EXHIBIT 2.3
MEDUNITE INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2002
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
MedUnite Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' deficit and cash flows present fairly, in all material
respects, the financial position of MedUnite Inc. at 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. 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 of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
As more fully discussed in Note 16, the Company was acquired on December 31,
2002.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 6, 2003
2
MEDUNITE INC.
BALANCE SHEET
DECEMBER 31, 2002
ASSETS
Current assets: $ 879,000
Cash and cash equivalents
Accounts receivable, net of allowance
of $662,000 3,141,000
Prepaid expenses and other current assets 664,000
-------------
Total current assets 4,684,000
Property and equipment, net 9,977,000
Intangible assets, net 8,138,000
Other assets 1,033,000
-------------
Total assets $ 23,832,000
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable $ 25,443,000
Accounts payable 4,034,000
Accrued expenses 5,483,000
Deferred compensation 1,000,000
Deferred revenue 74,000
Current portion of capital lease obligations 314,000
-------------
Total current liabilities 36,348,000
Notes payable, less current portion 2,139,000
Capital lease obligations, less current portion 194,000
Other long-term liabilities 1,237,000
-------------
Total liabilities 39,918,000
-------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.001 par value, 137,000,000 shares authorized:
Series A preferred stock, 87,000,000 authorized, 85,270,402
shares issued and outstanding; liquidation value
of $85,270,000 85,000
Common stock, $0.001 par value, 297,000 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 86,295,000
Accumulated deficit (102,466,000)
-------------
Total stockholders' deficit (16,086,000)
-------------
Total liabilities and stockholders' deficit $ 23,832,000
=============
The accompanying notes are an integral part of these financial statements.
3
MEDUNITE INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
Revenue $ 19,534,000
------------
Operating expenses:
Cost of revenue 7,946,000
Selling, general and administrative 37,322,000
Depreciation and amortization 12,276,000
Impairment of intangibles and other assets 11,670,000
Settlement of deferred compensation (2,558,000)
------------
Total operating expenses 66,656,000
------------
Loss from operations (47,119,000)
Interest income 169,000
Interest expense (1,906,000)
------------
Net loss $(48,859,000)
============
The accompanying notes are an integral part of these financial statements.
4
MEDUNITE INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2002
SERIES A
COMMON STOCK PREFERRED STOCK ADDITIONAL
------------------ --------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ------------ -------------- -----
Balance at December 31, 2001 $ -- -- 85,270,402 $ 85,000 85,314,000 $ (53,607,000) $ 31,792,000
Recognition of discount
on notes payable -- -- -- -- 981,000 -- 981,000
Net loss -- -- -- -- -- (48,859,000) (48,859,000)
------ ----- ---------- -------- ----------- ------------- -------------
Balance at December 31, 2002 $ -- -- 85,270,402 $ 85,000 $86,295,000 $(102,466,000) $ (16,086,000)
====== ===== ========== ======== =========== ============= =============
The accompanying notes are an integral part of these financial statements.
5
MEDUNITE INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(48,859,000)
Adjustments to reconcile net loss to net cash
used in operating activities
Impairment of intangibles and other assets 11,670,000
Amortization of debt discount 1,083,000
Depreciation and amortization 12,276,000
Provision for doubtful accounts 329,000
Changes in operating assets and liabilities:
Accounts receivable (637,000)
Prepaid expenses and other current assets 48,000
Other assets (22,000)
Accounts payable 569,000
Accrued expenses (731,000)
Deferred revenue 74,000
Deferred compensation (2,558,000)
Other long-term liabilities 103,000
------------
Net cash used in operating activities (26,655,000)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (4,912,000)
------------
Net cash used in investing activities (4,912,000)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debt and notes payable 23,975,000
Payments on capital lease obligations (143,000)
------------
Net cash provided by financing activities 23,832,000
------------
Net decrease in cash and cash equivalents (7,735,000)
Cash and cash equivalents at beginning of period 8,614,000
------------
Cash and cash equivalents at end of period $ 879,000
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 65,000
============
The accompanying notes are an integral part of these financial statements.
6
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.
During 2002, the Company incurred a net loss of $48,859,000 and generated
negative cash flows from operations of $26,655,000. The Company has an
accumulated deficit of $102,466,000 as of December 31, 2002.
As a result of these losses and negative cash flow, management engaged in
efforts to sell the Company. On December 31, 2002, the Company was sold to
ProxyMed, Inc. ("ProxyMed'), a publicly held provider of healthcare
transaction processing services based in Fort Lauderdale, Florida for $10.0
million in cash and $13.4 million in 4% Convertible Notes issued to the
Company's founders (see Note 16). Without the sale of the Company to ProxyMed
there would have been substantial doubt about the Company's ability to
continue as a going concern. These financial statements reflect the financial
position of the Company before the consummation of the acquisition by
ProxyMed and do not reflect any adjustments that might have resulted from
such transaction or 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 represent
the financial position of the Company immediately prior to its acquisition by
ProxyMed on December 31, 2002 (see Note 16).
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.
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. Certain transaction fee revenue may be subject to revenue sharing
or rebates per agreements with resellers, vendors, other clearinghouses, one
of the founders and other business partners. Revenue from maintenance fees is
recognized ratably over the applicable period.
COST OF REVENUE
Cost of revenue includes third party hosting and support services of network
connectivity, certain telecommunications costs, and revenue sharing and
rebate arrangements with resellers, vendors, other clearinghouses, one of the
founders and other business partners.
7
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. Cash and cash equivalents used to support
collateral instruments, such as letters of credit, are reclassified as either
current or long-term assets depending upon the maturity date of the
obligation they collateralize.
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. 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. Examination for obsolete, damaged and impaired fixed assets is
periodically reviewed by management.
INTERNAL-USE SOFTWARE
Internal and external costs incurred to develop internal-use computer
software during the application development stage are capitalized.
Amortization is computed on a straight-line basis over the estimated useful
lives of the assets. 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.
INTANGIBLE AND OTHER LONG-LIVED ASSETS
The Company assesses potential impairments of its intangible and other
long-lived assets when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely.
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. 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 or when third-party evidence exists as to the value of the
long-lived assets. 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.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was $112,000
for the year ended December 31, 2002.
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.
8
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 uncollateralized. The Company
performs on-going credit evaluations of its customers and maintains an
allowance for potential credit losses as considered necessary.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments which are presented herein
have been determined by management using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
amounts the Company could realize in a current market exchange.
Cash and cash equivalents, accounts and notes receivable, net, and accounts
payable are reflected in the accompanying Balance Sheets at amounts
considered by management to reasonably approximate fair value due to their
short-term nature.
The Company estimates the fair value of its long-term debt generally using
discounted cash flow analysis based on our current borrowing rates for
similar types of debt. As of December 31, 2002, the carrying value of the
long-term debt approximated the fair value of such instruments.
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 statement of stockholders' equity. For the
year ended December 31, 2002 the only component of comprehensive loss is net
loss.
3. ACQUISITION
In August 2001, the Company acquired NDC Health'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 (see Note 9). In
addition, the Company incurred acquisition costs of $1,043,000 related to the
acquisition.
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
============
As a result of an impairment review by management at December 31, 2002
prompted by the sale of the Company to ProxyMed (see Note 16), the Company
incurred an impairment charge of $3,194,000 in relation to certain of the
identifiable intangible assets from the Acquisition (see Note 6). The
resulting fair values recorded were based on an independent third-party
appraisal of the assets utilizing a replacement cost methodology.
9
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 provided software development and hosting
services related to the Company's internet portal. The development services
were invoiced to the Company on a time and materials basis and the hosting
service fees were 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. However, as a
result of an impairment review by management at December 31, 2002, the
Company wrote down the remaining net book value of the license to its fair
market value (see Note 5).
While the Company has taken an impairment charge for the perpetual software
license, it is evaluating whether it still may be liable to purchase software
maintenance services from Quovadx through December 31, 2005. Such
commitments, if paid, would be due as follows:
YEAR ENDING DECEMBER 31,
- -------------------------
2003 $ 700,000
2004 700,000
2005 408,000
-----------
$ 1,808,000
===========
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2002:
ESTIMATED
USEFUL LIVES
------------
Computer equipment $ 3,169,000 3 years
Internal-use software 4,800,000 2 - 5 years
Software 2,259,000 2 - 5 years
Furniture and fixtures 1,357,000 5 years
Office equipment 670,000 5 years
Leasehold improvements 518,000 Life of lease
------------
12,773,000
Less accumulated depreciation and amortization (2,796,000)
------------
$ 9,977,000
============
During the year ended December 31, 2002, the Company capitalized $2,006,000
of internal-use software development costs.
Depreciation and amortization expense related to property and equipment,
including amortization of internal-use software development costs, was
$8,829,000 for the year ended December 31, 2002.
As a result of an impairment review by management at December 31, 2002
prompted by the sale of the Company to ProxyMed (see Note 16), the Company
wrote-down certain software and license fees associated with its processing
platforms and previously capitalized internal-use software resulting in
impairment charges totaling $8,476,000. The resulting fair values recorded
were based on an independent third-party appraisal of the assets utilizing a
replacement cost methodology.
10
6. INTANGIBLE ASSETS
Intangible assets consists of the following at December 31, 2002:
Intangible Assets Subject to Amortization:
Software platform $ 1,200,000
Non-compete agreement 1,700,000
Customer related agreements 422,000
Other identifiable intangible assets 218,000
-----------
3,540,000
Less accumulated amortization (957,000)
-----------
Intangible assets subject to amortization, net 2,583,000
Goodwill 5,555,000
-----------
$ 8,138,000
===========
Through December 31, 2002, intangible assets were 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 2 to 5 years
Other identifiable intangible assets 0.5 to 5 years
Amortization expense was $3,447,000 for the year ended December 31, 2002. The
software platform will now be amortized over one year through December 31,
2003. The estimated future aggregate amortization expense for intangible
assets subject to amortization is as follows:
YEAR ENDING DECEMBER 31,
------------------------
2003 $1,678,000
2004 356,000
2005 347,000
2006 202,000
----------
$2,583,000
==========
7. RESTRICTED CASH
Restricted cash of $825,000 at December 31, 2002 includes a certificate of
deposit of $750,000, which has been pledged as security for an outstanding
letter of credit (see Note 15). Restricted cash is included in other assets
in the accompanying balance sheet.
8. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2002:
Compensation related costs $1,445,000
Severance 800,000
Interest 658,000
Other 2,580,000
----------
$5,483,000
==========
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9. DEBT
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
at 6% stated interest per year. 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 these notes of $133,000 is included in
accrued liabilities at December 31, 2002.
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 of $198,000 is included in other long-term
liabilities at December 31, 2002.
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. Under the terms of the promissory notes, 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 does not occur
before February 2003, then the outstanding principal balance (except for
$2,569,000 owed to NDCHealth representing NDCHealth's contribution in this
financing in excess of its prorata ownership in the Company) 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. The
Company imputed an interest rate of 8% on these notes, which more accurately
reflects the rate that the Company would pay to a third party lender. The
resulting debt discount of $885,000 was recorded as additional paid-in
capital because the notes were issued to the founders. Accrued interest
related to these notes of $444,000 is included in accrued liabilities at
December 31, 2002.
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.
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 $96,000 was recorded as additional
paid-in capital because the notes were issued to the founders. Accrued
interest related to these notes of $81,000 is included in accrued liabilities
at December 31, 2002.
Maturities of long-term debt and notes payable are as follows (see Note 16):
YEAR ENDING DECEMBER 31,
------------------------
2003 $ 25,540,000
2004 2,300,000
------------
27,840,000
Less discount (258,000)
------------
$ 27,582,000
============
12
Accretion of the discount as interest expense recorded on the above debt was
$1,083,000 for the year ended December 31, 2002.
10. 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 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 (see Note 16).
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.
13
11. INCOME TAXES
At December 31, 2002, deferred tax assets consist of the following:
Net operating loss carryforwards $ 29,865,000
Capitalized start-up costs 9,789,000
Deferred compensation 293,000
Developed internal-use software (1,994,000)
Intangible assets (609,000)
Other (2,283,000)
------------
Net deferred tax assets 35,061,000
Deferred tax asset valuation allowance (35,061,000)
------------
$ --
============
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:
Amounts computed at statutory federal rate $(16,611,000)
State taxes (2,430,000)
Permanent differences 31,000
Other 1,859,000
Intangibles (83,000)
Change in valuation allowance 17,234,000
------------
$ --
============
At December 31, 2002, the Company had $71,876,000 and $71,876,000 of federal
and state net operating loss carryforwards, respectively, which will be
limited under Internal Revenues Section 382 due to the change in ownership
that occurred on December 31, 2002. The federal and state net operating loss
carryforwards begin to expire in 2020 and 2010, respectively.
12. 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
14
for a guaranteed fixed pre-tax gain of $7,000,000 in the aggregate assuming
all shares were repurchased. This amount was being recognized as
compensation expense on a straight-line basis over the five-year service
period. Through December 31, 2002, $3,558,000 had been recorded as deferred
compensation; however, this amount was adjusted to $1,000,000 pursuant to a
separation agreement entered into with the executive on December 31, 2002
(see Note 16). As a result, the Company has recorded a gain of $2,558,000
pursuant to this event.
During 2002, no options were granted or exercised and options for 3,738,318
shares (including those of the executive noted above) were
forfeited/cancelled (with an average exercise price of $1.32).
At December 31, 2002, 5,566,233 shares were available for future grants
under the Plans.
The following table summarizes information regarding options outstanding as
of December 31, 2002 (see Note 16):
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 2,453,271 8.5 $1.18 981,308 $1.18
$2.30 2,260,870 8.7 $2.30 452,174 $2.30
------------- -----------
4,714,141 1,433,482 $1.53
============= ===========
PRO FORMA EMPLOYEE COMPENSATION EXPENSE
Had compensation cost for the Company's stock-based compensation been
determined based on fair value of the options at the date of the grant, the
Company's net loss would not have been materially different from the net
loss reported for 2002.
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%. No
options were granted during 2002.
13. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) retirement plan for substantially all
employees who meet certain minimum lengths of employment and minimum age
requirements. Contributions are made by employees based on the lesser of 60%
of eligible compensation or the deferral limit set by the government
($11,000 in 2002). Non-discretionary employer matching contributions are
made up to 100% of the employee's pretax contribution up to a maximum of 6%
of eligible compensation. Matching contributions vest under a five-year
schedule, based on completed full years of service, as follows: 20% after
one year; 40% after two years; 60% after three years; 80% after four years;
and 100% after five years. Matching contributions totaling $668,000 for the
year ended December 31, 2002 have been expensed.
14. RELATED PARTY TRANSACTIONS
The Company was founded by seven leading insurance companies who are
expected to be among the Company's primary customers (the "Founders"). 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, 2002 the Company has accounts receivable from its Founders
in the aggregate amount of $419,000. During 2002, the Company recognized
revenue of $1,983,000 from its Founders.
At December 31, 2002, the Company has accounts receivable from NDCHealth of
$1,315,000 and accounts payable and accrued liabilities due to NDCHealth of
$2,053,000. During 2002, the Company transacted the following with NDCHealth
(i) recognized revenue of $4,897,000; (ii) recognized the reimbursement of
expenses of certain operating costs of $569,000; and (iii) incurred amounts
payable to under revenue sharing, rebate and expense reimbursement
agreements totaling $3,509,000.
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15. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases facilities and equipment under non-cancelable operating
and capital leases which expire on varying dates through 2006. The Company's
future minimum payments under non-cancelable operating and capital leases
are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ ---------- -----------
2003 $ 338,000 $ 1,987,000
2004 190,000 1,671,000
2005 28,000 230,000
2006 15,000 9,000
----------- -----------
571,000 $ 3,897,000
===========
Less amounts representing interest (63,000)
-----------
Future minimum lease obligation 508,000
Less current portion (314,000)
-----------
$ 194,000
===========
During 2002, the Company acquired assets under capital leases totaling
$84,000. Assets under capital leases included in property and equipment at
December 31, 2002 had a net book value of $374,000, which includes
accumulated amortization of $215,900.
Rent expense was $2,155,000 for the year ended December 31, 2002. Certain
facility operating leases contain escalation clauses. The Company recognizes
rent expense on a straight-line basis over the related lease term.
In connection with its facilities lease in San Diego, California, the
Company entered into an irrevocable letter of credit in the amount of
$750,000. The letter of credit expires September 30, 2004. In an effort to
control its operating costs, the Company has engaged a commercial real
estate broker to assist the Company in subleasing or terminating its
facilities lease in San Diego. As of December 31, 2002, gross rents of
$2,509,000 remain on this property through September 2004 and are included
in the table above.
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
$1,535,000 at December 31, 2002.
The Company has entered into retention agreements with several key
management employees. The bonuses due under these retention agreements are
payable in two parts: 50% upon a change of control of the Company and 50%
upon the earlier to occur of (i) 90 days following the change in control
event or (ii) involuntary termination of the employee. As of December 31,
2002, the Company's total potential commitment under these retention
agreements was $257,000.
SERVICES AGREEMENT
In April 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. At December
31, 2002, $790,000 is accrued towards this minimum annual amount. 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.
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16. ACQUISITION BY PROXYMED
On December 31, 2002, the Company was sold to a wholly-owned subsidiary of
ProxyMed for $10.0 million in cash and $13.4 million in 4% Convertible Notes
paid to the founders due December 31, 2008.
As a result of this transaction, the following events took place (i) all
capital stock held by the Founders, including any restricted stock held by
other parties as part of compensation-related plans, were cancelled; (ii)
all notes payable, convertible notes and related accrued interest to the
Founders (except for the $2,300,000 issued to NDC Health in the Acquisition,
plus $198,000 of accrued interest on this note, and a $2,569,000 note
payable issued to NDCHealth on December 31, 2002) were cancelled; (iii) all
stock options outstanding under the Company's 2001 Equity Incentive Plan
were cancelled; and (iv) NDC Health waived its right of first refusal to
purchase the Company.
Subsequent to the acquisition by ProxyMed, the Company's senior management
team was terminated along with approximately 20% of the general workforce in
an effort to control costs. Additionally, the Company has attempted to enter
into financing agreements with certain major vendors and, as noted in Note
15, has attempted to sublease or terminate is facilities lease in San Diego
as a means to curtail cash flow.
17