EXHIBIT 20.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INFORMED ACCESS SYSTEMS, INC.
PAGE
----
Report of Ernst & Young LLP, Independent Auditors.......................... 1
Report of Arthur Andersen, Independent Public Accountants.................. 2
Report of Ehrhardt Keefe Steiner & Hottman PC, Independent Auditors........ 3
Supplemental Consolidated Balance Sheets at September 30, 1995 and 1996
(audited)................................................................. 4
Supplemental Consolidated Statements of Operations for the years ended
September 30, 1994, 1995 and 1996 (audited)............................... 5
Supplemental Consolidated Statements of Mandatorily Redeemable Convertible
Preferred Stock and Stockholders' Equity for the years ended September 30,
1994, 1995 and 1996 (audited)............................................. 6
Supplemental Consolidated Statements of Cash Flows for the years ended
September 30, 1994, 1995 and 1996 (audited)............................... 7
Notes to Supplemental Consolidated Financial Statements.................... 8
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Access Health, Inc.
We have audited the supplemental consolidated balance sheets of Access Health,
Inc. (resulting from the consolidation of Access Health, Inc., Informed Access
Systems, Inc. and Clinical Reference Systems, Ltd.) as of September 30, 1995
and 1996 and the related supplemental consolidated statements of operations,
mandatorily redeemable convertible preferred stock and stockholders' equity,
and cash flows for each of the three years in the period ended September 30,
1996. The supplemental consolidated financial statements give retroactive
effect to the mergers of Access Health, Inc. and Informed Access Systems,
Inc., and Access Health, Inc. and Clinical Reference Systems, Ltd. in November
1996, which have been accounted for using the pooling of interests method as
described in the notes to the supplemental consolidated financial statements.
These supplemental financial statements are the responsibility of the
management of Access Health, Inc. Our responsibility is to express an opinion
on these supplemental financial statements based on our audits. We did not
audit the 1994 and 1995 financial statements of Informed Access Systems, Inc.
and Clinical Reference Systems, Ltd. which statements reflect aggregate total
assets constituting approximately 15% of the related supplemental consolidated
financial statement total as of September 30, 1995, and which reflect
aggregate revenues constituting approximately 6% and 12% of the related
supplemental consolidated financial statement totals for 1994 and 1995,
respectively. Those statements were audited by other auditors whose reports
have been furnished to us, and our opinion, insofar as it relates to data
included for Informed Access Systems, Inc. and Clinical Reference Systems,
Ltd., is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Access Health, Inc. at September 30, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended September 30, 1996, after giving retroactive effect to the
mergers of Informed Access Systems, Inc. and Clinical Reference Systems, Ltd.,
as described in the notes to the supplemental consolidated financial
statements, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Sacramento, California
October 31, 1996,
except for Note 2, as to which the date is
November 18, 1996
1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Informed Access Systems, Inc.:
We have audited the accompanying consolidated balance sheets of INFORMED
ACCESS SYSTEMS, INC. (a Delaware corporation) and subsidiary as of December
31, 1994 and 1995, and the related consolidated statements of operations,
mandatorily redeemable convertible preferred stock and stockholders' deficit
and cash flows for each of the three years ended December 31, 1995. 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 in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Informed Access Systems,
Inc. and subsidiary as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years ended December 31,
1995, in conformity with generally accepted accounting principles.
Arthur Andersen llp
Denver, Colorado,
March 12, 1996
2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Clinical Reference Systems, Ltd.
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of Clinical
Reference Systems, Ltd. (a wholly-owned subsidiary of Associated Medical
Enterprises, Inc.) as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Clinical
Reference Systems, Ltd. at December 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
March 12, 1996
Denver, Colorado
3
ACCESS HEALTH, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30,
----------------
1995 1996
------- -------
ASSETS
Current assets:
Cash and equivalents....................................... $ 9,815 $26,533
Available-for-sale securities.............................. 5,172 14,126
Accounts receivable, net of allowance for doubtful accounts
of $600 ($448 at September 30, 1995)...................... 5,299 12,158
Licenses receivable, net of allowance for doubtful accounts
of $150 ($100 at September 30, 1995)...................... 1,525 786
Income taxes receivable.................................... 84 1,917
Prepaid expenses........................................... 959 2,009
Other current assets....................................... 538 1,073
------- -------
Total current assets..................................... 23,392 58,602
Licenses receivable due after one year....................... 782 165
Property and equipment, net.................................. 7,585 16,512
Purchased intangibles, net of accumulated amortization of
$4,327 ($3,735 at September 30, 1995)....................... 4,070 3,478
Investment in AHN............................................ -- 5,000
Other assets................................................. 1,253 535
------- -------
$37,082 $84,292
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 2,681 $ 4,314
Accrued payroll and related expenses........................ 1,997 3,413
Other accrued expenses...................................... 1,460 4,980
Notes payable to related parties............................ -- 1,500
Current portion of long-term debt........................... 292 180
Current portion of capital lease obligations................ 56 419
Deferred revenue............................................ 3,037 4,500
------- -------
Total current liabilities................................ 9,523 19,306
Capital leases obligations.................................. 133 933
Long-term debt.............................................. 398 411
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, $.001 par
value--3,859,196 shares authorized; 3,734,151 shares issued
and outstanding (3,685,740 at September 30, 1995); aggregate
liquidation and redemption preference of $10,995 ($10,635 at
September 30, 1995)......................................... 10,635 10,995
Stockholders' equity:
Preferred stock, $.001 par value--5,000,000 shares
authorized, no shares issued and outstanding............... -- --
Common stock, $.001 par value--30,000,000 shares authorized,
13,684,927 shares issued and outstanding (11,292,850 at
September 30, 1995)........................................ 11 14
Additional paid-in capital.................................. 23,421 58,182
Deferred stock compensation................................. -- (443)
Accumulated deficit......................................... (7,039) (5,106)
------- -------
Total stockholders' equity............................... 16,393 52,647
------- -------
$37,082 $84,292
======= =======
See accompanying notes.
4
ACCESS HEALTH, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER
30,
-------------------------
1994 1995 1996
------- ------- -------
Revenues:
Personal health management services................ $ 9,544 $26,484 $61,178
Licensing and support services..................... 8,047 9,526 10,925
------- ------- -------
Total commercial revenues........................ 17,591 36,010 72,103
Development program with related party............. 2,274 -- --
------- ------- -------
Total revenues................................. 19,865 36,010 72,103
Costs and expenses:
Costs of revenues:
Personal health management services.............. 10,324 19,374 34,653
Licensing and support services................... 3,179 4,961 5,349
Product and other development...................... 2,309 3,298 6,545
Development program................................ 2,541 -- --
Sales and marketing................................ 4,650 5,487 9,468
General and administrative......................... 3,263 4,540 10,391
------- ------- -------
Total costs and expenses....................... 26,266 37,660 66,406
------- ------- -------
Income (loss) from operations........................ (6,401) (1,650) 5,697
Non-operating income (expense):
Interest and other income.......................... 657 877 1,633
Interest expense................................... (175) (150) (186)
------- ------- -------
Income (loss) before income taxes.................... (5,919) (923) 7,144
Provision (credit) for income taxes.................. (1,352) (242) 6,050
------- ------- -------
Net income (loss).................................... $(4,567) $ (681) $ 1,094
======= ======= =======
Net income (loss) per share.......................... $ (0.44) $ (0.06) $ 0.06
======= ======= =======
Shares used in per share calculations................ 10,360 11,000 18,502
See accompanying notes.
5
ACCESS HEALTH, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MANDATORILY
REDEEMABLE STOCKHOLDERS' EQUITY
CONVERTIBLE --------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED STOCKHOLDER
----------------- ------------------ PAID-IN STOCK ACCUMULATED NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL
--------- ------- ---------- ------ ---------- ------------ ----------- ----------- -------
Balance, September 30,
1993................... 1,319,200 $ 1,635 10,023,489 $10 $18,244 $ -- $(1,733) $ (9) $16,512
Sale of common stock... -- -- 198,975 -- 570 -- -- -- 570
Issuance of common
stock to purchase
product............... -- -- 679,090 1 3,513 -- -- -- 3,514
Sale of mandatorily
redeemable convertible
preferred stock and
related issuance
costs................. 1,140,634 2,000 -- -- -- -- (17) -- (17)
Net loss............... -- -- -- -- -- -- (4,567) -- (4,567)
--------- ------- ---------- --- ------- ----- ------- ----- -------
Balance, September 30,
1994.................... 2,459,834 3,635 10,901,554 11 22,327 -- (6,317) (9) 16,012
Sale of common stock... -- -- 263,813 -- 671 -- -- -- 671
Repayment of
stockholder note
receivable............ -- -- -- -- -- -- -- 9 9
Income tax benefit from
exercise of stock
options............... -- -- -- -- 350 -- -- -- 350
Sale of mandatorily
redeemable convertible
preferred stock and
related issuance
costs................. 1,047,394 5,980 -- -- -- -- (41) -- (41)
Issuance of mandatorily
redeemable convertible
preferred stock for
conversion of notes
payable and accrued
interest.............. 178,512 1,020 -- -- -- -- -- -- --
Issuance of common
stock................. -- -- 127,483 -- 73 -- -- -- 73
Net loss............... -- -- -- -- -- -- (681) -- (681)
--------- ------- ---------- --- ------- ----- ------- ----- -------
Balance, September 30,
1995.................... 3,685,740 10,635 11,292,850 11 23,421 -- (7,039) -- 16,393
Sale of common stock in
secondary public
offering.............. -- -- 1,500,000 2 29,503 -- -- -- 29,505
Sale of common stock
upon exercise of
warrants and options.. -- -- 1,049,413 1 2,291 -- -- -- 2,292
Income tax benefit from
sale of stock options. -- -- -- -- 2,491 -- -- -- 2,491
Sale of mandatorily
redeemable convertible
preferred stock....... 48,411 360 -- -- -- -- -- -- --
Deferred stock
compensation.......... -- -- -- -- 476 (476) -- -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- 33 -- -- 33
Elimination of Informed
Access and CRS net
activity for the three
months ended
December 31, 1995..... -- -- (157,336) -- -- -- 839 -- 839
Net income............. -- -- -- -- -- -- 1,094 -- 1,094
--------- ------- ---------- --- ------- ----- ------- ----- -------
Balance, September 30,
1996................... 3,734,151 $10,995 13,684,927 $14 $58,182 $(443) $(5,106) $ -- $52,647
========= ======= ========== === ======= ===== ======= ===== =======
See accompanying notes.
6
ACCESS HEALTH, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER
30,
--------------------------
1994 1995 1996
------- ------- --------
Cash flows from operating activities:
Net income (loss)................................ $(4,567) $ (681) $ 1,094
Adjustments to reconcile net income (loss) to
cash provided (used) by operations:
Allowance for doubtful accounts................ (62) 285 210
Depreciation and amortization.................. 1,585 2,181 4,228
Deferred stock compensation.................... -- -- 33
Notes payable to related parties............... -- -- 1,500
Deferred income taxes.......................... 166 (183) 348
Changes in:
Accounts and licenses receivable............. 1,448 (1,532) (6,002)
Income tax receivable........................ (1,614) 1,530 658
Prepaid expenses and other current assets.... 467 (140) (1,699)
Accounts payable............................. 687 1,115 1,844
Accrued payroll and related expenses......... (261) 1,395 1,517
Other accrued expenses....................... 694 369 3,717
Deferred revenue............................. (104) 237 1,660
------- ------- --------
Net cash provided (used) by operating
activities................................ (1,561) 4,576 9,108
------- ------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities....... (4,009) (6,919) (33,259)
Maturities of available-for-sale securities...... 1,500 4,256 24,305
Purchase of property and equipment............... (1,521) (5,163) (11,063)
Investment in AHN................................ -- -- (5,000)
(Increase) decrease in other assets.............. (476) (76) 387
------- ------- --------
Net cash used by investing activities...... (4,506) (7,902) (24,630)
------- ------- --------
Cash flows from financing activities:
Payment of long-term debt and capital leases..... (788) (441) (1,043)
Payment of stockholder notes receivable
(payable)....................................... (32) 9 --
Sale of mandatorily redeemable convertible
preferred stock................................. 2,000 5,980 360
Proceeds from convertible notes payable to
stockholders.................................... 1,000 -- --
Proceeds from note payable....................... -- -- 680
Sale of common stock............................. 570 671 31,797
------- ------- --------
Net cash provided (used) by financing
activities................................ 2,750 6,219 31,794
------- ------- --------
Net increase (decrease) in cash and equivalents.... (3,317) 2,893 16,272
Elimination of Informed Access and CRS net cash
activity for the three months ended December 31,
1995.............................................. -- -- 446
Cash and equivalents at beginning of year.......... 10,239 6,922 9,815
------- ------- --------
Cash and equivalents at end of year................ $ 6,922 $ 9,815 $ 26,533
======= ======= ========
See accompanying notes.
7
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Business and Principles of Consolidation
These supplemental consolidated financial statements include the accounts of
Access Health, Inc. ("Access Health") and its wholly-owned subsidiaries. The
consolidated entity is referred to herein as the Company. All intercompany
accounts and transactions have been eliminated in consolidation.
As more fully described in Note 2, during November 1996, the Company entered
into business combinations with Informed Access Systems, Inc. ("Informed
Access") and Clinical Reference Systems, LTD ("CRS"). The business
combinations have been accounted for as poolings-of-interests and the
historical consolidated financial statements of the Company for all years
prior to the business combination have been restated in the accompanying
supplemental consolidated financial statements to include the financial
positions, results of operations and cash flows of Informed Access and CRS.
The supplemental financial statements will become the historical financial
statements of the Company upon issuance of financial statements for a
subsequent period that includes the date of the mergers.
The supplemental consolidated financial statements of the Company include
reclassifications made to conform financial statement presentation of Informed
Access and CRS to that of Access Health.
The Company develops, markets and supports personal health management
programs and products which help managed care organizations, self-insured
employers and hospitals manage consumer demand for health care services.
Revenue Recognition
Commercial revenues include personal health management services, which
consist of program membership, member communications and teleservicing fees
from the Company's Personal Health Advisor, FirstHelp and ASK-A-NURSE
contracts with managed care organizations, self-insured employers and
hospitals. Commercial revenues also include licensing and support services
related to the Company's ASK-A-NURSE, Cancer HELPLINK, Access Care Management
System, and LIFE MATCH products.
Program membership fees from Personal Health Advisor and FirstHelp contracts
are recognized ratably in accordance with contract terms on the basis of per-
member fees. Member communications fees are recognized upon the delivery of
services. Teleservicing fees are recognized in accordance with contract terms
on the basis of per-call fees or fees based on phone counselor staffing.
During fiscal 1994 and 1995, license revenues from ASK-A-NURSE and Cancer
HELPLINK were recognized when program implementation services were
substantially completed and, effective at the beginning of fiscal 1996, are
recognized ratably over the term of the contract. This modification resulted
from changes in the terms of the Company's contracts with customers and had no
material impact on the Company's consolidated financial statements. License
revenues from FirstHelp contracts are recognized ratably over the term of the
contract. Revenues from ASK-A-NURSE and Cancer HELPLINK include the present
value of contract installments, discounted at the prime rate (which ranged
from 6% to 9% for the periods presented), plus 3%, that are billable more than
one year after the license grant date. Licenses receivable due are $936,000,
$85,000, $15,000 and $66,000 for 1997, 1998, 1999 and thereafter,
respectively. LIFE MATCH software product licensing revenue is recognized
partially upon delivery of the software, with the remainder deferred until
installation and training services are complete.
8
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Support revenues are comprised of ASK-A-NURSE and Cancer HELPLINK support
revenue, LIFE MATCH software support revenue and direct marketing fees.
Revenue from support contracts and software maintenance contracts is deferred
when billed and recognized ratably over the contract term. Direct marketing
fees are recognized upon the delivery of services.
In fiscal 1993, the Company entered into a development agreement which
provided for the funding of specified development projects. Development
program revenue was recognized pro rata as costs were incurred under the
related agreement.
Cash Equivalents and Available-For-Sale Securities
The Company invests its excess cash in high quality money market instruments
and certain other investments. The Company considers highly liquid investments
with maturities of three months or less to be cash equivalents. Available-for-
sale securities are carried at amortized cost which approximated fair value as
of September 30, 1995 and 1996 and are available to fund current operations.
Property and Equipment
Property and equipment are stated at cost and consist of office furniture
and equipment, computer equipment, leasehold improvements and computer
software for internal use. Depreciation and amortization of furniture and
equipment, computer equipment and leasehold improvements are provided on the
straight-line basis over the useful lives of the respective assets or the
lease term if shorter, which range from two to ten years. Computer software
consists of the direct costs of internally-developed software and purchased
software and is being amortized on the straight-line basis over the estimated
useful lives of the respective assets of three to five years.
Purchased Intangibles
Purchased intangibles consist primarily of product rights and are being
amortized on the straight line basis over three to ten years.
Investment in AHN
In April, 1996, the Company invested $5.0 million in America's Health
Network, L.P. ("AHN"), a new 24-hour 7 days a week cable television channel
devoted to consumer healthcare information. The Company is a limited partner
in AHN and the investment in AHN is accounted for using the cost method.
Product and Other Development Costs
Product and other development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services related to the
development of the Company's products and services.
Concentrations of Credit Risk and Major Customers
During fiscal 1996, sales to each of the Company's three largest customers
were $10,446,000, $7,427,000 and $7,184,000. During fiscal 1995, sales to each
of the Company's three largest customers were $6,438,000, $4,327,000 and
$3,624,000.
The Company's accounts and licenses receivable are primarily with companies
in the health care and insurance industries. The Company believes that
adequate provision for uncollectible accounts and licenses receivable has been
made in the accompanying financial statements.
9
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Split
On February 15, 1996, the Company effected a three-for-two stock split. All
references in the accompanying financial statements to the number of capital
shares and per-share amounts have been retroactively restated to reflect the
stock split.
Net Income (Loss) per Share
The Company's net income (loss) per share is based upon the weighted average
number of shares of common stock outstanding. Common stock issuable upon the
exercise of stock options and stock warrants has been included in the
computation, to the extent dilutive, using the treasury stock method. Common
stock issuable upon the conversion of mandatorily redeemable convertible
preferred stock has been included in the computation, to the extent dilutive,
using the if-converted method. Mandatorily redeemable convertible preferred
stock was converted into common stock in November 1996 in connection with the
merger of Access Health and Informed Access (Note 2). Net loss per share would
have been $(0.36) and $(0.05) for the years ended September 30, 1994 and 1995,
respectively, had the conversion occurred at the beginning of the respective
period.
Income Taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws
that are scheduled to be in effect when the differences are expected to
reverse.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and equivalents,
available-for-sale securities, and long-term debt. The carrying values of cash
and equivalents and available-for-sale securities approximate fair value. The
fair value of long-term debt is estimated based on current rates available for
similar debt with similar maturities and securities, and at September 30, 1995
and 1996, approximates the carrying value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions. These estimates may affect the reported amounts of assets and
liabilities, 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.
Stock Issued To Employees
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provisions of the Accounting Principles
Board's Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25").
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123 provides an alternative to APB 25 and is
effective for fiscal years beginning after December 15, 1995. The Company
expects to continue to account for its stock plans in accordance with APB 25.
Accordingly, SFAS 123 is not expected to have any material impact on the
Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 121
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No.
121"), which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. SFAS No. 121 also addresses the accounting
for long-
10
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
lived assets that are expected to be disposed of. The Company will adopt SFAS
No. 121 in the first quarter of fiscal 1997 and, based on current
circumstances, management believes the effect of adoption will not be material
to the Company's consolidated financial position or results of operations.
Reclassifications
Certain reclassifications have been made to amounts reported as of and for
the years ended September 30, 1994 and 1995 to conform with the September 30,
1996 presentation.
NOTE 2: BUSINESS COMBINATIONS
During November 1996, the Company consummated business combinations with
Informed Access which included the exchange of 5,375,000 shares of Access
Health common stock (including 4,778,317 shares issued to Informed Access
shareholders and 596,683 shares reserved for future grant to Informed Access
option holders) and CRS, which included the exchange of 170,000 shares of
Access Health common stock. These business combinations were accounted for as
pooling-of-interests, and accordingly, the historical financial statements of
the Company have been restated to include the consolidated financial
statements of Access Health, Informed Access and CRS for all periods
presented. The supplemental consolidated statements of operations and
accompanying notes of the Company for the fiscal years ended September 30,
1994 and 1995 include the operations of Informed Access and CRS for the
calendar years ended December 31, 1994 and 1995. The supplemental consolidated
statement of operations and accompanying notes of the Company for the fiscal
year ended September 30, 1996 include the operations of Informed Access and
CRS for the twelve months ended September 30, 1996. Accordingly, the Company's
accumulated deficit has been adjusted for the effect of utilizing differing
fiscal year ends for these periods. Subsequent to the business combinations,
the fiscal year-ends of Informed Access and CRS have been changed from
December 31 to September 30 to conform to the fiscal year end of Access
Health.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the business combinations with Informed Access and
CRS in November, 1996. Generally accepted accounting principles prohibit
giving effect to a consummated business combination accounted for by the
pooling-of-interests method in financial statements that do not include the
date of consummation. The accompanying supplemental consolidated financial
statements do not extend through the date of consummation, however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combinations are issued.
In connection with the business combinations, the Company incurred direct
transaction costs of approximately $6.3 million which will be charged to
operations in the period during which the merger is consummated.
11
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The table below sets forth the combined revenues and net income (loss) for
the years ended September 30, 1994, 1995 and 1996 (in thousands):
INFORMED
ACCESS HEALTH ACCESS CRS ADJUSTMENT COMBINED
------------- -------- ------ ---------- --------
1994:
Revenues............... $18,629 $ 125 $1,111 $ -- $19,865
Net income (loss)...... (2,296) (2,381) 110 -- (4,567)
1995:
Revenues............... $31,553 $ 2,957 $1,500 $ -- $36,010
Net income (loss)...... 1,540 (3,745) 226 1,298 (681)
1996:
Revenues............... $62,073 $ 8,668 $1,362 $ -- $72,103
Net income (loss)...... 8,125 (6,007) (391) (633) 1,094
The adjustments to the combined results of operations included in the table
above reflect the realization of the Informed Access net operating loss
carryover to the extent of Access Health deferred income tax liabilities which
will reverse in periods subsequent to the merger.
NOTE 3: AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of September
30, 1995 and 1996 (in thousands):
1995 1996
------ -------
U.S. government and municipal debt securities............... $5,172 $23,789
Corporate debt securities................................... 525 6,451
Corporate and municipal bond funds.......................... 2,500 9,526
------ -------
Total debt securities....................................... 8,197 39,766
Less: amounts included in cash and equivalents.............. (3,025) (25,640)
------ -------
$5,172 $14,126
====== =======
Realized and unrealized gains and losses on available-for-sale securities
were immaterial as of and for the years ended September 30, 1995 and 1996.
The amortized cost of debt securities at September 30, 1996, by contractual
maturity, are shown below (in thousands). Expected maturities will differ from
contractual maturities.
Less than 1 year.................................................. $33,572
1 to 5 years...................................................... 6,194
-------
Total debt securities............................................. $39,766
=======
12
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: PROPERTY AND EQUIPMENT
As of September 30, 1995 and 1996, property and equipment consisted of the
following (in thousands):
1995 1996
------- -------
Computer equipment......................................... $ 7,439 $16,349
Office furniture and equipment............................. 2,185 3,804
Computer software.......................................... 978 2,295
Leasehold improvements..................................... 817 1,384
------- -------
11,419 23,832
Less: accumulated depreciation............................. (3,834) (7,320)
------- -------
$ 7,585 $16,512
======= =======
NOTE 5: NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties arising from bonuses are comprised of notes
payable to members of management, who are also stockholders of the Company,
and are payable in installments in March 1997 and September 1997.
NOTE 6: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
As of September 30, 1995, long-term debt included an installment note
payable to a bank bearing interest at 7.36%, requiring monthly principal and
interest payments of approximately $22,000 through March, 1998. This debt was
retired in fiscal 1996.
In May 1996, the Company signed a revolving credit agreement (the "Credit
Agreement") with a bank under which the Company may borrow up to $3 million
for qualifying equipment purchases. Interest on borrowings under the Credit
Agreement accrues at the bank's prime rate plus 0.50% (aggregating 8.75% as of
September 30, 1996) and is payable monthly. The Credit Agreement expires on
May 1, 1997, at which time any outstanding balance will be due and payable.
The Credit Agreement contains restrictive financial covenants which require
the Company to maintain specified levels of tangible net worth and maintain
specified minimum debt and earnings before interest and local taxes ratios.
Borrowings under the Credit Agreement would be unsecured. The Company has no
balances outstanding under the Credit Agreement at September 30, 1996.
The Company also has a term facility agreement (the "Term Agreement")
whereby the Company may borrow, in one or more borrowings, an amount not to
exceed $2 million in the aggregate, subject to certain conditions set forth in
the Term Agreement. This commitment is in the form of a $680,000 note payable
facility and a $1,320,000 capital lease facility. At September 30, 1996,
cumulative borrowings under the note payable facility and capital lease
facility were $591,000 and $953,000, respectively (borrowings under the
capital lease facility were $158,000 at September 30, 1995). Borrowings under
the Term Agreement are secured by certain of the Company's equipment, with an
aggregate carrying value of approximately $1,450,000 at September 30, 1996.
The total remaining commitment under the Term Agreement is $124,000 as of
September 30, 1996. Amounts payable under the Term Agreement at September 30,
1996 bear interest at 14.48%, are due at varying dates through September 1999,
and require monthly payments of principal and interest totaling approximately
$52,000. Amounts due under the note payable facility of the Term Agreement are
$180,000, $197,000 and $214,000 in fiscal 1997, 1998 and 1999, respectively.
In connection with the Term Agreement, the Company issued warrants to the
lender in October 1995 and May 1996. Under the terms of the warrants, the
lender may acquire a number of shares of Series C preferred
13
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock based on specified formulas set forth in the warrant agreements. The
warrants are exercisable for ten years after the date of issuance or five
years after the date an initial public offering is completed by Informed
Access, whichever is longer. The value attributable to these warrants was not
material. The warrants will be converted into warrants to purchase common
stock as a result of the merger (Note 2).
The Company has other capital leases outstanding aggregating $399,000 at
September 30, 1996 ($31,000 at September 30, 1995).
The following is a schedule of future minimum lease payments under all
capital leases, together with the present value of net minimum lease payments,
as of September 30, 1996 (in thousands):
FISCAL YEAR
-----------
1997.............................................................. $ 575
1998.............................................................. 556
1999.............................................................. 474
2000.............................................................. 36
------
1,641
Less: amount representing interest and taxes...................... (289)
------
Present value of future minimum lease payments.................... 1,352
Less: current portion............................................. (419)
------
Capital lease obligations, long-term.............................. $ 933
======
During 1994, the Company entered into a bridge loan with preferred
stockholders. Such notes payable to stockholders totaled $1 million and
accrued interest at 8% per annum. On March 17, 1995, these notes payable and
related accrued interest were converted into shares of Series C Preferred
Stock at $5.71 per share.
Interest paid during the years ended September 30, 1994, 1995 and 1996 was
$186,000, $120,000 and $170,000, respectively.
NOTE 7: INCOME TAXES
The provision (credit) for income taxes consists of the following (in
thousands):
1994 1995 1996
------- ----- ------
Federal:
Current............................................ $(1,518) $ 40 $4,459
Deferred (prepaid)................................. 266 (259) --
------- ----- ------
Total federal.................................... (1,252) (219) 4,459
State:
Current............................................ -- 6 1,591
Deferred (prepaid)................................. (100) (29) --
------- ----- ------
Total state...................................... (100) (23) 1,591
------- ----- ------
Provision (credit) for income taxes.................. $(1,352) $(242) $6,050
======= ===== ======
14
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The income tax provisions differ from the amount computed by applying the
federal statutory income tax rate to income (loss) before income taxes. A
reconciliation to the statutory federal income tax rate is as follows:
1994 1995 1996
---- ---- ----
Statutory federal income tax rate........................ (34)% (34)% 35 %
State income taxes, net of federal benefit............... (2) (2) 15
Tax exempt interest income............................... (3) -- (2)
Unconsolidated operating loss with no current benefit.... -- 9 37
Other.................................................... 2 1 --
--- ---- ---
Effective income tax rate................................ (37)% (26)% 85 %
=== ==== ===
Significant components of the Company's deferred income tax assets and
liabilities at September 30, 1995 and 1996 are as follows (in thousands):
1995 1996
------- -------
Deferred income tax liabilities:
Depreciation and amortization............................ $ 331 $ 1,080
Prepaid expenses......................................... 2,550 2,354
------- -------
Total deferred income tax liabilities...................... 2,881 3,434
Deferred income tax assets:
Research & development credit............................ 161 161
Amortization............................................. -- 954
Vacation accrual......................................... 191 297
Accrued expenses......................................... 271 784
State income taxes....................................... 61 386
Receivable allowances and reserves....................... 213 288
Alternative minimum tax credit........................... 129 --
Net operating loss....................................... 2,901 4,243
Stock compensation....................................... 350 --
Other.................................................... 93 60
------- -------
Total deferred income tax assets........................... 4,370 7,173
Less: valuation allowance.................................. (1,141) (3,739)
------- -------
Net deferred income tax asset.............................. $ 348 $ --
======= =======
The net change in the Company's valuation allowance was $1,141,000 and
$2,598,000 during the fiscal years ended September 30, 1995 and 1996,
respectively.
Income tax payments were $70,000, $50,000 and $4,909,000 for the years ended
September 30, 1994, 1995 and 1996, respectively. The Company received income
tax refunds of $427,000 and $1,630,000 during the years ended September 30,
1994 and 1995, respectively.
The Company's federal and state net operating loss carryforwards of
approximately $11 million as of September 30, 1996 expire between 2007 and
2011 for both federal and state purposes. The Company also has approximately
$161,000 of Research & Development tax credits available which expire between
2007 and 2011. Certain provisions of the Internal Revenue Code of 1986, as
amended, may limit the net operating loss carryforwards and tax credit
available for use in any given year if certain events occur including
significant changes in ownership.
15
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's income tax returns for fiscal years ended September 30, 1989,
1990 and 1994 are currently under examination by the Internal Revenue Service
(the "IRS"). The IRS is examining the deductibility of certain expenses
claimed in connection with prior acquisitions by the Company. Subsequent to
September 30, 1996, the Company reached a partial settlement with the IRS for
certain deductions related to fiscal years 1989, 1990 and 1994. As a result of
the partial settlement, the Company had no additional income tax expense. With
respect to the remaining deductions under examination, the Company believes
that these deductions were properly taken and that adequate provision has been
made in the statements of operations for taxes owed.
NOTE 8: COMMITMENTS
Operating Leases
The Company leases its offices under the terms of operating leases. Annual
minimum rental payments for fiscal 1997, 1998, 1999, 2000, 2001 and thereafter
are $2,552,000, $2,347,000, $1,735,000, $1,448,000, $1,394,000 and $118,000,
respectively. Rental expenses are recorded on a straight-line basis over the
respective lease terms and were $1,222,000, $1,549,000 and $1,883,000 for the
years ended September 30, 1994, 1995 and 1996, respectively.
NOTE 9: MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Informed Access was authorized to issue shares of mandatorily redeemable
preferred stock from time to time in one or more series of designations,
rights, preferences and limitations established by its board of directions. As
of September 30, 1996, 3,734,151 aggregate shares of Series A, B, and C
mandatorily redeemable preferred stock have been issued. Each share of
mandatorily redeemable preferred stock will be converted into one share of
common stock upon completion of the merger (Note 2).
In July 1996, the Company issued a warrant to a customer to purchase 64,548
shares of Series C mandatorily redeemable preferred stock at $15.49 per share.
The warrants became exercisable in November 1996. The warrants will be
converted into warrants to purchase common stock as a result of the merger
(Note 2).
NOTE 10: STOCKHOLDERS' EQUITY
Common Stock
In December, 1995, the Company completed a secondary public offering of its
common stock. A total of approximately 4.8 million shares were sold at $21.33
per share of which 1.5 million shares were sold by the Company and
approximately 3.3 million shares were sold by the Company's original venture
capital stockholders who are now fully divested. Net proceeds to the Company
from the offering were approximately $29.5 million.
During May and July 1996 certain options were granted with exercise prices
below the applicable fair market value (as determined by an independent
appraisal) on the date of grant, resulting in deferred stock compensation of
approximately $476,000. The deferred stock compensation will be amortized into
expense ratably over the four year vesting term of the related options;
however, because such options will become 100% vested as a result of the
merger with Informed Access in November 1996, the unamortized balance of
deferred stock compensation will be recorded as an expense in the quarter
ended December 31, 1996. At September 30, 1996, the unamortized balance of
deferred stock compensation was approximately $443,000.
Employee Stock Options
Access Health established an employee common stock participation plan in
1989 (the "1989 Incentive Stock Plan") under which incentive stock options,
nonqualified stock options, and restricted common stock may
16
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
be issued or sold to employees and consultants. As of September 30, 1996 a
total of 2,550,000 shares of common stock have been reserved for issuance
under this plan, of which 32,065 shares remained available for the granting of
options at September 30, 1996.
The following table summarizes incentive stock option activity of Access
Health for the years ended September 30, 1994, 1995 and 1996:
EXERCISE
NUMBER OF PRICE
SHARES PER SHARE
--------- ------------
Balance, September 30, 1993......................... 895,242 $0.167-6.833
Options granted................................... 367,605 5.33-8.83
Options exercised................................. (54,495) 0.167-5.42
Options cancelled................................. (33,285) 1.333-5.42
--------- ------------
Balance, September 30, 1994......................... 1,175,067 0.167-8.83
Options granted................................... 259,365 10.25-13.75
Options exercised................................. (102,975) 0.167-6.917
Options cancelled................................. (17,475) 0.167-10.25
--------- ------------
Balance, September 30, 1995......................... 1,313,982 0.167-13.75
Options granted................................... 1,141,470 15.333-62.50
Options exercised................................. (421,499) 0.167-13.75
Options cancelled................................. (208,786) 1.333-62.50
--------- ------------
Balance, September 30, 1996......................... 1,825,167 $0.167-60.75
========= ============
Incentive stock options of Access Health generally become exercisable at the
rate of twenty percent per year commencing on the first anniversary of the
date of grant, however certain officers of the Company may exercise options
for restricted common stock at the date of grant. As of September 30, 1995 and
1996, options to purchase 510,498 shares at exercise prices ranging from
$0.167 to $12.67 per share and 330,221 shares at exercise prices ranging from
$0.167 to $12.42 per share, respectively, were exercisable.
Informed Access has adopted a stock option plan (the "Informed Access Plan")
to provide directors, officers, other employees and consultants options to
purchase up to 564,795 at December 31, 1995 and 766,508 at September 30, 1996
shares of common stock. Under the terms of the Informed Access Plan, the Board
of Directors may grant either "nonqualified" or "incentive" stock options, as
defined by the Internal Revenue Code and regulations. Under the terms of the
Informed Access Plan, the purchase price of the shares subject to an incentive
stock option will be the fair market value of Informed Access' common stock on
the date the option is granted. The purchase price of a nonqualified option
will not be less than 85% of fair market value. If the grantee owns more than
10% of the total combined voting power or value of all classes of Informed
Access stock on the date of grant, the purchase price of an incentive stock
option shall be at least 110% of the fair market value at the date of grant
and the exercise term will be up to five years from the date of grant. All
other options granted under the Informed Access Plan are exercisable up to ten
years from the date of grant. All options granted to date are exercisable up
to a five year period.
17
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The activity relating to the Informed Access Plan is as follows (shares and
per share amounts have been adjusted for the merger exchange ratio):
NUMBER OF SHARES PER SHARE
---------------------- EXERCISE
NONQUALIFIED INCENTIVE PRICE
------------ --------- ----------
Balances, December 31, 1993............... -- -- --
Granted................................. 8,069 148,460 $ 0.17
------- ------- ----------
Balances, December 31, 1994............... 8,069 148,460 0.17
Granted................................. 6,051 257,627 0.17-0.57
Exercised............................... (14,120) (29,853) 0.17
Cancelled............................... -- (84,719) 0.17
------- ------- ----------
Balances, December 31, 1995............... -- 291,515 0.17-0.57
Granted................................. 82,702 328,872 0.17-3.72
Exercised............................... (16,540) (15,935) 0.17-0.57
Cancelled............................... (16,944) (65,153) 0.17-0.57
------- ------- ----------
Balances, September 30, 1996.............. 49,218 539,299 $0.17-3.72
======= ======= ==========
Exercisable, September 30, 1996........... 1,513 39,294 $0.17-1.86
======= ======= ==========
Common Stock Warrants and Options
In August 1993, the Company issued warrants to purchase 525,000 shares of
the Company's common stock. The warrants became exercisable in January 1994
and 356,916 shares of common stock were issued upon the cashless exercise of
all warrants in December, 1995.
In October 1988, nonqualified stock options to purchase 98,974 shares of
Series A Preferred Stock at $0.46 per share, which converted to common stock
options on February 28, 1992, were granted to a former director. As of
September 30, 1996, 96,617 shares of common stock have been issued pursuant to
this option.
Nonqualified stock options to purchase 22,500 shares of common stock at
prices ranging from $4.167 to $6.667 per share were granted in fiscal 1993 to
certain consultants of the Company. The options become exercisable in equal
installments over a five-year period commencing on the first anniversary of
the date of grant; as of September 30, 1996, 13,500 shares of common stock
have been purchased pursuant to these options and none of the remaining 9,000
shares are exercisable.
In May 1996, the Company granted 2,000 shares of restricted stock to an
officer. The Company retained the right to repurchase, at the market price on
the date of grant ($50.625 per share), all of the shares if the officer leaves
the Company during the first year after the grant date and half of the shares
if the officer leaves the Company during the second year after the grant date.
During 1996, the Company granted nonqualified stock options to purchase
230,000 shares of common stock at $50.625 per share to an officer. The options
become exercisable in equal installments over a five-year period commencing on
the first anniversary of the date of grant; as of September 30, 1996 none of
the options are exercisable.
Stock Purchase Plan
The Company established a stock purchase plan in 1991 (the "1991 Plan")
under which most employees of the Company may participate. A total of 825,000
shares of the Company's common stock have been reserved
18
ACCESS HEALTH, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for issuance under the 1991 Plan. The 1991 Plan is administered by a committee
appointed by the Board of Directors. Employees can elect to have from 1% to
10% of their monthly gross salary deducted during each offering period and
applied to the purchase of stock. The purchase price is an amount equal to 85%
of the fair market value of a share of common stock of the Company on the
enrollment date or on the purchase date, whichever is lower. During the years
ended September 30, 1994, 1995 and 1996, the Company sold 96,320 shares of
common stock for $410,553, 48,548 shares of common stock for $468,710 and
41,659 shares of common stock for $753,146, respectively.
Director Options
The Company established a director common stock participation plan in 1995
(the "1995 Director Stock Option Plan") under which nonqualified stock options
may be granted to directors. As of September 30, 1996 a total of 150,000
shares of common stock have been reserved for issuance under this plan, of
which 116,250 shares remained available for the granting of options at
September 30, 1996. As of September 30, 1996, options to purchase 33,750
shares were granted and 16,558 shares were exercisable at prices ranging from
$10.25 to $54.25 per share.
19