8-K 1 a75277e8-k.txt FORM 8-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report: August 20, 2001 (Date of earliest event reported) DRKOOP.COM, INC. (exact name of registrant as specified in its charter) DELAWARE 000-26275 95-4697615 (State or other jurisdiction (Commission File No. (I.R.S. Employer of incorporation or Identification No.) organization) 225 ARIZONA AVENUE, SUITE 250 SANTA MONICA, CA 90401 (Address of Principal executive offices, including zip code) (310) 395-5700 (Registrant's telephone number, including area code) ================================================================================ 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. ACQUISITION OF IVONYX GROUP SERVICES, INC. GENERAL. On August 20, 2001, we consummated our acquisition of substantially all the operating assets of IVonyx Group Services, Inc., a privately-held provider of home infusion therapy services. As part of the consideration for the IVonyx acquisition, at the closing, we paid IVonyx $2.0 million in cash and 5.0 million shares of our common stock. In addition, we may be required to make one (and only one) of the following additional earnout payments to IVonyx based on the net income of the IVonyx business, as part of the consideration in this acquisition: - if net income during the first 12 month period following the closing (the "Earnout Period") for the IVonyx business exceeds $2.0 million but is less than $3.0 million, we will be obligated to pay IVonyx an additional $666,667 plus thirty three percent (33%) of the incremental net income above $2.0 million (such payment to be made in quarterly installments following the completion of the Earnout Period); - if net income during the Earnout Period for the IVonyx business exceeds $3.0 million but is less than $5.0 million, we will be obligated to pay IVonyx an additional $2.0 million ($1.0 million of which will be paid upon final determination of net income during the Earnout Period and the remaining $1.0 million will be paid in quarterly installments following the completion of the Earnout Period) and 2.5 million shares of our common stock; or - if net income during the Earnout Period for the IVonyx business exceeds $5.0 million, we will be obligated to pay IVonyx an additional $2.0 million and 7.5 million shares of our common stock. Prior to the closing of the acquisition, we amended the terms of the purchase agreement to require that a portion of the cash purchase price to be paid at closing be placed in a joint escrow account to be used to satisfy certain pre-closing liabilities of IVonyx. In addition, IVonyx will be required to pay us $190,000, subject to adjustment, by January 31, 2002, subject to payment by Ivonyx of existing obligations to secured creditors. The stock component of the consideration paid at closing was structured as a private placement of our common stock exempt from the registration requirements of the Securities Act, and the shares of common stock issued may not be offered or sold absent registration or an applicable exemption from registration. We have agreed to grant "piggyback" registration rights with respect to shares of our common stock issued in the transaction. The summary of our agreement with IVonyx set forth above is qualified in its entirety by references to the asset purchase agreement and first amendment thereto, filed as an exhibit on our Forms 8-K filed on April 16, 2001 and July 31, 2001, respectively, and the second and third amendments to the asset purchase agreement which we are filing as exhibits with this report. Please refer to our reports on Forms 8-K filed with the Securities and Exchange Commission on April 16, 2001, July 16, 2001, July 27, 2001, July 31, 2001 and August 9,2001 for more information regarding the IVonyx acquisition. CHANGES IN MANAGEMENT AND OUR BOARD OF DIRECTORS. In connection with the consummation of the IVonyx acquisition, G. Peter Molloy, Jr., the Chief Executive Officer and President of IVonyx, replaced Edward A. Cespedes as President of our company. Mr. Cespedes will continue to serve as the Vice Chairman of our Board of Directors. Simultaneously with the closing of the IVonyx acquisition, Mr. Molloy has entered into a one- 1 3 year employment agreement with us, pursuant to which he will be paid an annual base salary of $300,000. In connection with his entering into the employment agreement, Mr. Molloy has been granted options to purchase 3.0 million shares of our common stock, with an exercise price per share equal to $0.112, the market price of our common stock on the closing date of the acquisition. Of these options, 100,000 will vest on the date of grant and the balance will vest in annual installments over three years. Vesting is accelerated in the event of a change of control of our company and in the event of a termination without cause or for good reason under the employment agreement. Under the terms of his employment agreement, if Mr. Molloy is terminated without cause, he will be entitled to receive his base salary and continuation of his benefits for a period of six (6) months after the date of termination. If he is terminated without cause, all stock options held by him will immediately vest. Mr. Molloy and Albert J. Henry, the Chairman of IVonyx, have joined our Board of Directors. CREDIT FACILITY. Concurrently with the consummation of the IVonyx transaction, drkoop Lifecare, Inc., our wholly-owned subsidiary which acquired the operating assets of IVonyx, entered into a $10.0 million working capital credit facility with Heller Healthcare Finance, Inc. ("Heller"). Borrowings under the facility are subject to our building up a borrowing base of accounts receivables from the IVonyx business following the closing date and are limited to eighty five percent (85%) of the above-referenced accounts receivable borrowing base, subject to adjustment based on liquidity and other features. The loan is secured by all of the assets of the business acquired from IVonyx. In addition, we will not be permitted to make borrowings under the credit facility until certain post-closing obligation are satisfied. The summary of the credit facility in this report is qualified in its entirety by references to the loan and security agreement which we are filing as an exhibit with this report. ADVISORY SERVICES OF COMMONWEALTH ASSOCIATES, L.P. Under the terms of advisory agreements which we have previously entered into with Commonwealth Associates, L.P. ("Commonwealth"), we have paid Commonwealth a fee of $200,000 for advisory services relating to the IVonyx acquisition and $100,000 for advisory services relating to the above-referenced credit facility. ITEM 5. OTHER EVENTS. PREFERRED STOCK FINANCING. On August 20, 2001, we consummated a $4.325 private placement of our preferred stock. The offering was made solely to accredited investors by way of a private placement exempt from registration under the Securities Act of 1933, as amended. 2 4 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits 10.105 Loan and Security Agreement, dated as of August 20, 2001, by and between drkoop Lifecare, Inc. and Heller Healthcare Finance, Inc. 10.106 Employment Agreement, dated as of August 20, 2001, by and between drkoop Lifecare, Inc. and G. Peter Molloy, Jr. 10.107 Non-Qualified Stock Option Agreement, dated as of August 20, 2001, by and between drkoop.com, Inc. and G. Peter Molloy, Jr. 10.108 Non-Qualified Stock Option Agreement, dated as of August 20, 2001, by and between drkoop.com, Inc. and G. Peter Molloy, Jr. 10.109 Amendment No. 2 to Asset Purchase Agreement, by and among IVonyx Group Services, Inc., IVonyx, Inc., drkoop.com, Inc., and drkoop LifeCare, Inc. (formerly known as Infusion Acquisition Sub, Inc.), dated as of August 8, 2001. 10.110 Amendment No. 3 to Asset Purchase Agreement, by and among IVonyx Group Services, Inc., IVonyx, Inc., drkoop.com, Inc., and drkoop LifeCare, Inc. (formerly known as Infusion Acquisition Sub, Inc.), dated as of August 17, 2001. 99.1 Text of press release, dated as of August 20, 2001, of drkoop.com, Inc.

3 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized, drkoop.com, Inc. Date: August 20, 2001 By /s/ RICHARD M. ROSENBLATT --------------------------------- Name: Richard M. Rosenblatt Title: Chief Executive Officer II-1 6 EXHIBIT INDEX

~~FOR~~Exhibit ~~THE~~No. ~~YEAR~~Description ~~ENDED DECEMBER 31, 2000~~ ------------ -----------~~-----------------------------------------------~~ ($10.105 inLoan ~~000s)~~and ~~DRKOOP~~Security ~~IVONYX~~Agreement, ~~PROFORMA~~dated ~~PROFORMA~~as ~~(HISTORICAL)~~of ~~(HISTORICAL)~~August ~~ADJUSTMENTS~~20, ~~REFERENCE~~2001, ~~BALANCES~~by ~~------------~~and ~~------------~~between ~~-----------~~drkoop ~~---------~~Lifecare, ~~---------~~Inc. ~~Revenues: Content subscription~~ and ~~software~~Heller ~~license~~Healthcare ~~....... $ 3~~Finance,~~505~~ $Inc. 010.106 $Employment ~~0 $ 3~~Agreement,~~505~~ ~~Home~~dated ~~infusion~~as ~~revenues~~of ~~..........................~~August ~~0 28~~20,~~481~~ ~~0 28~~2001,~~481~~ ~~Advertising~~by and ~~sponsorship~~between ~~.....................~~drkoop 7Lifecare,~~111~~ 0Inc. ~~0 7,111 E-commerce~~ and ~~other~~ G.~~...........................~~ 32Peter 0Molloy, ~~0 32 --------- --------- --------- --------- Total revenues~~ Jr.~~..............................~~ 10~~,648~~.107 ~~28,481 0 39,129~~ Non-~~--------~~Qualified ~~---------~~Stock ~~---------~~Option ~~---------~~Agreement, ~~Operating~~dated ~~expenses:~~as ~~Cost~~ of ~~home~~August ~~infusion revenues .................. 0 11~~20,~~403~~ ~~0 11~~2001,~~403~~ ~~Compensation~~by and ~~benefits~~between ~~expense~~ drkoop.~~.............. 0 10~~com,~~510~~ 0Inc. ~~10,510 Production, content~~ and ~~product development~~ G.~~....~~ ~~18,420~~Peter ~~0 0 18~~Molloy,~~420~~ ~~Sales~~Jr. ~~and marketing~~ 10.~~............................~~108 ~~74,393~~Non-Qualified 0Stock 0Option 74Agreement,~~393~~ ~~General~~dated ~~and~~as ~~administrative~~of ~~expenses~~August ~~............. 17~~20,~~242~~ 22001,~~616~~ 0by ~~19,858~~and ~~Provision~~between ~~for doubtful accounts~~ drkoop.~~................ 0 1~~com,~~404~~ 0Inc. ~~1,404 Depreciation~~ and ~~amortization~~ G.~~..................~~ ~~5,797~~Peter ~~203 334 Note 3 6~~Molloy,~~334~~ ~~Impairment~~Jr. of10.109 ~~assets~~Amendment No.~~...........................~~ ~~3,790~~2 0to 0Asset 3Purchase Agreement,~~790~~ ~~Write-off~~by ofand ~~investment~~among ~~and~~IVonyx ~~intangible~~Group ~~assets~~Services, Inc.~~...................................... 7~~,~~444~~ ~~0 0 7~~IVonyx,~~444~~ ~~Other~~ Inc.~~.......................................... (2~~,~~000)~~ ~~0 0 (2~~drkoop.com,~~000)~~ ~~--------- --------- --------- --------- Total operating expenses~~ Inc.~~.................... 125~~,~~086~~ ~~26,136~~and ~~334~~drkoop ~~151~~LifeCare,~~556~~ ~~---------~~Inc. ~~--------- --------- --------- Income~~ (~~loss)~~formerly ~~from~~known ~~operations~~as ~~.......................~~Infusion ~~(114,438)~~Acquisition 2Sub,~~345~~ ~~(334~~Inc.) ~~(112~~,~~427)~~ ~~Interest~~dated ~~expense,~~as ~~net~~of ~~...............................~~August ~~(6,776) (1,371) 0 (~~8,~~147)~~ ~~Other~~2001. ~~income~~ 10.~~.......................................~~110 0Amendment 93No. 03 93to ~~Loss~~Asset onPurchase ~~disposal~~Agreement, ofby ~~property~~ and ~~equipment~~among ~~..........~~IVonyx 0Group ~~(7)~~Services, ~~0 (7) --------- --------- --------- --------- Net income (loss)~~ Inc.~~.................................. (121~~,~~214)~~ 1IVonyx,~~060~~ ~~(334) (120~~Inc.,~~488)~~ ~~Beneficial conversion feature related to Series D preferred stock~~ drkoop.~~....................... (27~~com,~~500)~~ ~~0 0 (27,500) Cumulative effect of accounting change~~ Inc.~~............. 2~~,~~750~~ 0and 0drkoop 2LifeCare,~~750~~ ~~Provision for income taxes~~ Inc.~~.........................~~ 0 (~~46)~~formerly 0known ~~(46)~~as ~~Net~~Infusion ~~income~~Acquisition ~~(loss)~~Sub, ~~attributable to common stock~~ Inc.~~................................ $(145,964~~), $dated ~~1,014~~as $of ~~(334)~~August ~~$(145~~17,~~284)~~ ~~========= ========= ========= ========= Net loss per common share: Basic and diluted loss~~ 2001.~~.........................~~ ~~$ (4~~99.~~24)~~1 $Text ~~(3.70) Cumulative effect~~ of ~~accounting~~press ~~change~~release, ~~..............~~dated ~~0.08~~as ~~.07~~of ~~---------~~August ~~---------~~20, $2001, ~~(4.16)~~of ~~$ (3~~drkoop.~~63) --------- --------- Basic and diluted weighted average shares outstanding ..................................... 35~~com,~~077~~ ~~5,000 40,077 ========= ========= ========= See accompanying notes to unaudited pro forma condensed financial statements~~Inc.

II-1

FOR THE THREE MONTHS ENDED MARCH 31, 2001 ------------------------------------------------------------------- DRKOOP IVONYX PROFORMA PROFORMA ($ in 000s) (HISTORICAL) (HISTORICAL) ADJUSTMENTS REFERENCE BALANCES ------------ ------------ ----------- --------- -------- Revenues: Content subscription and software license ..... $ 492 $ 0 $ 0 $ 492 Home infusion revenues ........................ 0 6,456 0 6,456 Advertising and sponsorship ................... 378 0 0 378 -------- -------- -------- -------- Total revenues ............................. 870 6,456 0 7,326 -------- -------- -------- -------- Operating expenses: Cost of home infusion revenues ................ 0 2,879 0 2,879 Compensation and benefits expense ............. 0 2,883 0 2,883 Production, content and product development ................................ 1,920 0 0 1,920 Sales and marketing ........................... 567 0 0 567 General and administrative expenses ........... 2,496 661 0 3,157 Provision for doubtful accounts ............... 0 356 0 356 Depreciation and amortization ................. 225 41 83 Note 3 349 Special charges ............................... 3,585 0 0 3,585 Other ......................................... (500) 0 0 (500) -------- -------- -------- -------- Total operating expenses ................... 8,293 6,820 83 15,196 -------- -------- -------- -------- Income (loss) from operations ..................... (7,423) (364) (83) (8,370) Interest income (expense), net .................... 134 (210) 0 (76) Other income ...................................... 0 55 0 55 Provision for income taxes ........................ 0 (42) 0 (42) Net loss attributable to common stock ......... $ (7,289) $ (561) $ (83) $ (7,933) ======== ======== ======== ======== Net loss per common share: Basic and diluted loss ........................ $ (0.18) $ (0.18) ======== ======== Basic and diluted weighted average shares outstanding ............................ 39,986 5,000 44,986 ======== ======== ======== See accompanying notes to unaudited pro forma condensed financial statements.

AS OF MARCH 31, 2001 ------------------------------------------------------------------ DRKOOP IVONYX PROFORMA PROFORMA ($ in 000s) (HISTORICAL) (HISTORICAL) ADJUSTMENTS REFERENCE BALANCES ------------ ------------ ----------- --------- -------- Assets: Current assets: Cash and cash equivalents ............................... $ 7,093 $ 96 $ (2,596) Note 3 $ 4,593 Accounts receivable ..................................... 1,839 16,653 (16,653) Note 3 1,839 Accounts receivable allowance ........................... (1,000) (4,340) 4,340 Note 3 (1,000) Inventories ............................................. 0 761 0 761 Prepaid and other assets ................................ 2,651 41 (11) Note 3 2,681 --------- --------- --------- --------- Total current assets ................................. 10,583 13,211 (15,095) 8,699 Property and equipment ..................................... 2,191 806 484 3,481 Intangible assets .......................................... 0 0 1,008 Note 3 1,008 Goodwill ................................................... 0 0 112 Note 3 112 Other assets ............................................... 236 78 (78) Note 3 236 --------- --------- --------- --------- Total assets ......................................... $ 13,010 $ 14,095 $ (13,394) $ 13,711 ========= ========= ========= ========= Liabilities: Current liabilities: Line of credit .......................................... $ 0 $ 5,671 $ (5,671) Note 3 $ 0 Note payable to financial institution ................... 0 2,006 (2,006) Note 3 0 Short term notes payable ................................ 0 2,703 (2,703) Note 3 0 Current portion of long term debt ....................... 0 168 (168) Note 3 0 Current portion of capital lease obligations ............ 704 99 (43) 760 Medicare settlement ..................................... 0 2,553 (2,553) Note 3 0 Trade accounts payable .................................. 2,676 4,215 (4,215) Note 3 2,676 Accrued liabilities ..................................... 2,242 3,142 (3,142) Note 3 2,242 Deferred credit ......................................... 2,000 0 0 2,000 Deferred revenue ........................................ 1,015 0 0 1,015 --------- --------- --------- --------- Total current liabilities ............................ 8,637 20,557 (20,501) 8,693 Long-term debt, less current portion ....................... 0 297 (297) Note 3 0 Capital lease obligations, less current portion ............ 822 168 (123) 867 Deferred credit ............................................ 2,500 0 0 2,500 Other liabilities .......................................... 0 9 (9) Note 3 0 --------- --------- --------- --------- Total liabilities .................................... 11,959 21,031 (20,930) 12,060 Preferred stock of IVonyx: Series A preferred stock ................................ 0 2,108 (2,108) Note 3 0 Series B preferred stock ................................ 0 6,306 (6,306) Note 3 0 Series C preferred stock ................................ 0 7,473 (7,473) Note 3 0 Series D preferred stock ................................ 0 340 (340) Note 3 0 --------- --------- --------- --------- Total preferred stock financing ...................... 0 16,227 (16,227) 0

2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................................................... $ 135,689 $ 111,350 Accounts receivable, less allowance for doubtful accounts of $4,104,088 and $2,865,000 at December 31, 2000 and 1999, respectively ................................................. 12,997,012 9,696,653 Inventory ................................................................................... 758,042 590,582 Prepaid expenses and other current assets ................................................... 46,385 12,306 ------------ ------------ Total current assets .................................................................... 13,937,128 10,410,891 Property and equipment, net .................................................................... 707,915 927,144 Other assets: Deposits .................................................................................... 81,645 88,736 Other assets ................................................................................ 8,563 9,167 ------------ ------------ Total assets ............................................................................. $ 14,735,251 $ 11,435,938 ============ ============ LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities .................................................... $ 7,108,297 $ 5,565,870 Line of credit .............................................................................. 5,963,951 7,272,757 Short term notes payable .................................................................... 4,505,036 2,038,411 Short term notes payable to related parties ................................................. 333,954 333,954 Current portion of long-term debt ........................................................... 119,146 18,246 Current portion capital lease obligations ................................................... 101,129 86,437 Other current liabilities (Note 10) ......................................................... 2,562,311 -- ------------ ------------ Total current liabilities ................................................................ 20,693,824 15,315,675 Long-term debt, net of current portion ...................................................... 221,828 419,698 Capital lease obligations, net of current portion ........................................... 194,457 267,858 Other noncurrent liabilities (Note 10) ...................................................... -- 2,821,850 ------------ ------------ Total liabilities ........................................................................ 21,110,109 18,825,081 ------------ ------------ Redeemable convertible preferred stock: Series A redeemable convertible preferred stock, $.0025 par value; 3,000,000 shares authorized, 2,557,550 issued and outstanding; aggregate liquidation preference of $6,189,271 ......... 2,108,288 2,108,288 Series B redeemable convertible preferred stock, $.0025 par value; 3,000,000 shares authorized, 2,557,550 issued and outstanding; aggregate liquidation preference of $6,189,271 ......... 6,305,520 6,305,520 Series C redeemable convertible preferred stock, $.0025 par value; 7,473,000 shares authorized, 7,493,000 issued and outstanding; aggregate liquidation preference of $9,042,330 ......... 7,473,000 7,473,000 Series D redeemable convertible preferred stock, $.0025 par value; 7,500,000 shares authorized, 226,667 issued and outstanding; aggregate liquidation preference of $411,400 ............ 340,001 340,001 Commitments and contingencies .................................................................. -- -- Stockholders' deficit: Common stock, $.0025 par value; 52,203,163 shares authorized, 2,192,840 shares outstanding at December 31, 2000 and 1999 ............................................................... 5,482 5,482 Additional paid-in capital ..................................................................... 3,167,574 3,167,574 Accumulated deficit ............................................................................ (25,774,723) (26,789,008) ------------ ------------ Total stockholders' deficit .............................................................. (22,601,667) (23,615,952) ------------ ------------ Total liabilities, redeemable convertible preferred stock and stockholders' deficit ............................................................. $ 14,735,251 $ 11,435,938 ============ ============

2000 1999 1998 ------------ ------------ ------------ Revenue, net .......................................... $ 28,481,206 $ 25,875,842 $ 22,786,522 Cost of revenue ....................................... 11,402,890 8,734,630 7,084,611 ------------ ------------ ------------ Gross profit ................................. 17,078,316 17,141,212 15,701,911 ------------ ------------ ------------ Operating expenses: Selling and marketing .............................. 10,509,767 9,612,244 9,144,160 General and administrative ......................... 2,615,969 3,032,219 3,206,425 Bad debt expense ................................... 1,403,662 3,064,420 3,186,407 Depreciation and amortization ...................... 203,081 166,948 156,493 ------------ ------------ ------------ Total operating expenses ..................... 14,732,479 15,875,831 15,693,485 ------------ ------------ ------------ Income from operations ....................... 2,345,837 1,265,381 8,426 ------------ ------------ ------------ Other income (expense): Interest expense ................................... (1,370,757) (1,267,589) (1,135,772) Interest income .................................... 2,760 8,695 2,586 Loss on sale of assets ............................. (7,061) (23,958) (2,900) Other income, net .................................. 89,946 46,133 852,181 ------------ ------------ ------------ Income (loss) before provision for income taxes .... 1,060,725 28,662 (275,479) ------------ ------------ ------------ Income tax expense .................................... 46,440 98,948 217,764 ------------ ------------ ------------ Net income (loss) ............................ $ 1,014,285 $ (70,286) $ (493,243) ============ ============ ============ Net income (loss) per common share Basic ........................................ $ 0.46 $ (0.03) $ (0.22) Diluted ...................................... $ 0.03 $ (0.03) $ (0.22) Number of weighted average shares outstanding Basic ........................................ 2,192,840 2,192,840 2,192,840 Diluted ...................................... 30,898,584 30,898,584 30,898,584

ADDITIONAL TOTAL COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT DEFICIT ------------ ------------ ------------ ------------ ------------- Balance, December 31, 1997 2,192,480 $ 5,482 $ 3,167,574 $(26,225,479) $(23,052,423) Net loss -- -- -- (493,243) (493,243) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 2,192,480 $ 5,482 $ 3,167,574 (26,718,722) $(23,545,666) Net loss -- -- -- (70,286) (70,286) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 2,192,480 $ 5,482 $ 3,167,574 (26,789,008) $(23,615,952) Net loss -- -- -- 1,014,285 1,014,285 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2000 2,192,480 $ 5,482 $ 3,167,574 $(25,774,723) $(22,601,667) ============ ============ ============ ============ ============

2000 1999 1998 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss) ................................................. $ 1,014,285 $ (70,286) $ (493,243) Adjustments to reconcile net loss to net cash (used) provided by operating activities: Depreciation and amortization .................................. 203,081 166,948 156,493 Bad debt expense ............................................... 1,403,662 3,064,420 3,186,407 Loss on disposal of assets ..................................... 7,061 23,958 2,900 Changes in: Accounts receivable ......................................... (4,704,021) (5,502,677) (1,273,636) Inventory ................................................... (167,460) (3,508) (110,717) Prepaid expenses and other current assets ................... (34,079) 98,854 1,328,310 Other noncurrent assets ..................................... 7,695 1,404 19,914 Accounts payable and accrued liabilities .................... 1,542,427 526,216 (2,671,687) Other noncurrent liabilities ................................ (15,473) (15,409) (10,708) ----------- ----------- ----------- Net cash (used) provided by operating activities .......... (742,822) (1,710,080) 134,033 ----------- ----------- ----------- Cash flows from investing activities: Purchases of property and equipment ............................... -- (71,468) (71,895) Proceeds from disposal of assets .................................. 9,087 -- 2,700 ----------- ----------- ----------- Net cash used in investing activities ..................... 9,087 (71,468) (69,195) ----------- ----------- ----------- Cash flows from financing activities: Proceeds from line of credit ...................................... -- 2,185,935 263,508 Proceeds from short term notes payable ............................ 2,466,625 -- -- Proceeds from issuance of stockholder notes ....................... -- 173,150 -- Proceeds from long term debt ...................................... -- 169,379 114,235 Payments on line of credit ........................................ (1,308,806) -- -- Payment of long-term debt ......................................... (96,970) (101,087) (160,447) Payment of capital lease obligations .............................. (58,709) (118,951) (25,879) Payment on settlement of litigation ............................... (244,066) (713,480) (489,180) ----------- ----------- ----------- Net cash provided (used) by financing activities .......... 758,074 1,594,946 (297,763) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents ..................... 24,339 (186,602) (232,925) Cash and cash equivalents, beginning of year ......................... 111,350 297,952 530,877 ----------- ----------- ----------- Cash and cash equivalents, end of year ............................... $ 135,689 $ 111,350 $ 297,952 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest ....................................................... $ 1,118,952 $ 1,145,331 $ 994,485 Taxes .......................................................... $ 46,440 $ 98,948 $ 217,763

2001 1999 ------ ------ Commercial insurance carriers ............... 60% 72% Medicaid .................................... 10% 10% Medicare .................................... 15% 7% Other ....................................... 15% 11% ------ ------ 100% 100% ====== ======

DECEMBER 31, ----------------------------- 2000 1999 ----------- ----------- Furniture and equipment ...................... $ 443,123 $ 457,195 Medical equipment ............................ 880,666 915,511 Furniture and equipment ...................... 441,115 468,141 Other ........................................ 280,241 239,598 ----------- ----------- 2,045,145 2,080,445 Less accumulated depreciation and amortization (1,337,230) (1,153,301) ----------- ----------- Property and equipment, net ......... $ 707,915 $ 927,144 =========== ===========

2000 1999 --------- --------- Equipment under capital lease ......... $ 450,803 $ 463,602 Less accumulated amortization ......... (171,280) (158,935) --------- --------- $ 279,523 $ 304,667 ========= =========

DECEMBER 31, -------------------------- 2000 1999 ---------- ---------- Line of credit from a financial institution; interest at Prime plus 2.25% (11.75% and 10.75% at December 31, 2000 and 1999, respectively), payable monthly; collateralized by all assets of the Company; commitment fee of 1% of the unused balance, payable monthly; due January 2001 $5,963,951 $7,272,757

DECEMBER 31, -------------------------- 2000 1999 ---------- ---------- Short-term notes payable, including notes payable to related parties, consisted of the following: Subordinated notes, interest at 5%, payable on demand .. $1,438,000 $1,438,000 Subordinated notes, interest at Prime (9.50% at December 31, 2000), payable on demand ................ 500,000 500,000 Non-interest bearing note to vendor, payable on demand, collateralized by accounts receivable ................ 1,895,921 -- Notes payable to shareholders, interest from 8% to 10%, payable on demand .................................... 333,954 333,954 Non-interest bearing note payable to customer, principal due in 2001 .......................................... 608,000 -- Other short-term notes payable ......................... 63,115 100,411 ---------- ---------- $4,838,990 $2,372,365 ========== ==========

DECEMBER 31, ------------------------- 2000 1999 --------- --------- Non-interest bearing installment purchase agreement, due in 2003, collateralized by IV pumps ....................... $ 285,804 $ 369,776 Automobile loans, interest from 3.90%, to 12.49%, due 2002 and 2003, collateralized by automobile ............... 41,983 51,939 Bank note, 10.5% interest, principal due in 2003, collateralized by automobile .............................. 13,187 16,229 Less current portion: ....................................... (119,146) (18,246) --------- --------- $ 221,828 $ 419,698 ========= =========

DECEMBER 31, ------------------------- 2000 1999 --------- --------- Obligations under various capital leases collateralized by equipment; interest from 10.5% to 18.6%; due 2003 ........ $ 295,586 $ 354,295 Less current portion ..................................... (101,129) (86,437) --------- --------- $ 194,457 $ 267,858 ========= =========

DECEMBER 31, ---------------------------------------- 2000 1999 1998 --------- --------- --------- Tax expense (benefit) derived by applying the Federal statutory income rate to net losses before income taxes ..................................... $ 360,646 $ 9,745 $ (93,663) State tax provision ................................. 21,689 1,152 217,764 Permanent differences and other ..................... 10,147 18,496 11,493 (Benefit) expense attributable to change in valuation allowances ............................. (346,042) 69,555 82,170 --------- --------- --------- $ 46,440 $ 98,948 $ 217,764 ========= ========= =========

DECEMBER 31, ----------------------------- 2000 1999 ----------- ----------- Deferred tax assets: Net operating losses ................... $ 5,503,311 $ 6,318,360 AMT tax credits ........................ 53,227 -- Accruals ............................... 1,808,689 1,309,344 Accrued taxes .......................... 258,764 232,874 Accrued compensation ................... 103,953 25,270 Medicare settlement .................... 921,732 1,009,840 Charitable contributions ............... 22,212 121,481 ----------- ----------- Current deferred tax asset ....... $ 8,671,888 $ 9,017,169 ----------- ----------- Deferred tax liabilities: Basis of property and equipment ........ (74,548) (73,787) Valuation allowance .......................... (8,597,340) (8,943,382) ----------- ----------- Net deferred tax asset (liability) ..... $ -- $ -- =========== ===========

OPTIONS OUTSTANDING --------------------------------- WEIGHTED EXERCISE SHARES PRICES PER SHARE ---------- ----------------- BALANCE, JANUARY 1, 1998 3,236,250 $0.096 Granted 300,000 0.100 Exercised -- -- Forfeited (888,000) 0.069 ---------- ------ BALANCE, DECEMBER 31, 1998 2,648,250 0.086 Granted 100,000 0.010 Exercised -- -- Forfeited (818,750) 0.091 ---------- ------ BALANCE, DECEMBER 31, 1999 1,929,500 0.081 Granted -- -- Exercised -- -- Forfeited (130,000) 0.078 ---------- ------ BALANCE, DECEMBER 31, 2000 1,799,500 $0.080 ---------- ------ Exercisable at December 31, 2000 1,399,500 $0.115 Exercisable at December 31, 1999 1,529,500 0.112 Exercisable at December 31, 1998 2,348,250 0.107 Exercisable at January 1, 1998 3,216,818 0.096 Weighted-average fair value options granted during 1998 0.100 Weighted-average fair value options granted during 1999 0.010 Weighted-average fair value options granted during 2000 --

Options Outstanding & Exercisable ---------------------------------------------------------- Weighted Average Remaining Number Contract Exercisable at Range of Number Life December 31, Exercise Prices Outstanding (Years) 2000 ----------------------- ------------------- ----------- -------------- $ 0.0100 100,000 8.03 100,000 $ 0.0625 10,000 0.93 10,000 $ 0.1000 1,484,000 2.99 1,084,000 $ 0.1500 173,500 1.03 173,500 $ 0.5100 32,000 1.13 32,000 ----------------------- ------------------- ----------- -------------- $.01-$0.51 1,799,500 2.60 1,399,500 ======================= =================== =========== ==============

December 31, 2000 December 31, 1999 December 31, 1998 ------------------------- -------------------------- -------------------------- As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- ----------- --------- Net income (loss) $1,014,285 $ 978,632 $ (70,286) $ (109,483) $ (493,243) $ (557,488)

MARCH 31, DECEMBER 31, 2001 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ............................................. $ 96,215 $ 135,689 Accounts receivable, less allowance for doubtful accounts of $4,340,298 and $4,104,088 at March 31, 2001 and December 31, 2000, respectively 12,313,110 12,997,012 Inventory ............................................................. 760,881 758,042 Prepaid expenses and other current assets ............................. 40,846 46,385 ------------ ------------ Total current assets ............................................... 13,211,052 13,937,128 Property and equipment, net .............................................. 806,222 707,915 Other assets: Deposits .............................................................. 70,570 81,645 Other assets .......................................................... 6,942 8,563 ------------ ------------ Total assets ....................................................... $ 14,094,786 $ 14,735,251 ============ ============ LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities .............................. $ 7,356,636 $ 7,108,297 Line of credit ........................................................ 5,670,669 5,963,951 Short term notes payable .............................................. 4,375,370 4,505,036 Short term notes payable to related parties ........................... 333,954 333,954 Current portion of long-term debt ..................................... 168,436 119,146 Current portion capital lease obligations ............................. 99,003 101,129 Other current liabilities ............................................. 2,553,273 2,562,311 ------------ ------------ Total current liabilities .......................................... 20,557,341 20,693,824 Long-term debt, net of current portion ................................ 296,754 221,828 Capital lease obligations, net of current portion ..................... 167,862 194,457 Other noncurrent liabilities .......................................... 9,038 -- ------------ ------------ Total liabilities .................................................. 21,030,995 21,110,109 ------------ ------------ Redeemable convertible preferred stock: Series A redeemable convertible preferred stock, $.0025 par value; 3,000,000 shares authorized, 2,557,550 issued and outstanding; aggregate liquidation preference of $6,189,271 ....... 2,108,288 2,108,288 Series B redeemable convertible preferred stock, $.0025 par value; 15,796,837 shares authorized, 14,241,461 issued and outstanding aggregate liquidation preference of $7,629,679 ........ 6,305,520 6,305,520 Series C redeemable convertible preferred stock, $.0025 par value; 7,473,000 shares authorized, 7,493,000 issued and outstanding; aggregate liquidation preference of $9,042,330 ....... 7,473,000 7,473,000 Series D redeemable convertible preferred stock, $.0025 par value; 7,500,000 shares authorized, 226,667 issued and outstanding; aggregate liquidation preference of $411,400 ......... 340,001 340,001 Commitments and contingencies ............................................ -- -- Stockholders' deficit: Common stock, $.0025 par value; 52,203,163 shares authorized, 2,192,840 shares outstanding at March 31, 2001 and December 31, 2000 ............ 5,482 5,482 Additional paid-in capital ............................................... 3,167,574 3,167,574 Accumulated deficit ...................................................... (26,336,074) (25,774,723) ------------ ------------ Total stockholders' deficit ........................................ (23,163,018) (22,601,657) ------------ ------------ Total liabilities, redeemable convertible preferred stock and stockholders' deficit ............................... $ 14,094,786 $ 14,735,251 ============ ============

THREE MONTHS ENDED MARCH 31, ----------------------------- 2001 2000 ----------- ----------- Revenue, net ........................................... $ 6,456,042 $ 7,549,126 Cost of revenue ........................................ 2,878,821 2,704,381 ----------- ----------- Gross profit .................................. 3,577,221 4,844,745 ----------- ----------- Operating expenses: Selling and marketing ............................... 2,883,177 2,634,899 General and administrative .......................... 661,434 669,134 Bad debt expense .................................... 355,508 651,357 Depreciation and amortization ....................... 40,864 51,704 ----------- ----------- Total operating expenses ...................... 3,940,983 4,007,094 ----------- ----------- Income (loss) from operations ................. (363,762) 837,651 Other income (expenses): Interest expense .................................... (210,405) (427,182) Other income, net ................................... 55,065 22,107 ----------- ----------- Income (loss) before provision for income taxes ..... (519,102) 432,576 Income tax expense ..................................... 42,250 44,150 ----------- ----------- Net income (loss) ............................. $ (561,352) $ 388,426 =========== ===========

THREE MONTHS ENDED MARCH 31, ----------------------------- 2001 2000 ----------- ----------- Cash flows from operating activities: Net income (loss) ....................................... $ (561,352) $ 388,426 Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: Depreciation and amortization ........................ 40,864 51,703 Bad debt expense ..................................... 355,508 651,357 Changes in: Accounts receivable ............................... 328,394 (2,344,333) Inventory ......................................... (2,839) (63,674) Prepaid expenses and other current assets ......... 5,539 (44,978) Other noncurrent assets ........................... 12,696 7,472 Accounts payable and accrued liabilities .......... 248,339 679,988 Other noncurrent liabilities ...................... -- (64,633) ----------- ----------- Net cash (used) provided by operating activities 427,149 (738,672) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment ..................... (139,170) (8,407) Proceeds from disposal of assets ........................ -- 11,430 ----------- ----------- Net cash used in investing activities .......... (139,170) 3,023 ----------- ----------- Cash flows from financing activities: Proceeds from line of credit ............................ -- 692,724 Proceeds from long term debt ............................ 124,216 62,649 Payments on line of credit .............................. (293,282) -- Payment of long-term debt ............................... (129,666) (100,411) Payment of capital lease obligations .................... (28,721) -- ----------- ----------- Net cash provided (used) by financing activities (327,453) 654,962 ----------- ----------- Decrease in cash and cash equivalents ...................... (39,474) (80,687) Cash and cash equivalents, beginning period ................ 135,689 111,350 ----------- ----------- Cash and cash equivalents, end of period ................... $ 96,215 $ 30,663 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest ............................................. $ 181,366 $ 314,372 Taxes ................................................ $ 42,250 $ 44,150

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