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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Health Net, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Health Net, Inc. at December
31, 1999 and 1998, and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, 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
audits provide a reasonable basis for the opinion expressed above.
July 6, 2000
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HEALTH NET, INC.
BALANCE SHEETS
DECEMBER 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 53,007 $ 21,674
Accounts receivable, net 287,395 337,191
Inventory 27,212 8,038
Prepaid expenses 6,034 --
-------- --------
Total current assets 373,648 366,903
Restricted cash -- 18,971
Property and equipment, net 112,341 89,689
Other assets -- 100
-------- --------
Total assets $485,989 $475,663
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,023 $138,656
Bank borrowings -- 189,706
Current portion of capital leases 15,496 11,729
Accrued expenses 16,630 9,509
-------- --------
Total current liabilities 92,149 349,600
-------- --------
Noncurrent liabilities:
Long-term debt and capital leases 7,635 28,880
-------- --------
Total liabilities 99,784 378,480
-------- --------
Commitments and contingencies (Notes 3 and 6)
Stockholders' equity:
Common stock, no par value, 1,000 shares authorized,
issued and outstanding at December 31, 1999 and 1998 -- --
Additional paid-in capital 8,518 8,518
Retained earnings 377,687 88,665
-------- --------
Total stockholders' equity 386,205 97,183
-------- --------
Total liabilities and stockholders' equity $485,989 $475,663
-------- --------
See notes to financial statements.
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HEALTH NET, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
1999 1998
Revenues $ 2,487,659 $ 1,190,807
Cost of revenues 996,484 474,442
----------- -----------
Gross profit 1,491,175 716,365
Operating expenses:
Selling, general and administrative 1,042,443 568,615
----------- -----------
Operating income 448,732 147,750
Interest expense, net (21,885) (18,646)
----------- -----------
Net income $ 426,847 $ 129,104
----------- -----------
See notes to financial statements.
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HEALTH NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- -------- ---------- ---------- ----------
Balances, December 31, 1997 1,000 $ -- $ 8,518 $ 111,654 $ 120,172
Net income -- -- -- 129,104 129,104
Distribution to stockholders -- -- -- (152,093) (152,093)
----------- ------- --------- --------- ---------
Balances, December 31, 1998 1,000 -- 8,518 88,665 97,183
Net income -- -- -- 426,847 426,847
Distribution to stockholders -- -- -- (137,825) (137,825)
----------- ------- --------- --------- ---------
Balances, December 31, 1999 1,000 $ -- $ 8,518 $ 377,687 $ 386,205
----------- ------- --------- --------- ---------
See notes to financial statements.
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5
HEALTH NET, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 426,847 $ 129,104
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 32,351 19,244
Changes in assets and liabilities:
Accounts receivable 49,796 (245,815)
Inventory (19,174) 5,078
Prepaid expenses (6,034) 1,051
Restricted cash 18,971 (18,971)
Other assets 100 --
Accounts payable (78,633) 131,263
Accrued expenses 8,522 494
Taxes payable (1,401) (25,968)
--------- ---------
Net cash provided by (used in) operating activities 431,345 (4,520)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (55,003) (40,581)
Distributions to shareholders (137,825) (152,093)
--------- ---------
Net cash used in investing activities (192,828) (192,674)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit -- 189,706
Repayment of line of credit (189,706) --
Principal payments on capital lease obligations (17,478) (20,901)
--------- ---------
Net cash (used in) provided by financing activities (207,184) 168,805
--------- ---------
Net increase (decrease) in cash and cash equivalents 31,333 (28,389)
Cash and cash equivalents at beginning of year 21,674 50,063
--------- ---------
Cash and cash equivalents at end of year $ 53,007 $ 21,674
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for:
Interest $ 21,885 $ 18,655
--------- ---------
See notes to financial statements.
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HEALTH NET, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Health Net, Inc. (the "Company") was incorporated in Louisiana as a
Subchapter S Corporation on June 14, 1988. The Company provides mobile
health screening services to the general public and for promotional
purposes for the healthcare industry. The Company's services are provided
at various remote locations throughout the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORY
Inventory consists primarily of consumable supplies and is stated at the
lower of cost or market, using the average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years, or the lease term of the respective assets,
if shorter.
REVENUE RECOGNITION
The Company's revenues are derived primarily from service revenues and are
recognized as the service is provided.
BUSINESS RISK AND UNCERTAINTIES
The Company's revenue is primarily attributable to one source of revenue.
The Company's future success will depend upon its ability to continue to
improve its level of service and develop new services to meet diverse and
evolving customer demands.
ADVERTISING
The Company expenses advertising costs as incurred. Included in selling,
general and administrative expenses are advertising costs of approximately
$14,990 and $4,506 for 1999 and 1998, respectively.
INCOME TAXES
There is no provision for income taxes in the financial statements of the
Company as the Company is not subject to corporate income taxes under the
provisions of Subchapter S of the Internal Revenue Code. Each stockholder
is individually liable for its own tax payments.
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HEALTH NET, INC.
NOTES TO FINANCIAL STATEMENTS
2. BALANCE SHEET COMPONENTS
DECEMBER 31,
1999 1998
Accounts receivable, net:
Accounts receivable $288,949 $337,191
Less: Allowance for doubtful
accounts (1,554) --
-------- --------
$287,395 $337,191
-------- --------
Property and equipment, net:
Furniture and fixtures $ 14,429 $ 11,029
Machinery and equipment 157,484 105,881
-------- --------
171,913 116,910
Less accumulated depreciation (59,572) (27,221)
-------- --------
$112,341 $ 89,689
-------- --------
Property and equipment includes $49,007 of equipment under capital leases
at both December 31, 1999 and 1998. Accumulated amortization of assets
under capital leases totaled $22,664 and $12,863 at December 31, 1999 and
1998, respectively.
Depreciation expense was $32,351 and $19,244 for 1999 and 1998,
respectively.
3. LONG-TERM DEBT AND CAPITAL LEASES
DECEMBER 31,
1999 1998
Note payable to Deposit Guaranty Bank due in monthly
installments of $1,192 including interest at 8.75%,
secured by pDEXA equipment; matures September 2001 $ 23,131 $ 34,852
Note payable to Hancock Bank due in monthly installments
of $499 including interest; prepaid in 1998 -- 5,757
-------- --------
Total long-term debt and capital leases 23,131 40,609
Less: current portion (15,496) (11,729)
-------- --------
$ 7,635 $ 28,880
-------- --------
Future minimum lease payments under capital leases are as follows:
YEAR ENDING DECEMBER 31,
2000 $14,304
2001 10,728
-------------
Total minimum lease payments 25,032
Less: Amount representing interest (1,901)
-------------
Present value of lease obligations 26,933
Less: Current portion (15,496)
-------------
$11,437
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HEALTH NET, INC.
NOTES TO FINANCIAL STATEMENTS
4. LINE OF CREDIT
During 1998, the Company entered into a $3 million line of credit
agreement with Deposit Guaranty Bank collateralized by assets of the
Company and personally guaranteed by the stockholders. The line consisted
of advances against eligible accounts receivable in an aggregate amount
not to exceed the reserve of 10% of the face amount of all receivables
initially purchased by the bank. This line of credit was terminated and
repaid in full on November 9, 1999. At December 31, 1998, advances on the
line of credit totaled $189,706. The line of credit agreement required
that the Company keep 10% of the amount advanced as cash and cash
equivalents. This amount has been shown as restricted cash on the balance
sheet at December 31, 1998.
5. RELATED PARTY TRANSACTIONS
In 1999, the Company leased an office building from the stockholders. Rent
expense paid to the stockholders during the year was $18,407 and was
included in selling, general and administrative expense in the
accompanying income statement.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases an office building under a noncancelable operating
lease that expires in 2002. Future minimum lease payments at December 31,
1999 are as follows:
YEAR ENDING DECEMBER 31,
2000 $ 30,000
2001 36,000
2002 36,000
---------
$102,000
---------
Rent expense for the years ended December 31, 1999 and 1998 was $18,407
and $10,926, respectively.
7. SUBSEQUENT EVENT
On January 21, 2000, the Company sold all of its assets to Cholestech,
Corporation, a publicly traded company that manufactures medical equipment.
Proceeds from this sale consisted of cash of $2,200,000 and 51,010 shares of
Cholestech common stock valued at approximately $300,000.
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