EX-99.4 14 v81078ex99-4.txt EXHIBIT 99.4 Exhibit 99.4 Audited Financial Statements Health Personnel Options Corporation Years ended June 30, 2001 and 2000 with Report of Independent Auditors Audited Financial Statements Health Personnel Options Corporation Years ended June 30, 2001 and 2000 with Report of Independent Auditors CONTENTS Report of Independent Auditors................................................1 Audited Financial Statements Balance Sheets................................................................2 Statements of Operations......................................................3 Statements of Shareholders' Equity............................................4 Statements of Cash Flows......................................................5 Notes to Financial Statements.................................................6 [ERNST & YOUNG LETTERHEAD] Report of Independent Auditors Board of Directors Health Personnel Options Corporation We have audited the balance sheet of Health Personnel Options Corporation as of June 30, 2001, and the related statements of operations, 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. The financial statements of Health Personnel Options Corporation for the year ended June 30, 2000, were audited by other auditors whose report dated November 29, 2000, expressed an unqualified opinion on those statements. 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 2001 financial statements referred to above present fairly, in all material respects, the financial position of Health Personnel Options Corporation, and the 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 August 10, 2001 Health Personnel Options Corporation Balance Sheets
JUNE 30 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1,000 $ 4,849 Accounts receivable, net of allowance for doubtful accounts of $100,000 and $207,765, respectively 5,603,956 1,914,068 Prepaid expenses and other current assets 221,979 50,477 Deferred income taxes 468,753 -- ------------ ------------ Total current assets 6,295,688 1,969,394 Equipment and leasehold improvements, net 802,100 668,246 Goodwill, net 6,066,795 6,548,552 Deferred income taxes 87,924 -- Other assets 40,152 77,463 ------------ ------------ Total assets $ 13,292,659 $ 9,263,655 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,672,560 $ 789,321 Accrued expenses 2,034,845 533,739 Line of credit 696,101 1,800,000 Current portion of long-term debt 332,423 452,970 ------------ ------------ Total current liabilities 4,735,929 3,576,030 Deferred income taxes 43,253 -- Long-term debt 1,555,476 2,809,701 Shareholders' equity: Preferred stock, $1,000 par value Authorized shares -- 4,257.14 Issued shares -- 3,304.76 at June 30, 2001 and 2,828.57 at June 30, 2000 3,304,760 2,828,570 Common stock, no par value (at amount paid in) Authorized shares -- 1,000,000 Issued and outstanding shares -- 194,200 2,425,400 2,425,400 Additional paid-in capital 2,095,240 1,571,430 Accumulated deficit (867,399) (3,947,476) ------------ ------------ Total shareholders' equity 6,958,001 2,877,924 ------------ ------------ Total liabilities and shareholders' equity $ 13,292,659 $ 9,263,655 ============ ============
See accompanying notes. 2 Health Personnel Options Corporation Statements of Operations
YEAR ENDED JUNE 30 2001 2000 ------------ ------------ Revenues $ 34,490,682 $ 15,940,638 Cost of services 24,023,010 11,977,556 ------------ ------------ 10,467,672 3,963,082 Other operating expenses: Corporate, general and administrative 6,686,387 5,093,968 Depreciation and amortization 718,984 735,585 ------------ ------------ 7,405,371 5,829,553 ------------ ------------ Operating income (loss) 3,062,301 (1,866,471) Other revenue (expense): Interest expense, net (465,767) (404,098) Other 29,518 (10,863) ------------ ------------ Income (loss) before income taxes 2,626,052 (2,281,432) Income tax benefit 454,025 -- ------------ ------------ Net income (loss) $ 3,080,077 $ (2,281,432) ============ ============
See accompanying notes. 3 Health Personnel Options Corporation Consolidated Statements of Shareholders' Equity
PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------------- ----------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances June 30, 1999 2,828.57 $2,828,570 194,200 $2,425,400 $1,571,430 $(1,666,044) $5,159,356 Net loss and comprehensive loss -- -- -- -- -- (2,281,432) (2,281,432) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances June 30, 2000 2,828.57 2,828,570 194,200 2,425,400 1,571,430 (3,947,476) 2,877,924 Conversion of note payable 476.19 476,190 -- -- 523,810 -- 1,000,000 Net income and comprehensive income -- -- -- -- -- 3,080,077 3,080,077 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances June 30, 2001 3,304.76 $3,304,760 194,200 $2,425,400 $2,095,240 $ (867,399) $6,958,001 ========== ========== ========== ========== ========== =========== ==========
See accompanying notes. 4 Health Personnel Options Corporation Statements of Cash Flows
YEAR ENDED JUNE 30 2001 2000 ------------ ------------ OPERATING ACTIVITIES Net income (loss) $ 3,080,077 $ (2,281,432) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 718,984 735,585 Deferred income taxes (513,424) -- Changes in operating assets and liabilities: Accounts receivable (3,689,888) (673,620) Prepaid expenses and other current assets (171,502) 62,478 Other assets 37,311 (17,660) Accounts payable 883,239 276,952 Accrued expenses 1,501,106 163,376 ------------ ------------ Net cash provided by (used in) operations 1,845,903 (1,734,321) INVESTING ACTIVITIES Acquisition, net of cash acquired -- (178,000) Purchases of equipment and leasehold improvements (371,081) (274,365) ------------ ------------ Net cash used in investing activities (371,081) (452,365) FINANCING ACTIVITIES (Decrease) increase in line of credit (1,103,899) 2,158,832 Proceeds from long-term debt 932,500 517,830 Repayments of long-term debt (1,307,272) (576,594) ------------ ------------ Net cash (used in) provided by financing activities (1,478,671) 2,100,068 ------------ ------------ Decrease in cash (3,849) (86,618) Cash at beginning of year 4,849 91,467 ------------ ------------ Cash at end of year $ 1,000 $ 4,849 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 529,224 $ 372,169 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Property and equipment acquired under capital lease $ -- $ 351,483 Issuance of preferred stock upon conversion of note payable 1,000,000 --
See accompanying notes. 5 Health Personnel Options Corporation Notes to Financial Statements June 30, 2001 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Health Personnel Options Corporation (the Company) is engaged in the business of temporary staffing of licensed medical professionals, medical clerical personnel and other healthcare professionals and assistants in the United States. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Expenditures for significant renewals and improvements are capitalized. Repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method based on the estimated useful lives of the assets (3 to 5 years). GOODWILL Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition. Goodwill is amortized on a straight-line basis over 15 years. Accumulated amortization of goodwill was $1,159,566 and $677,808 at June 30, 2001 and 2000, respectively. INCOME TAXES The Company uses the liability method to account for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that are anticipated to be in effect when the differences are expected to reverse. 6 Health Personnel Options Corporation Notes to Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION The Company accounts for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25). Under APB 25, because the exercise price of the Company's stock options is equal to or greater than the fair market value on the date of grant, no compensation expense is recognized. The Company provides additional pro forma disclosures as required under SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). ADVERTISING The costs of advertising, which are charged to expense as incurred, were approximately $247,000 and $174,000 for the years ended June 30, 2001 and 2000, respectively. USE OF ESTIMATES Preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following:
JUNE 30 2001 2000 ------------ ------------ Furniture and fixtures $ 199,105 $ 132,992 Computer software 229,211 173,597 Computer equipment 305,023 131,645 Equipment under capital leases 533,997 533,997 Leasehold improvements 44,740 -- ------------ ------------ 1,312,076 972,231 Accumulated depreciation (509,976) (303,985) ------------ ------------ Equipment and leasehold improvements, net $ 802,100 $ 668,246 ============ ============
Accumulated depreciation includes $249,182 at June 30, 2001 ($139,515 at June 30, 2000) for equipment under capital leases. 7 Health Personnel Options Corporation Notes to Financial Statements (continued) 3. LINE OF CREDIT The Company has a $2,000,000 revolving line of credit with The First National Bank of Southwest Ohio (First National). Borrowings totaled $696,101 at June 30, 2001 ($1,800,000 at June 30, 2000) and bear interest at 1.0% over the prime rate (7.75% at June 30, 2001). The line of credit expires on September 14, 2001. The line of credit is collateralized by a security interest in all assets of the Company and is guaranteed by certain shareholders. 4. LONG-TERM DEBT Long-term debt obligations are summarized as follows:
JUNE 30 2001 2000 ------------ ------------ $1,000,000 note payable to First National; variable interest rate at the prime rate plus 1.0 percent (7.75% at June 30, 2001); due in monthly installments of $16,028, including interest through March 29, 2004; collateralized by all assets of the Company $ 761,517 $ 871,583 $550,025 note payable to First National; variable interest rate at the prime rate plus 1.0 percent (7.75% at June 30, 2001); due in monthly installments of $9,031, including interest through March 30, 2003; collateralized by all assets of the Company 345,261 418,521 Note payable to shareholder; fixed interest rate of 5.75%; interest due quarterly; principal due April 8, 2004 459,280 459,280 Note payable to shareholder; fixed interest rate of 12.0%; interest due quarterly; converted to 476.19 shares of Series B preferred stock in 2001 -- 1,000,000 Capitalized equipment leases; payable $11,386 monthly including interest from 7.75% to 9.8% 321,841 424,671 Other -- 88,616 ------------ ------------ 1,887,899 3,262,671 Current portion (332,423) (452,970) ------------ ------------ Long-term debt $ 1,555,476 $ 2,809,701 ============ ============
8 Health Personnel Options Corporation Notes to Financial Statements (continued) 4. LONG-TERM DEBT (CONTINUED) Maturities of long-term debt subsequent to 2001 are as follows: 2002 $332,423 2003 326,998 2004 396,541 2005 831,937 ---------------- $1,887,899 ================ 5. LEASES The Company leases certain equipment under capital leases, office space under operating leases, and short-term housing under operating leases. The following is a schedule of future minimum lease payments under the capital leases and operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 2001:
CAPITALIZED OPERATING LEASES LEASES -------------- ------------- 2002 $131,914 $336,744 2003 103,821 357,070 2004 85,980 362,113 2005 55,179 303,541 2006 - 202,119 -------------- ------------- 376,894 $1,561,587 ============= Less amounts representing interest (55,053) -------------- $321,841 ==============
Rent expense for 2001 and 2000 was approximately $1,037,000 and $1,167,000, respectively. 9 Health Personnel Options Corporation Notes to Financial Statements (continued) 6. INCOME TAXES Deferred income taxes are determined based upon the temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. For financial reporting purposes, a valuation allowance of $1,528,000 has been provided at June 30, 2000 against net deferred tax assets. At June 30, 2001, the Company has net operating loss carryforwards of $951,486, which expire in 2019. Additionally, the Company has alternate minimum tax credits of $47,451 available to offset future tax liabilities. Income tax expense benefit (expense) for the year ended June 30 was: 2001 2000 ------------ ------------ Current $ (59,399) $ 79,000 Deferred 513,424 (79,000) ------------ ------------ $ 454,025 $- ============ ============ Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of tax assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management has removed the valuation allowance against the deferred tax assets, since it is more likely than not that the tax benefit will ultimately be realized under current income tax law. Significant components of the Company's net deferred tax assets (liabilities) are as follows:
JUNE 30 2001 2000 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 371,080 $ 1,376,000 Allowance for doubtful accounts 39,000 88,000 Intangible assets 87,924 90,000 AMT tax credit carryforwards 47,451 -- Other 11,222 -- ------------ ------------ 556,677 1,554,000 Valuation allowance -- (1,528,000) ------------ ------------ 556,677 26,000 Deferred tax liabilities: Difference between book and tax bases of equipment and leasehold improvements (43,253) (26,000) ------------ ------------ Net deferred tax assets $ 513,424 $- ============ ============
10 Health Personnel Options Corporation Notes to Financial Statements (continued) 7. EMPLOYEE BENEFIT PLANS The Company sponsors a 401(k) plan that covers substantially all employees who have met certain eligibility requirements. Employees may contribute up to 15% of their eligible compensation to the plan, subject to IRS limitations. The Company makes contributions at the discretion of the Board of Directors. The Company contributed $23,483 during the year ended June 30, 2001. There were no contributions during the year ended June 30, 2000. 8. SHAREHOLDERS' EQUITY PREFERRED STOCK The Company has issued 1,400 shares of Series A preferred stock and 1,904.76 shares of Series B preferred stock. The preferred stock is convertible into common stock at any time at the option of the preferred stockholder. The conversion rate is 81.43 shares of common stock for each share of Series A preferred stock and 99.96 shares of common stock for each share of Series B preferred stock and is adjusted based on the Company's performance or issuance of additional common shares. The preferred stock is automatically converted into common stock at the closing of an underwritten public offering of common stock that results in net proceeds to the Company of at least $10 million and a market capitalization of at least $40 million. The holder of any preferred shares converted is immediately entitled to receive all accrued and unpaid dividends. Each holder of preferred stock has voting rights equivalent to the number of common shares into which the preferred shares held by such holder could be converted on the record date fixed for the vote of stockholders. The holders of record of the preferred shares shall be entitled to receive, when and if declared by the Board of directors out of the retained earnings of the Company, cash dividends at the rate of 9% per annum. These dividends are payable quarterly and are cumulative. The holders of the preferred stock are also entitled to receive any dividend paid to the holders of common stock in the amount to which they would have been entitled to receive had the preferred shares been converted to common shares immediately prior to the record date for the dividends. No dividends have been declared to date as of June 30, 2001. In the event of liquidation or dissolution of the Company, the holders of preferred stock are entitled to be paid $1,000 per share together with all accrued and unpaid dividends prior to any payments to common stockholders. After this payment to preferred stockholders, the common stockholders are entitled to payment of $1,000 per common share. After these payments are made, the preferred and common stockholders are entitled to share pro rata in the distribution of the remaining assets of the Company. 11 Health Personnel Options Corporation Notes to Financial Statements (continued) 8. SHAREHOLDERS' EQUITY (CONTINUED) SHARES RESERVED FOR FUTURE ISSUANCE At June 30, 2001, the Company has reserved shares of capital stock for future issuance as follows:
COMMON STOCK ------------ Stock options outstanding 12,502 Convertible preferred stock 304,402 ------------ 316,904 ============
STOCK OPTION PLAN In 1999, the Company's Board of Directors adopted an employee stock option plan (the Plan). The Plan allows for incentive stock options to be granted to employees and directors. Shares issued under the Plan may be subject to right of first refusal, repurchase options, or other conditions and restrictions as determined by the Board of Directors. The exercise price for incentive stock options shall not be less than 100% of the fair value of the stock subject to the option on the date of grant. The Board of Directors determines the fair value of the stock of the Company. All options expire no more than ten years from the date of grant. All options vest over a period of four years from the date of grant with 25% vesting after one year and 2.08% vesting each month thereafter. Under the terms of the Plan, all incentive options are immediately exercisable on the date of grant. However, all shares that are issued under the Plan are subject to repurchase by the Company at the original exercise price until the underlying options have vested. A summary of the Company's stock option activity for the year ended June 30, 2001 and related information are as follows:
WEIGHTED SHARES AVERAGE AVAILABLE FOR OPTIONS EXERCISE GRANT OUTSTANDING PRICE ------------ ------------ ------------ Shares authorized 50,300 -- Options granted (12,502) 12,502 $ 20.00 Options exercised -- -- -- Options canceled -- -- -- ------------ ------------ Balance at June 30, 2001 37,798 12,502 20.00 ============ ============
12 Health Personnel Options Corporation Notes to Financial Statements (continued) 8. SHAREHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLAN (CONTINUED) The options outstanding at June 30, 2001, have a weighted average remaining contractual life of 9.46 years. There are no options that are vested and exercisable at June 30, 2001. SFAS 123 requires the disclosure of pro forma information regarding results of operations, to be determined as if the Company has accounted for its stock options granted under the fair value method. The fair value of these options was estimated at the date of grant using the minimum value approach permitted by SFAS 123 for private companies, using the following assumptions in 2001: Dividend yield 0.0% Risk-free interest rate 6.0% Expected life in years 4 The effect of applying SFAS 123 to the Company's stock option awards did not result in pro forma net income that was materially different from the historical amount reported. Therefore, such pro forma information is not separately presented herein. Future pro forma net income results may be materially different from actual amounts reported. 13