Interest income 425,000 306,000
Interest expense (1,251,000) (495,000)
------------ ------------
Net loss $(40,399,000) $(13,208,000)
============ ============
The accompanying notes are an integral part of these
financial statements.
-3-
MEDUNITE INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Year Ended December 31, 2001 and for the
Period from June 9, 2000 (Inception) to December 31, 2000
- --------------------------------------------------------------------------------
SERIES A
COMMON STOCK PREFERRED STOCK ADDITIONAL
---------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ------- ------- -----
Issuance of common stock in
June and August 2000 6,550 $ -- -- $ -- $ 6,000 $ -- $ 6,000
Net loss -- -- -- (13,208,000) (13,208,000)
------------ ---- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 6,550 -- -- -- 6,000 (13,208,000) (13,202,000)
Issuance of Series A preferred
stock upon conversion of
common stock (6,550) -- 6,550 -- -- -- --
Issuance of Series A preferred
stock, including conversion
of notes payable -- -- 85,263,852 85,000 85,179,000 -- 85,264,000
Recognition of discount on
notes payable -- -- -- -- 129,000 -- 129,000
Net loss -- -- -- -- -- (40,399,000) (40,399,000)
------------ ---- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 -- $ -- 85,270,402 $ 85,000 $ 85,314,000 $(53,607,000) $ 31,792,000
============= ==== ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
financial statements.
-4-
MEDUNITE INC.
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 2001 and for the
Period from June 9, 2000 (Inception) to December 31, 2000
- --------------------------------------------------------------------------------
PERIOD FROM
JUNE 9, 2000
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(40,399,000) $(13,208,000)
Adjustments to reconcile net loss to net cash
used in operating activities
Investment income -- (905,000)
Non-cash interest expense 1,238,000 --
Depreciation and amortization 3,063,000 23,000
Gain on sale of investment (4,956,000) --
Changes in operating assets and liabilities,
net of assets acquired
Accounts receivable (589,000) --
Prepaid and other current assets (642,000) (70,000)
Other assets 179,000 (176,000)
Accounts payable 2,016,000 1,449,000
Accrued expenses and other long-term liabilities 5,208,000 3,155,000
Deferred compensation 1,400,000 758,000
------------ ------------
Net cash used in operating activities (33,482,000) (8,974,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in warrant (Note 4) (941,000) (2,113,000)
Purchases of property and equipment (22,559,000) (300,000)
Proceeds from sale of investment 8,915,000 --
Increase in restricted cash (825,000) --
Costs incurred in connection with business combination (1,043,000) --
------------ ------------
Net cash used in investing activities (16,453,000) (2,413,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 6,000
Proceeds from issuance of Series A preferred stock 25,660,000 --
Proceeds from issuance of convertible notes payable 24,340,000 20,000,000
Payments on capital lease obligations (70,000) --
------------ ------------
Net cash provided by financing activities 49,930,000 20,006,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,000) 8,619,000
Cash and cash equivalents at beginning of period 8,619,000 --
------------ ------------
Cash and cash equivalents at end of period $ 8,614,000 $ 8,619,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Issuance of Series A preferred stock upon conversion of notes
payable (Note 5) $ 44,340,000 $ --
============ ============
Series A preferred stock issued in connection
with acquisition $ 15,263,000 $ --
============ ============
Issuance of long-term debt in connection with acquisition (Note 3) $ 1,966,000 $ --
============ ============
Cash paid for interest $ 14,000 $ --
============ ============
The accompanying notes are an integral part of these
financial statements.
-5-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
THE COMPANY
MedUnite Inc. (the "Company") was incorporated in Delaware in June
2000. The Company was formed to develop and maintain an exchange that
provides connectivity applications in the healthcare market that
facilitates various business transactions, including claims submission,
real-time claim status inquiry, eligibility and referral and
authorization.
The Company is subject to risks common to rapidly growing
technology-based companies, including rapid technological change,
dependence on principal products, new product development, new product
introductions, other activities of competitors, and a limited operating
history in Internet related e-commerce activities.
The Company incurred a net loss of $40,399,000 and generated negative
cash flows from operations of $33,482,000 during 2001. The Company has
an accumulated deficit of $53,607,000 as of December 31, 2001. In
February 2002 and August 2002, the Company issued notes payable to its
founders in the aggregate amount of $23,975,000 (Note 12).
Due to liquidity constraints in the second half of 2002, management
implemented certain measures to conserve capital resources that
included reducing its workforce and certain product development and
marketing efforts. In addition, management has been engaged in efforts
to raise additional resources through the issuance of additional
capital or the sale of the Company. However, there can be no assurance
that management will be successful in raising additional capital or in
its efforts to sell the Company. These circumstances raise substantial
doubt about the Company's ability to continue as a going concern. These
financial statements do not reflect any adjustments that might result
if the Company was unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of MedUnite Inc. and its
wholly-owned subsidiary. All intercompany balances 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 and the disclosure 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities from the date of purchase of three months or less to be cash
equivalents. Cash and cash equivalents include cash on hand and
certificates of deposit with a financial institution.
INVESTMENT IN DERIVATIVE SECURITIES
Changes in the fair value of the Company's investment in derivative
securities are recorded in investment income. The Company elected to
adopt Statement on Financial Accounting Standards No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, upon the Company's
inception.
-6-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, which range from two to
three years. Leasehold improvements are amortized using the
straight-line method over the shorter of their estimated useful lives
or the term of the lease. 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
income. Expenditures for repairs, maintenance and minor renewals and
betterments are expensed as incurred.
INTERNAL-USE SOFTWARE
Internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized.
Application development stage costs generally include software
configuration, coding, installation to hardware and testing. Costs of
upgrades and major enhancements that result in additional functionality
are also capitalized. Costs incurred for maintenance and minor upgrades
and enhancements are expensed as incurred. During the year ended
December 31, 2001, the Company capitalized $9,876,000 of internal-use
software development costs. Amortization expense, which is computed on
a straight-line basis over estimated useful lives ranging from two to
three years, was $293,000 for the year ended December 31, 2001. The
Company did not capitalize any internal-use software development costs
during the period ended December 31, 2000 (Note 5).
LONG-LIVED ASSETS
The Company assesses potential impairments of its long-lived assets
when there is evidence that events or changes in circumstances have
made recovery of an asset's carrying value unlikely. An impairment loss
is recognized when the sum of the expected undiscounted future net cash
flows expected to be generated by an asset (or group of assets) is less
than its carrying value. Any required impairment loss would be measured
as the amount by which the asset's carrying value exceeds its fair
value and would be recorded as a reduction in the carrying value of the
related asset and a charge to operations. The Company has not recorded
any such impairment losses.
INTANGIBLE ASSETS
Intangible assets consist primarily of a software platform, non-compete
agreement, customer related agreements and software and goodwill
arising from the Company's acquisition of NDCHealth's physician network
services business in 2001 (Note 3). Identifiable intangible assets with
determinable lives are stated at their fair value and are being
amortized using the straight-line method over their estimated useful
lives as follows:
Software platform 3 years
Non-compete agreement 5 years
Customer related agreements 3 to 5 years
Other identifiable intangible assets 0.5 to 5 years
Goodwill is not amortized, but is reviewed annually (or more frequently
if impairment indicators arise) for impairment. Intangible assets that
are not deemed to have indefinite lives are reviewed for impairment in
accordance with the Company's policy for long-lived assets. As of
December 31, 2001, no such impairment losses have been recognized.
-7-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
REVENUE RECOGNITION
The Company derives revenue from processing electronically submitted
medical claims for insurance companies and health care providers.
Revenue is recognized as services are provided according to the terms
of the underlying contracts.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
$481,000 and $0 for the year ended December 31, 2001 and the period
ended December 31, 2000, respectively.
INCOME TAXES
Current income tax expense or benefit represents the amount of income
taxes expected to be payable or refundable for the current year. A
deferred income tax asset or liability is computed for the expected
future impact of differences between the financial reporting and income
tax bases of assets and liabilities and for the expected future tax
benefit to be derived from tax credits and loss carryforwards. Deferred
income tax expense or benefit represents the net change during the year
in the deferred income tax asset or liability. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax
assets will not be realized.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments subject to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts
receivable. The Company's policy is to place its cash and cash
equivalents with high quality financial institutions in order to limit
its credit exposure. To date, the Company has not experienced any
credit losses associated with these financial institutions. Accounts
receivable are generally unsecured. The Company performs on-going
credit evaluations of its customers and maintains an allowance for
potential credit losses as considered necessary.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as the change in the equity of a
business enterprise during a period from transactions and other events
and circumstances from non-owner sources. The Company presents other
comprehensive income (loss) in its statements of stockholders' equity.
For the year ended December 31, 2001 and the period ended December 31,
2000, the only component of comprehensive loss is net loss.
3. ACQUISITION
In August 2001, the Company acquired NDCHealth's physician network
services business (the "Acquisition"). The physician network services
business connects physicians to payors to provide electronic processing
for claims, eligibility, referrals and other health transactions. The
Company acquired the physician network services business in exchange
for 15,263,402 shares of Series A preferred stock, having an estimated
fair value, as determined by management, of $15,263,000, and a
promissory note with a principal amount of $2,300,000, having an
estimated fair value of $1,966,000 (Note 6). In addition, the Company
incurred acquisition costs of $1,043,000 related to the acquisition.
-8-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
The acquisition was accounted for using the purchase method of
accounting, and accordingly, the results of the acquired business have
been included in the Company's financial statements from the date of
acquisition. The aggregate purchase price was allocated as follows:
Accounts receivable $ 2,214,000
Property and equipment 572,000
Identifiable intangibles 10,665,000
Goodwill 5,555,000
Other assets 52,000
Accrued liabilities (786,000)
------------
Total purchase price $ 18,272,000
============
4. INVESTMENT IN WARRANT OF QUOVADX, INC.
In October 2000, the Company entered into a Software License and
Services Agreement (the "Agreement") with Quovadx, Inc., formerly
XCare.net, Inc. ("Quovadx") under which Quovadx provides software
development and hosting services related to the Company's internet
portal. The development services are invoiced to the Company on a time
and materials basis and the hosting service fees are invoiced based on
the number of servers hosted. In June 2001, the Company accepted and
paid approximately $6,700,000 for a perpetual software license, which
is included in property and equipment.
In addition, the Company is committed to purchase software maintenance
services from Quovadx from June 2002 through December 31, 2005, as
follows:
YEAR ENDING DECEMBER 31,
2002 $ 700,000
2003 700,000
2004 700,000
2005 408,000
----------------
$ 2,508,000
================
In connection with the Agreement, Quovadx issued warrants to the
Company to purchase 1,350,000 shares of Quovadx's common stock at an
exercise price of $4.06. The warrants were immediately vested,
exercisable and non-forfeitable and had a contractual life of 18 months
from the date of grant. The fair value of the warrants at the date of
issuance was estimated to be $3,054,000, using the Black-Scholes option
pricing model assuming a volatility factor of 120%, risk-free interest
rate of 5.9%, dividend yield of 0%, a contractual life of 18 months and
Quovadx's stock price of $4.06. The warrants are classified as an
investment and are stated at fair value at December 31, 2000. Payments
made to Quovadx up to the initial fair value of the warrant are
considered payment for the purchase of the warrant. For the period
ended December 31, 2000, the Company made payments of $2,113,000 to
Quovadx. The remaining $941,000, which was included in accrued expenses
at December 31, 2000, was offset against payments made during the year
ended December 31, 2001. The difference between (i) the value of the
development services provided on a time and materials basis and the
software payment of $6,700,000 and (ii) the fair value of the warrant
of $3,054,000 is being accounted for as internally developed software.
In September 2001, the Company exercised these warrants and sold the
underlying Quovadx common stock for a total of $8,915,000, recognizing
a gain of $4,956,000, which is included in investment income for 2001.
-9-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
In addition, under the terms of the Agreement, the Company has a put
right with Quovadx that would require Quovadx to invest between $10
million and $20 million in a future financing, subject to certain
conditions, if requested by Company's Board of Directors. The
investment shall be on terms similar to other investors in the
financing. However, there can be no assurance that the Board of
Directors will exercise this right or that the conditions of the put
right will be met.
5. COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
Property and equipment, net consists of the following:
2001
------------
Computer equipment $ 2,124,000
Internal-use software 9,876,000
Software 10,003,000
Furniture and fixtures 1,051,000
Office equipment 585,000
Leasehold improvements 292,000
------------
23,931,000
Less accumulated depreciation and amortization (1,645,000)
------------
$ 22,286,000
============
Depreciation and amortization expense related to property and equipment
was $1,595,000 and $23,000 for the year ended December 31, 2001 and the
period ended December 31, 2000, respectively.
Intangible assets, net consists of the following:
2001
---------------
Intangible Assets Subject to Amortization:
Software platform $ 8,325,000
Non-compete agreement 1,700,000
Customer related agreements 422,000
Other identifiable intangible assets 218,000
------------
10,665,000
Less accumulated amortization (1,441,000)
------------
Intangibles assets subject to amortization, net 9,224,000
Goodwill 5,555,000
------------
$ 14,779,000
============
-10-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
Amortization expense was $1,441,000 for the year ended December 31,
2001. Estimated amortization expense subsequent to the year ended
December 31, 2001 is as follows:
YEAR ENDING DECEMBER 31,
2002 $ 3,447,000
2003 3,253,000
2004 1,975,000
2005 347,000
2006 202,000
---------------
$ 9,224,000
===============
Restricted cash of $825,000 at December 31, 2001 includes a certificate
of deposit of $750,000, which has been pledged as security for an
outstanding letter of credit (Note 11).
Accrued expenses consist of the following:
2001
Compensation related costs $ 2,666,000
Other 4,948,000
----------------
$ 7,614,000
================
6. NOTES PAYABLE
During 2001 and 2000, the Company received proceeds of $24,340,000 and
$20,000,000, respectively, from its founders in connection with the
issuance of convertible notes payable (the "Notes"), as amended. The
Notes have annual interest rates ranging from 6.10% to 6.53%. The
principal balance of the Notes automatically converted into 44,340,331
shares of Series A preferred stock at $1.00 per share upon the closing
the Acquisition in August 2001. The outstanding accrued interest of
$1,565,000 was converted into notes payable. The Company imputed an
interest rate of 12% on these notes, which more accurately reflects the
rate that the Company would pay to a third party lender. The resulting
debt discount of $129,000 was recorded as additional paid-in capital
because the notes were issued to the founders. The notes are repayable
in four quarterly installments during 2003. Accrued interest related to
this note at December 31, 2001 of $70,000 is included in other
long-term liabilities.
During 2001, the Company issued a promissory note in connection with
the Acquisition. The note has a principal amount of $2,300,000 payable
in full in August 2004, and was initially recorded at its estimated
fair value of $1,996,000, representing an effective annual interest
rate of 12%. Accrued interest related to this note at December 31, 2001
of $99,000 is included in other long-term liabilities.
-11-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
Maturities of long-term debt and notes payable are as follows:
YEAR ENDING DECEMBER 31,
2002 $ --
2003 1,565,000
2004 2,300,000
---------------
3,865,000
Less discount (360,000)
---------------
$ 3,505,000
===============
7. COMMON STOCK AND PREFERRED STOCK
COMMON STOCK
The rights and privileges of the common stock under the Company's
Amended and Restated Certificate of Incorporation are as follows:
Each holder of Class A common stock and Class B common stock is
entitled to one vote per share. Holders of Class B common stock, voting
as a separate class, are entitled to elect or remove from office the
founders' members of the Company's Board of Directors. The holders of
all outstanding shares of Company stock, voting together on an
if-converted basis as a single class, are entitled to elect all
remaining members of the Board of Directors.
Each share of Class B common stock is convertible at any time into an
equal number of shares of Class A common stock transferred to a
non-founder. Class B common stock transferred to a non-founder will
automatically convert into Class A common stock. In addition, Class B
common stock owned by the founders will automatically convert into
Class A common stock upon the earlier of a) the fifth anniversary of an
initial public offering of the Company, or b) when the founders own, in
aggregate, less than 50% of Class B common stock that would be issued
upon conversion of the Series A preferred stock.
PREFERRED STOCK
The rights, preferences and privileges of the Series A preferred stock
under the Company's Amended and Restated Certificate of Incorporation
are as follows:
DIVIDENDS - The holders of shares of the Series A preferred stock are
entitled to receive dividends at the rate of 8% of the original issue
price, which is $1.00 per share, per annum (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination
or other similar recapitalization affecting such shares), payable when
and as declared by the Board of Directors of the Company. The right to
receive dividends shall be noncumulative; however the Company shall not
declare or pay any distributions on shares of common stock until the
preferred stockholders have received a cumulative distribution at the
rate specified above.
LIQUIDATION PREFERENCE - In certain events, including liquidation,
dissolution or winding up of the Company, including a consolidation or
merger and conveyance of substantially all of the assets of the
Company, the holders of Series A preferred stock have a preference in
liquidation over the common stockholders equal to the original issue
price of $1.00 per share (subject to appropriate adjustment in the
event of any stock dividend, stock split, combination or other similar
-12-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
recapitalization affecting such shares), plus any dividends declared
but unpaid thereon. If the assets of the Company are not sufficient to
fulfill the liquidation amount, the stockholders will share in the
liquidation amount on a pro rata basis.
SALE OF THE COMPANY - In the event the Board of Directors decides to
pursue the sale of the Company, the founders shall be given the first
right of refusal to acquire the Company. If none of the founders
exercise this right, NDCHealth has the option to purchase the Company.
VOTING RIGHTS - Each holder of preferred stock shall be entitled to the
number of votes equal to the number of whole shares of common stock
into which they are then convertible. Holders of Series A preferred
stock, voting as a separate class, are entitled to elect or remove from
office the founders' members of the Company's Board of Directors.
CONVERSION - Each share of preferred stock is automatically convertible
into one share of Class B common stock (subject to customary
adjustments to protect against dilution) upon the closing of a public
offering of the Company's common stock that results in gross proceeds
of at least $50,000,000.
8. INCOME TAXES
Deferred tax assets consist of the following:
2001
---------------
Net operating loss carryforwards $ 17,439,000
Capitalized start-up costs 5,282,000
Investment in warrant --
Deferred compensation 1,599,000
Developed internal-use software (3,729,000)
Intangible assets (3,106,000)
Other 342,000
----------------
Net deferred tax assets 17,827,000
Deferred tax asset valuation allowance (17,827,000)
----------------
$ --
================
Due to the uncertainty of the Company generating future taxable income,
the Company has recorded a valuation allowance against its deferred tax
assets.
A reconciliation of income taxes to the amounts computed by applying
the statutory federal income tax rate to the net loss is summarized as
follows:
2001 2000
------------ ------------
Amounts computed at statutory federal rate $(13,736,000) $ (4,491,000)
State taxes (1,905,000) (771,000)
Other 21,000 --
Intangible assets 3,055,000 --
Change in valuation allowance 12,565,000 5,262,000
------------ ------------
$ -- $ --
============ ============
-13-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
At December 31, 2001, the Company had $44,739,000 and $44,739,000 of
federal and state net operating loss carryforwards, respectively. The
federal and state net operating loss carryforwards begin to expire in
2020 and 2010, respectively.
Management is currently exploring various strategic alternatives
including the possible sale of the Company. Future changes in control
may result in a limitation on the future utilization of the company's
net operating loss carryforwards.
9. STOCK OPTIONS
The Company has adopted the 2001 Equity Incentive Plan (the "Plan")
providing for the granting of up to 10,280,374 shares of the Company's
common stock. The Plan provides for the granting of stock options and
restricted stock awards. Incentive stock options granted under the Plan
must be granted with strike prices not less than the fair market value.
Non-qualified stock options granted under the Plan must be granted with
strike prices not less than 85% of fair market value. Options generally
expire ten years from the date of grant. Option vesting is determined
by the Board of Directors upon each grant and is generally a five-year
period.
In June 2000, the Company entered into a five-year employment agreement
with an executive under which the Company issued stock options to
purchase 2,803,738 shares of common stock and is obligated to issue
847,458 shares of restricted common stock to the executive. If the
executive's employment terminates, other than for cause, prior to the
fifth anniversary of the executive's hire date, the Company is
obligated to repurchase all of the restricted common stock for an
aggregate price equal to the greater of the then fair market value or
$1,000,000. Commencing on the fifth anniversary of the executive's hire
date, the executive has a right to sell all or some of his shares of
restricted common stock and stock option shares to the Company for a
guaranteed fixed pre-tax gain of $7,000,000 in the aggregate assuming
all shares were repurchased. This amount is being recognized as
compensation expense on a straight-line basis over the five-year
service period. Through December 31, 2001, $2,158,000 has been recorded
as deferred compensation.
In 2002, this executive has asserted that if his employment is
terminated following a change in control of the Company, the
"guaranteed value" provision set forth in Section 7 of this employment
agreement will be accelerated and become fully due and payable. He
asserts that he would be entitled to receive $7,000,000 for his
restricted stock and options. The Company believes the executive's
"guaranteed value" provision does not accelerate upon a change of
control of the Company and that the executive must be an employee of
the Company on the fifth anniversary of his hire date in order to
receive the $7,000,000 guaranteed value. The Company does not dispute
that if the executive's employment terminates without cause as defined
in the agreement prior to the fifth anniversary of his hire date, he
would be entitled to put the shares to the Company for repurchase at an
aggregate purchase price equal to the greater of the then fair market
value or $1,000,000.
The executive has requested that the Company agree to a binding
arbitration to resolve this dispute. The Company has rejected this
request for arbitration and intends to defend any claim vigorously. The
accompanying financial statements do not include any adjustments that
may result from this uncertainty.
During 2001, the Company granted options to purchase 8,452,458 shares
of common stock (including the options to purchase 2,803,738 shares of
common stock granted to the executive referred to above) with a
weighted average exercise price of $1.54.
-14-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
The following table summarizes information regarding options
outstanding as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------ ----------- ------------ ----- ----------- -----
$1.18 5,257,009 9.5 $1.18 1,051,402 $1.18
$1.74 to $2.30 3,195,449 9.7 $2.00 -- --
--------------- ------------
8,452,458 1,051,402
=============== =============
At December 31, 2001, 980,458 shares (exclusive of the 897,458 shares
of restricted stock to be issued to the executive referred to above)
were available for future grants under the Plans.
The weighted-average fair value of options granted during the year
ended December 31, 2001 was $0.08.
PRO FORMA EMPLOYEE COMPENSATION EXPENSE
Had compensation cost for the Company's stock-based compensation been
determined based on the fair value of the options at the date of grant,
the Company's net loss would not have been materially different from
the net loss reported for 2001.
The fair value of these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions for grants during 2001: dividend yield of
0%, expected life of five years, expected volatility of 0%, and
risk-free interest rate of 6%.
10. RELATED PARTY TRANSACTIONS
The Company was founded by seven leading insurance companies who are
expected to be among the Company's primary customers. In August 2001,
the Company entered into service agreements with each of the founders
under which the Company will facilitate specified business transactions
for fees. These agreements have a term of two years and automatically
renew for successive annual periods, if not cancelled by either party.
At December 31, 2001, the Company has accounts receivable from its
founders in the aggregate amount of $361,000. During 2001, the Company
recognized revenue of $1,348,000 from its founders.
At December 31, 2001, the Company has accounts receivable from
NDCHealth of $506,000 and accounts payable and accrued liabilities due
to NDCHealth of $1,642,000. During 2001, the Company recognized revenue
of $2,157,000 from NDCHealth.
-15-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases facilities and equipment under non-cancelable
operating and capital leases which expire on varying dates through
2006. In connection with a facilities lease, the Company entered into
an irrevocable letter of credit in the amount of $750,000. The letter
of credit expires September 30, 2004. The Company's future minimum
payments under non-cancelable operating and capital leases are as
follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ -------------- -----------------
2002 $ 229,000 $ 1,567,000
2003 233,000 1,471,000
2004 153,000 1,145,000
2005 55,000
2006 9,000
--------------- ----------------
615,000 $ 4,247,000
================
Less amounts representing interest 48,000
---------------
Future minimum lease obligation 567,000
Less current portion 201,000
---------------
$ 366,000
===============
Assets under capital leases included in property and equipment at
December 31, 2001 had a net book value of $542,000, which includes
accumulated amortization of $95,000.
Rent expense was $1,555,000 and $441,000 for the year ended December
31, 2001 and the period ended December 31, 2000, respectively. Certain
facility operating leases contain escalation clauses. The Company
recognizes rent expense on a straight-line basis over the related lease
term.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with certain executives
that provide for cash severance payments if the executives are
terminated without cause. The Company's aggregate commitment under
these agreements is $2,335,000 at December 31, 2001.
12. SUBSEQUENT EVENTS
In February 2002, the Company issued convertible promissory notes
bearing interest at 2.74% per annum, pursuant to a note purchase
agreement with its founders, under which the Company borrowed an
aggregate amount of $18,160,000. In the event that the Company issues
and sells shares of Series B Preferred Stock to new investors with
total proceeds of not less than $30,000,000, including the $18,160,000
advanced, prior to February 2003, then the outstanding principal of the
convertible promissory notes will automatically convert into shares of
Series B Preferred Stock at the same price per share that the shares of
Series B Preferred Stock are sold to the new investors. If a financing
-16-
MEDUNITE INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
does not occur before February 2003, then the outstanding principal
balance will automatically convert into shares of Series B Preferred
Stock at the price per share equal to the then fair market value. The
Series B Preferred Stock will have such rights, preferences and
privileges as are approved by the required vote of the founders (as
defined in the Company's amended and restated certificate of
incorporation); provided that the rights of the Series B Preferred
stockholders shall be pari passu to the rights of the Series A
Preferred stockholders upon a liquidation of the Company.
In April 2002, the Company entered into a non-cancellable operating
lease for office space, which expires on April 30, 2005. The Company's
future minimum payments under the lease for the years ending December
31, 2002, 2003, 2004 and 2005 are $327,652, $501,880, $517,483, and
$174,228, respectively.
In July 2002, the Company entered into a three-year information
technology services agreement to outsource certain hosting, system
maintenance and operation services. Actual service fees are based on
the number of transactions processed by the software being supported;
however, the Company is committed to pay a minimum annual service fee
of $1,212,000. The Company has the option to cancel the agreement by
providing 90 days notice and paying an early termination fee which will
be equal to between one and three months' average transaction fees,
depending upon when the agreement is terminated.
In August 2002, the Company issued promissory notes bearing interest at
6% per annum, pursuant to a note purchase agreement with its founders,
under which the Company subsequently borrowed the maximum amount
available of $5,815,000. The outstanding principal amount of the loan
is due and payable on the earliest of the following events: (a)
December 31, 2002, (b) the date that the Company completes an equity
financing for the minimum amount of $20,000,000 or (c) the effective
date of a change of control of the Company.
-17-