EXHIBIT 99.2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Arthur Andersen LLP, independent auditors. . . . . . . . . . . . . . . . . 13
Consolidated Balance Sheets at September 30, 1995, 1996 and 1997 (audited) . . . . . 14
Consolidated Statements of Operations for the years ended September 30, 1995,
1996 and 1997 (audited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Consolidated Statements of Manditorily Redeemable Convertible Preferred
Stock and Stockholder Equity for the years ended September 30, 1995, 1996
And 1997 (audited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Cash Flows for the years ended September 30, 1995,
1996 and 1997 (audited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 18
12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Access Health, Inc.
We have audited the accompanying consolidated balance sheets of Access
Health, Inc. as of September 30, 1996 and 1997, and the related 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, 1997. 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 consolidated financial position
of Access Health, Inc. at September 30, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended September 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
October 14, 1998.
13
ACCESS HEALTH, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
SEPTEMBER 30,
---------------------
1996 1997
------- -------
ASSETS
Current assets:
Cash and equivalents $26,976 $17,499
Available-for-sale securities 14,126 41,969
Accounts and licenses receivable, net of allowance for
doubtful accounts of $1,068 at September 30, 1997, $860 at
September 30, 1996 15,355 16,918
Deferred income taxes 2,602 9,295
Income taxes receivable 1,917 3,231
Prepaid expenses 2,722 2,456
Other current assets 1,146 1,708
------- -------
Total current assets 64,844 93,076
Property and equipment, net 17,457 17,766
Purchased intangible assets, net of accumulated
amortization of $4,911 at September 30, 1997, $4,327 at
September 30, 1996 3,478 2,894
Investment in AHN 5,000 --
Deferred income taxes -- 1,042
Other assets 1,366 773
------- -------
Total assets $92,145 $115,551
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,573 $4,434
Accrued payroll and related expenses 3,829 4,473
Accrued integration and restructuring costs -- 3,109
Other accrued expenses 5,196 4,558
Notes payable to related parties 1,696 1,264
Current portion of long-term debt 444 209
Current portion of capital lease obligations 424 469
Deferred revenue 11,039 15,782
------- -------
Total current liabilities 27,201 34,298
Capital lease obligations 965 542
Long-term debt 541 217
Commitments and contingencies
Mandatorily redeemable convertible preferred stock, $.001
par value, aggregate liquidation and redemption preference
of $10,995 at September 30, 1996; 3,859,196 shares authorized,
3,734,151 shares issued and outstanding as of September 30,
1996 (none at September 30, 1997) 10,995 --
Stockholders' equity:
Preferred stock, $.001 par value 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value 75,000,000 shares authorized,
22,060,394 shares issued and outstanding at September 30,
1997, 17,499,162 at September 30, 1996 18 22
Additional paid-in capital 58,311 80,935
Deferred stock compensation (443) --
Accumulated deficit (5,443) (463)
------- -------
Total stockholders' equity 52,443 80,494
------- -------
$92,145 $115,551
------- -------
------- -------
See accompanying notes.
14
ACCESS HEALTH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30,
-------------------------------------
1995 1996 1997
------- ------- -------
Revenues:
Care management services $26,484 $61,178 $93,729
Licensing and support services 16,281 21,658 26,913
------- ------- -------
Total revenues
42,765 82,836 120,642
Costs and expenses:
Cost of revenues:
Care management services 19,374 34,653 49,237
Licensing and support services 8,556 8,630 7,879
Product and other development 3,972 8,350 11,232
Sales and marketing 6,434 11,408 11,684
General and administrative 6,967 13,897 13,499
Transaction costs -- -- 6,345
Integration and restructuring -- -- 9,661
------- ------- -------
Total costs and expenses 45,303 76,938 109,537
Income (loss) from operations (2,538) 5,898 11,105
Non-operating income (expenses):
Impairment loss on interests in AHN -- -- (10,000)
Interest and other income 911 1,633 2,182
Interest expense (188) (225) (357)
------- ------- -------
Income (loss) before income taxes (1,815) 7,306 2,930
Provision (credit) for income taxes (638) 6,110 (2,050)
------- ------- -------
Net income (loss) $(1,177) $1,196 $4,980
------- ------- -------
------- ------- -------
Net income (loss) per share
Basic $(0.08) $0.07 $0.23
------- ------- -------
------- ------- -------
Diluted $(0.08) $0.05 $0.21
------- ------- -------
------- ------- -------
Shares used in per share calculations
Basic 14,814 16,698 21,668
------- ------- -------
------- ------- -------
Diluted 14,814 22,667 23,892
------- ------- -------
------- ------- -------
See accompanying notes.
15
ACCESS HEALTH, INC.
CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Stockholders' Equity
Mandatorily
Redeemable
Convertible Common Stock
Preferred Stock
Deferred Stockholder
Additional Stock Accumulated Notes
Shares Amount Shares Amount Paid-in Capital Compensation Deficit Receivable Total
---------- -------- ---------- ------ --------------- ------------ ----------- ----------- -------
BALANCE, SEPTEMBER 30, 1994 2,459,834 $ 3,635 14,715,789 $15 $22,456 $-- $(6,260) $(9) $16,202
Sale of common stock -- -- 263,813 -- 671 -- -- -- 671
Repayment of stockholder -- -- -- -- -- -- 9 9
note receivable
Income tax benefit from -- -- -- 350 -- -- -- 350
exercise of stock
options
Sale of mandatorily 1,047,394 5,980 -- -- -- -- (40) -- (40)
redeemable convertible
preferred stock and
related issuance costs
Issuance of mandatorily 178,512 1,020 -- -- -- -- -- -- --
redeemable convertible
preferred stock for
conversion of notes
payable and accrued
interest
Issuance of common stock -- -- 127,483 -- 73 -- -- -- 73
Net loss -- -- -- -- -- -- (1,177) -- (1,177)
---------- -------- ---------- ------ --------------- ------------ ----------- ----------- -------
BALANCE, SEPTEMBER 30, 3,685,740 10,635 15,107,085 15 23,550 -- (7,477) -- 16,088
1995
Sale of common stock in -- -- 1,500,000 2 29,503 -- -- -- 29,505
secondary public
offering
Sale of common stock -- -- 1,049,413 1 2,291 -- -- -- 2,292
upon exercise of
warrants and options
Income tax benefit from -- -- -- -- 2,491 -- -- -- 2,491
exercise of stock
options
Sale of mandatorily 48,411 360 -- -- -- -- -- -- --
redeemable convertible
preferred stock
Deferred stock -- -- -- -- 476 (476) -- -- --
compensation
Amortization of deferred -- -- -- -- -- 33 -- -- 33
stock compensation
Elimination of IAS and -- -- (157,336) -- -- -- 838 -- 838
CRS net activity for the
three months ended
December 31, 1995
Net income -- -- -- -- -- -- 1,196 -- 1,196
---------- -------- ---------- ------ --------------- ------------ ----------- ----------- -------
BALANCE, SEPTEMBER 30, 3,734,151 10,995 17,499,162 18 58,311 (443) (5,443) -- 52,443
1996
Conversion of (3,734,151) (10,995) 3,734,151 3 10,992 -- -- -- 10,995
mandatorily redeemable
convertible preferred
stock into common stock
Stock compensation costs -- -- -- -- 1,886 -- -- -- 1,886
related to accelerated
vesting of stock options
Amortization of deferred -- -- -- -- -- 443 -- -- 443
stock compensation
Sale of common stock -- -- 762,581 1 3,803 -- -- -- 3,804
upon exercise of
warrants and options
Shares issued for -- -- 64,500 -- 2,233 -- -- -- 2,233
services in connection
with acquisition
Income tax benefit from -- -- -- -- 3,710 -- -- -- 3,710
exercise of stock
options
Net income -- -- -- -- -- -- 4,980 -- 4,980
---------- -------- ---------- ------ --------------- ------------ ----------- ----------- -------
BALANCE, SEPTEMBER 30, -- -- 22,060,394 $22 $80,935 -- $ (463) -- $80,494
1997
---------- -------- ---------- ------ --------------- ------------ ----------- ----------- -------
---------- -------- ---------- ------ --------------- ------------ ----------- ----------- -------
See accompanying notes.
16
ACCESS HEALTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED SEPTEMBER 30,
-------------------------
1995 1996 1997
-------- ------ ------
Cash flows from operating activities:
Net income (loss) $(1,177) $1,196 $4,980
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Provision for doubtful accounts 285 210 18
Depreciation and amortization 2,251 4,378 6,622
Impairment loss on interests in AHN -- -- 10,000
Deferred stock compensation -- 33 443
Accelerated vesting of stock options -- -- 1,886
Common stock issued for services -- -- 2,233
Notes payable to related parties -- 1,500 --
Deferred income taxes 391 (482) (7,735)
Changes in:
Accounts and licenses receivable (2,306) (7,215) (1,582)
Income taxes receivable 1,530 658 2,396
Prepaid expenses and other current assets (245) (2,179) (296)
Accounts payable 1,138 1,956 (140)
Accrued payroll and related expenses 1,662 1,666 644
Accrued integration and restructuring costs -- -- 3,109
Other accrued expenses 590 3,292 602
Deferred revenue 1,365 4,023 3,836
------ ------ ------
Net cash provided by operating activities
5,484 9,036 27,016
------ ------ ------
Cash flows from investing activities:
Purchases of available-for-sale securities (6,919) (33,259) (73,206)
Maturities of available-for-sale securities 4,256 24,305 45,363
Purchase of property and equipment (5,484) (11,775) (6,634)
Investments in and notes receivable from AHN -- (5,000) (5,000)
(Increase) decrease in other assets (172) 358 593
------ ------ ------
Net cash used by investing activities
(8,319) (25,371) (38,884)
------ ------ ------
Cash flows from financing activities:
Payment of long-term debt and capital leases (342) (827) (1,177)
Payment of stockholder note receivable 9 -- --
Notes payable to related parties -- -- (236)
Sale of mandatorily redeemable convertible preferred stock 5,980 360 --
Proceeds from note payable -- 680 --
Sale of common stock 671 31,797 3,804
------ ------ ------
Net cash provided by financing activities
6,318 32,010 2,391
------ ------ ------
Net increase (decrease) in cash and equivalents
3,483 15,675 (9,477)
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 7,372 10,855 26,976
------ ------ ------
Cash and equivalents at end of year $10,855 $26,976 $17,499
------ ------ ------
------ ------ ------
Non-Cash Financing Activities
Income tax benefit from exercise of common stock $350 $2,491 $3,710
------ ------ ------
------ ------ ------
See accompanying notes.
17
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BUSINESS AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of Access Health, Inc. 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, the Company entered into business combinations with Informed
Access Systems, Inc., ("Informed Access") and Clinical Reference Systems,
Ltd., ("CRS") during November of 1996 and InterQual, Inc. ("InterQual")
during June of 1998. The business combinations have been accounted for as
poolings-of-interests and the historical consolidated financial statements of
the Company for all dates and periods prior to the business combinations have
been restated to include the financial positions, results of operations and
cash flows of Informed Access, CRS and InterQual.
The Company develops, markets and supports care management programs
which help managed care organizations, insurers, self-insured employers,
physician groups and hospitals manage consumer demand for health care
services. The Company operates primarily in the United States.
REVENUE RECOGNITION
Revenues include care management services, which consist of program
membership, member communications and teleservicing fees from the Company's
Personal Health Advisor-Registered Trademark-, FirstHelp-TM- and
ASK-A-NURSE-Registered Trademark- contracts with managed care organizations,
insurers, self-insured employers and hospitals. Revenues also include
licensing and support services related to the Company's products including
InterQual Clinical Decision Support Criteria, ASK-A-NURSE-Registered
Trademark-, FirstHelp-TM-, patient education software, Access Care Management
System ("ACMS"), HealthSelect, and Cancer HELPLINK-Registered Trademark-.
Program membership fees from Personal Health Advisor-Registered
Trademark-and FirstHelp-TM- 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.
License revenues from InterQual Clinical Decision Support Criteria,
ASK-A-NURSE-Registered Trademark-, FirstHelp-TM-, ACMS and Cancer
HELPLINK-Registered Trademark- are recognized ratably over the term of the
contract. During fiscal 1995, revenues from ASK-A-NURSE-Registered
Trademark-and Cancer HELPLINK-Registered Trademark- were recognized when
implementation services were substantially complete, no significant
continuing obligations remained and collection was probable. Fees billable
more than one year after the license grant date are discounted at the prime
rate (which ranged from 6% to 9% for the periods presented), plus 3%.
HealthSelect and patient education software revenue is recognized upon
delivery of the software.
Support revenues are comprised of 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. Fees for direct marketing and other services are recognized upon the
delivery of services.
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.
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 original maturities of three months or less to be
cash equivalents. Available-for-sale securities are recorded at amounts that
approximated fair value as of September 30, 1996 and 1997 and are available
to fund current operations.
18
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 cost of internally developed
software and purchased software and is being amortized on the straight-line
basis over an estimated useful life of four years.
PURCHASED INTANGIBLE ASSETS
Purchased intangible assets consist primarily of product rights and are
being amortized on the straight-line basis over three to ten years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the difference between the carrying value and fair value of the
long-lived asset.
INTERESTS IN AHN
In April 1996, the Company invested $5.0 million in America's Health
Network, L.P. ("AHN"), a 24-hour 7 days a week cable television channel
devoted to consumer health care information. The Company is a limited partner
in AHN. In 1996 the investment in AHN was accounted for using the cost
method. During January 1997, the Company purchased an 8% Convertible
Subordinated Debenture from AHN in the face amount of $5.0 million. The
debenture, which matures on December 31, 2001, is unsecured and subordinated
to all other debt owed by AHN. Interest accrues at 8% annually and is only
payable under certain conditions as described in the agreement. The debenture
is convertible into partnership interests at the option of the holder.
During fiscal 1997, AHN's majority owner and principal financial
sponsor, The Providence Journal Company ("PJC") was acquired by AH Belo Corp
("Belo"). Subsequent to Belo's acquisition of PJC in February 1997, Belo
indicated that it did not intend to provide additional financing to AHN and
pursued alternate financing and operating strategies for AHN. On July 31,
1997, Belo terminated its 65 percent ownership interest in AHN when a
previously announced agreement to sell its interest in AHN to Columbia/HCA
Healthcare Corp. ("Columbia") was terminated. As a result of losing its
principal financial sponsor and not being able to obtain additional
financing, AHN suspended daily operations and furloughed the majority of its
employees. Accordingly, the Company determined the equity investment and the
subordinated debenture were not recoverable and they were written off in the
fourth quarter of fiscal 1997.
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and trade receivables. The Company places its cash investments
with high credit quality banks and financial institutions and invests
primarily in US government and high-grade municipal debt securities and
corporate debt securities. Concentration of credit risk with respect to trade
receivables are limited because the Company's accounts and licenses
receivable are with a large number of companies. A large number of the
Company's clients are in the health care and insurance industries and the
Company generally does not require collateral. The Company provides for known
and unknown uncollectible accounts and licenses receivable.
During fiscal 1997, the Company had no clients that represented over 10%
of total revenue. During fiscal 1996, the Company had one customer that
represented over 10% of total revenue. Sales to this customer were
$10,609,000 during fiscal 1996. During fiscal 1995, the Company had two
customers which each represented over 10% of total revenues. Sales to these
customers in fiscal 1995 were $6,569,000 and $4,484,000.
19
STOCK SPLIT
On February 15, 1996, the Company effected a three-for-two common stock
split. All references in the accompanying financial statements to the number
of common shares and per-share amounts have been retroactively restated to
reflect the stock split.
NET INCOME (LOSS) PER SHARE
In connection with the filing of its quarterly report for the first
quarter of fiscal year 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128") "Earning per Share". This statement
establishes standards for computing and presenting basic and diluted earnings
per share. Under this statement, basic earnings or loss per share is computed
by dividing the net earnings or loss by the weighted average number of shares
of common stock outstanding. Diluted earnings or loss per share is determined
by dividing the net earnings or loss by the sum of (1) the weighted average
number of common shares outstanding, (2) if not anti-dilutive, the number of
shares of convertible preferred stock as if converted upon issuance, and (3)
if not anti-dilutive, the effect of outstanding stock options determined
utilizing the treasury stock method. As a result of adopting SFAS 128,
reported (loss) earnings per share for the years ended September 30, 1995,
1996 and 1997 were restated. The effect of this accounting change on
previously reported (loss) earnings per share was as follows:
SEPTEMBER 30,
1995 1996 1997
------ ------ ------
Primary (loss) earnings per share $(0.08) $ 0.05 $ 0.21
Effect of SFAS 128 -- 0.02 0.02
------ ------ ------
Basic (loss) earnings per share as (0.08) 0.07 0.23
Effect of SFAS 128 -- (0.02) (0.02)
------ ------ ------
Diluted (loss) earnings per share $(0.08) $0.05 $ 0.21
------ ------ ------
------ ------ ------
A reconciliation of the numerators and the denominators of the basic and
diluted per share computations for income (loss) for the years ended
September 30, 1995, 1996 and 1997 are as follows:
FOR THE YEAR ENDED SEPTEMBER 30, 1995
-------------------------------------
INCOME (Loss) SHARES PER SHARE
------------- ------ AMOUNT
---------
Net loss $(1,177,000)
Basic and diluted earnings (loss) per share:
Income (loss) available to common $(1,177,000) 14,814,000 $(0.08)
stockholders
------------ ---------- ------
Options to purchase approximately 1.9 million shares of Access Health's
common stock and convertible preferred stock that were convertible into
approximately 3.7 million shares of Access Health's common stock were
outstanding as of September 30, 1995 but were not included in the computation
of diluted earnings per share because they were anti-dilutive.
20
FOR THE YEAR ENDED SEPTEMBER 30, 1996
-------------------------------------
INCOME SHARES PER SHARE
------------- ------ AMOUNT
---------
Net income $1,196,000
Basic earnings per share:
Income available to common stockholders $1,196,000 16,698,000 $0.07
---------- ------
Options issued to directors and employees 2,276,000
Common stock issuable from Convertible preferred stock
3,693,000
---------
Diluted earnings per share:
Income available to common stockholders $1,196,000 22,667,000 $0.05
---------- ---------- -----
FOR THE YEAR ENDED SEPTEMBER 30, 1997
-------------------------------------
INCOME SHARES PER SHARE
------------- ------ AMOUNT
---------
Net income $4,980,000
Basic earnings per share:
Income available to common stockholders $4,980,000 21,668,000 $0.23
---------- -----
Options issued to directors and employees 2,224,000
----------
Diluted earnings per share:
Income available to common stockholders $4,980,000 23,892,000 $0.21
---------- ---------- -----
---------- ---------- -----
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. A valuation allowance is established for deferred tax assets
(deductible temporary differences and credit and net operating loss
carryforwards) that, on a more likely than not basis, are not expected to be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and equivalents,
available-for-sale securities, trade receivables and long-term debt. The
carrying values of cash and equivalents, available-for-sale securities and
trade receivables 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, 1996 and 1997, approximates
the carrying value.
STOCK ISSUED TO EMPLOYEES
As permitted under the provisions of Financial Accounting Standards No.
123 "Accounting for Stock Based Compensation" ("SFAS 123"), the Company has
elected to account for stock-based compensation for employees using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price or fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock.
21
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amounts
of assets and liabilities and 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.
NEW ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which is required to be adopted for fiscal years beginning after December 15,
1997. This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management has determined this change will
not significantly affect its financial reporting. The Company expects to
adopt Statement No. 130 in the first quarter of fiscal 1999. For all
periods presented, comprehensive income is the same as net income.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. The statement requires that a public company report
financial and descriptive information about its reportable operating segments
using the management approach. Management has determined this change will not
significantly affect its financial reporting. The Company expects to adopt
Statement No. 131 in the first quarter of fiscal 1999.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
Statement No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
1998 and thereafter). Statement No. 133 cannot be applied retroactively.
Statement No. 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (and, at the
company's election, before January 1, 1998).
The Company does not typically enter into arrangements that would fall under
the scope of Statement No. 133. The Company's management has not yet
quantified the impacts of adopting Statement No. 133 on the Company's
financial statements and has not determined the timing of or method of the
Company's adoption of Statement 133. However, should the Company determine to
utilize the arrangements covered by Statement No. 133, the Statement could
increase volatility in earnings and other comprehensive income. Because the
Company has not historically entered into such arrangements, management
believes that the Statement No. 133 will not significantly affect its
financial reporting.
22
STATEMENT OF POSITION 98-1
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This statement is effective for fiscal years beginning after
December 15, 1998, although earlier application is permitted. In general,
SOP 98-1 requires that certain costs to develop software for internal use be
capitalized. These requirements are to be applied prospectively from the
date of the Company's adoption. The Company does not anticipate any adverse
impact on its financial position and results of operations.
STATEMENT OF POSITION 98-5
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". This statement is effective for financial statements
for fiscal years beginning after December 15, 1998. In general, SOP 98-5
requires costs of start-up activities and organization costs to be expensed
as incurred. Initial application of SOP 98-5 should be reported as the
cumulative effect of a change in accounting principle. Management believes
that the adoption of SOP 98-5 will not have a material impact on its
financial statements.
NOTE 2: BUSINESS COMBINATIONS
During November 1996, the Company completed mergers with Informed Access
in exchange for 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 grants to Informed Access option holders) and CRS, in
exchange for 170,000 issued shares of Access Health common stock. During
June 1998, the Company completed the merger with InterQual, Inc.
("InterQual") in exchange for 4,540,000 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, CRS and InterQual for all dates and periods presented.
The consolidated statements of operations and accompanying notes for the
fiscal year ended September 30, 1995 include the operations of Informed
Access and CRS for the calendar year ended December 31, 1995. The
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. The
combined revenues and net income (loss) of Informed Access and CRS for the
three months ended December 31, 1995 were $1,814,000 and $(838,000),
respectively. 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 consolidated
statements of operations and accompanying notes of the Company for the fiscal
years ended September 30, 1995, 1996 and 1997 include the operations of
InterQual for the calendar years ended December 31, 1995, 1996 and 1997,
respectively. Subsequent to the consummation of this business combination,
the fiscal year-end of InterQual was changed from December 31 to September 30
to conform to the fiscal year-end of Access Health.
23
The table below sets forth the combining and combined revenues and net
income (loss) for the fiscal years ended September 30, 1995, 1996 and 1997
(in thousands):
ACCESS HEALTH INFORMED ACCESS CRS INTERQUAL ADJUSTMENT COMBINED
------------- --------------- ------ --------- ---------- --------
1995
Revenues $31,553 $ 2,957 $1,500 $6,755 -- $42,765
Net income (loss) 1,540 (3,745) 226 (496) $1,298 (1,177)
1996
Revenues $62,073 $8,668 $1,362 $10,733 -- $82,836
Net income (loss) 8,125 (6,007) (391) 102 $(633) 1,196
1997
Revenues $104,327 N/A N/A $16,315 $120,642
Net income 4,618 N/A N/A 362 4,980
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 reversed in 1997.
Integration and restructuring costs related to the mergers of Informed
Access and CRS were recorded in the amounts of $7.0 million and $2.7 million
during the first and fourth quarters of fiscal 1997, respectively.
Integration and restructuring costs include: $7.2 million for severance,
outplacement and relocation costs specifically related to the merger; $1.2
million related to the closure and elimination of duplicate leased
facilities, primarily corporate headquarters, a sales office and a call
center; and $1.3 million related to the write-off of computer hardware and
other assets which were made obsolete as a result of the merger and duplicate
information systems. Total expected cash expenditures relating to the merger
charge are estimated to be approximately $6.7 million, of which approximately
$3.6 million was disbursed prior to September 30, 1997. The remaining
merger-related accrual at September 30, 1997 was approximately $3.1 million.
Termination benefits received by employees terminated through September 30,
1997 were approximately $4.5 million. Substantially all of the remaining
severance and outplacement amounts were paid during fiscal 1998.
Transaction, integration and restructuring costs related to the merger
of InterQual, Inc. are anticipated to be approximately $9.0 million and will
be reflected in fiscal year 1998. Approximately $5.6 million is anticipated
to be spent on transaction related payments to bankers, financial advisors,
legal firms and accounting firms. Approximately $3.4 million is anticipated
to be incurred related to severance and other integration activities.
NOTE 3: AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities as of
September 30, 1996 and 1997 (in thousands):
1996 1997
-------- -------
U.S. government and municipal debt securities $ 23,789 $ 8,237
Corporate debt securities 6,451 7,968
Corporate and municipal bond funds 9,526 28,631
-------- -------
Total available-for-sale securities 39,766 44,836
Less: amounts included in cash and equivalents (25,640) (2,867)
-------- -------
$ 14,126 $41,969
-------- -------
-------- -------
Realized and unrealized gains and losses on available-for-sale
securities were immaterial as of and for the years ended September 30, 1996
and 1997.
24
The carrying value of available-for-sale securities at September 30,
1997, by contractual maturity, are shown below (in thousands).
Less than 1 year $21,264
1 to 5 years 5,116
5 to 10 years 0
After 10 years 18,456
-------
Total available-for-sale securities $44,836
-------
-------
NOTE 4: PROPERTY AND EQUIPMENT
As of September 30, 1996 and 1997, property and equipment consisted of
the following (in thousands):
1996 1997
------- --------
Computer equipment $16,830 $ 21,019
Office furniture and equipment 4,730 5,705
Computer software 2,433 3,168
Leasehold improvements 1,560 1,698
------- --------
25,553 31,590
Less: accumulated depreciation (8,096) (13,824)
------- --------
$17,457 $17,766
------- --------
------- --------
NOTE 5: NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist primarily of notes payable
arising from bonuses to members of Access Health management who are also
stockholders of the Company, and were paid January 1998. The outstanding
balances were $1,500,000 and $1,264,000 at September 30, 1996 and September
30, 1997, respectively.
NOTE 6: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The Company has a term facility agreement (the "Term Agreement") whereby
through December 1996 the Company could borrow, in one or more borrowings, an
amount not to exceed $2.0 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, 1997, cumulative borrowings under the note payable facility and
capital lease facility aggregated $395,000 and $676,000, respectively (at
September 30, 1996, borrowings under the note payable facility and capital
lease facility were $591,000 and $953,000, respectively). Borrowings under
the Term Agreement are secured by certain of the Company's equipment with a
net book value of approximately $1,200,000 at September 30, 1997.
Amounts payable under the Term Agreement 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 $198,000 and $197,000 in
fiscal 1998 and 1999, respectively.
In connection with the Term Agreement, the Company issued warrants to
the lender in October 1995 and May 1996. The warrants were converted into
8,638 shares of common stock in 1997.
The Company had other capital leases outstanding aggregating $335,000 at
September 30, 1997 and $436,000 at September 30, 1996.
25
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, 1997 (in thousands):
FISCAL YEAR
-----------
1998 $ 586
1999 503
2000 64
2001 26
2002 9
------
1,188
Less: amount representing interest and taxes (177)
------
Present value of future minimum lease payments 1,011
Less: current portion (469)
------
Capital lease obligations, long-term $542
------
------
In June 1996, InterQual established a line of credit agreement for
$750,000 with a bank, renewable annually. In December of 1997, a new line of
credit was established for $2,000,000. Under the agreement, borrowings are
due on demand and bear interest at the bank's prime rate (8.5% and 8.25% as
of December 31, 1997 and 1996). The note is secured by substantially all
assets of InterQual and requires that certain covenants be met. The Company
met all covenants as of the end of fiscal 1997. In accordance with the terms
of the agreement, the line of credit terminated upon merger with Access
Health. The balance outstanding was $200,000 and $0 at the end of fiscal
1996 and 1997, respectively.
InterQual had certain other notes payable to banks and finance companies
with outstanding balances of $194,000 and $31,000 at the end of fiscal 1996
and fiscal 1997, respectively. These notes were secured by assets of the
Company and had interest rates ranging from 8% to 8.75%. Monthly principal
payments totaled approximately $6,000 and mature on various dates through
October 2001.
Interest paid during the years ended September 30, 1995, 1996 and 1997
was $141,000, $193,000 and $403,000, respectively.
NOTE 7: INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
Year ended September 30,
------------------------
1995 1996 1997
------ ------ -------
Federal:
Current $(716) $5,153 $ 4,079
Deferred 188 (647) (6,189)
----- ------ -------
Total federal (528) 4,505 (2,111)
State:
Current (207) 1,787 1,607
Deferred 97 (183) (1,546)
----- ------ -------
Total state (110) 1,604 61
----- ------ -------
Provision (benefit) for income taxes $(638) $6,110 $(2,050)
26
The income tax provision (benefit) differs 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 to the
effective income tax rate is as follows:
YEAR ENDED SEPTEMBER 30,
------------------------
1995 1996 1997
---- ---- ----
Statutory federal income tax rate (34%) 34% 34%
State income taxes, net of federal benefit (2) 15 2
Tax exempt interest income -- (2) (4)
Transaction costs -- -- 39
Amortization -- -- (6)
Utilization of net operating loss -- -- (136)
Unconsolidated operating loss with no current 5 36 --
benefit
Other (4) 1 0
--- --- ----
Effective income tax rate (35%) 84% (70)%
--- --- ----
--- --- ----
Significant components of the Company's deferred income tax assets and
liabilities at September 30, 1996 and 1997 are as follows (in thousands):
1996 1997
------- -------
Deferred income tax liabilities:
Depreciation and amortization $ 1,124 $ 1,059
Prepaid expenses 2,354 2,933
------- -------
Total deferred income tax liabilities 3,478 3,992
Deferred income tax assets:
Research and development credit 161 161
Amortization 954 1,016
Vacation accrual 305 441
Accrued expenses 784 1,548
Deferred revenue 2,604 4,259
State income taxes 386 243
Receivable allowances and reserves 322 3,461
Investment loss -- 3,183
Net operating loss 4,243 371
Other 60 17
------- -------
Total deferred income tax assets 9,819 14,700
Less: valuation allowance (3,739) (371)
------- -------
Net deferred income tax asset $2,602 $10,337
------- -------
Current portion 2,602 9,295
Long term portion 0 1,042
------- -------
Total net deferred income tax asset $2,602 $10,337
------- -------
------- -------
Income tax payments were $72,100, $6,638,000 and $2,800,000 for the
years ended September 30, 1995, 1996 and 1997, respectively. The Company
received income tax refunds totaling $1,629,658 during the year ended
September 30, 1995.
During 1997, the Company liquidated one of its subsidiaries, resulting
in the ability to utilize the net operating loss and reduce the valuation
allowance by $3,368,000. The Company has a state net operating loss carry
forward of approximately $6,700,000 that expires between 2007 and 2011. The
Company also has approximately $161,000 of federal research and development
credits which expire between 2007 and 2011.
27
Realization of the Company's net deferred tax assets is dependent upon
the Company generating sufficient taxable income in future years in
appropriate tax jurisdiction to obtain benefit from the reversal of temporary
differences and from tax credit carryforwards. The amount of deferred tax
assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are reduced.
NOTE 8: COMMITMENTS
OPERATING LEASES
The Company leases its offices and certain equipment under the terms of
operating leases that expire between September 1998 and December 2012.
Minimum lease payments under these agreements are as follows:
Minimum
Lease
Fiscal Year Payments
----------- ----------
1998 $3,442,000
1999 3,307,000
2000 3,073,000
2001 3,028,000
2002 1,957,000
Thereafter 20,220,000
-----------
Total $35,027,000
-----------
-----------
Rental expenses are recorded on a straight-line basis over the respective
lease terms and were $1,992,000, $2,348,000 and $2,968,000 for the years
ended September 30, 1995, 1996 and 1997, respectively.
NOTE 9: 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 certain of the Company's
original Access Health, Inc. venture capital stockholders. Net proceeds to
the Company from the offering were approximately $29.5 million.
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 directors. As
of September 30, 1996, 3,734,151 aggregate shares of Series A, B, and C
mandatorily redeemable preferred stock were issued and outstanding. Each
share of mandatorily redeemable preferred stock was converted into one share
of common stock upon completion of the merger with Informed Access (Note 2).
STOCK OPTIONS
At September 30, 1997, the Company has four stock-based compensation
plans, which are described below. The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employee" ("APB 25") and related interpretations in accounting for its
employee stock options. The Company has provided proforma disclosures below
that are calculated using fair value accounting under SFAS No. 133.
28
EMPLOYEE OPTIONS
The Company established an employee common stock option plan in 1989
(the "1989 Plan") under which incentive stock options, nonqualified stock
options, and restricted common stock may be issued or sold to employees and
consultants. As of September 30, 1997, a total of 3,550,000 shares of common
stock have been reserved for issuance under these plans, of which 127,647
shares remained available for the granting of options at September 30, 1997.
Incentive stock options generally become exercisable at the rate of
twenty percent per year commencing on the first anniversary of the date of
grant. As of September 30, 1996 and 1997, options to purchase 330,221 shares
at exercise prices ranging from $0.167 to $12.42 per share and 677,129 shares
at exercise prices ranging from $0.333 to $39.00 per share, respectively,
were exercisable.
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 was
to be amortized into expense ratably over the four year vesting term of the
related options; however, because such options became 100% vested as a result
of the merger with Informed Access in November 1996, the unamortized balance
of deferred stock compensation was recorded as an expense in the quarter
ended December 31, 1996.
On November 18, 1996, options to acquire 739,500 shares of common stock
under the Informed Access employee stock option plan converted to options to
acquire 596,593 shares of Access Health common stock. As of September 30,
1997, 297,055 shares were outstanding and 291,693 were exercisable at prices
ranging from $0.18 to $14.375 per share.
On June 30, 1998, options to acquire 1,922 shares of common stock under
InterQual's non qualified stock option plan were exercised and the resulting
common shares of InterQual stock were converted upon the merger into 725,765
shares of Access Health common stock with exercise prices (after conversion)
ranging from $0.08 to $0.25.
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, 1997, a total of
150,000 shares of common stock have been reserved for issuance under this
plan, of which 93,750 shares remained available for the granting of options
at September 30, 1997. As of September 30, 1997, options to purchase 56,250
shares were granted and 32,812 shares were exercisable at prices ranging from
$10.25 to $54.25 per share.
SUPPLEMENTAL PLAN
The Company established a Supplemental Plan in fiscal 1997 (the
"Supplemental Plan") under which nonqualified stock options may be granted to
employees and consultants. As of September 30, 1997, a total of 1,000,000
shares of common stock have been reserved for issuance under this Plan, of
which 706,058 had been granted, 153,154 were cancelled and 447,096 were
available for grant. As of September 30, 1997, 5,000 were exercisable at
prices ranging from $14.375 to $33.125 per share.
29
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 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 lower
fair market values of a share of common stock of the Company as of the
beginning or end of each six-month offering period. During the years ended
September 30, 1995, 1996 and 1997, the Company sold 48,548 shares of common
stock for $468,710, 41,659 shares of common stock for $753,146 and 42,272
shares of common stock for $990,239, respectively. For purposes of
calculating the pro forma disclosures required by SAFS 123, the fair value of
the employee's purchase rights was estimated using the Black-Scholes option
pricing model with the following assumptions for the years ended September
30, 1996 and 1997: dividend yield of 0; expected life of 6 months; expected
volatility of 72.2%; and risk-free interest rate of 5.70% for both periods.
The weighted-average fair value per share of those purchase rights granted
during the years ended September 30, 1996 and 1997, were $7.61 and $12.33,
respectively.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 PRO FORMA DISCLOSURES
Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS 123, which also requires that the information
be determined as if the Company has accounted for its employee stock options
granted subsequent to October 1, 1995 under the fair value method of SFAS
123. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
for fiscal 1996 and 1997: risk-free interest rate range of 5.70% to 6.77%; a
dividend yield of 0%; volatility factors of the expected market price of the
Company's common stock of 72.2%; and an average expected life of the option
of 3.0 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period. The Company's pro
forma information, which includes the stock option plans and the employee
stock purchase plan follows (in thousands, except for per share information):
YEARS ENDED SEPTEMBER 30,
-------------------------
1996 1997
---- ----
Net income as reported $1,196 $4,980
Net loss pro forma (18,253) (3,824)
Net income per share as reported
Basic 0.07 0.23
Diluted 0.05 0.21
Net loss per share pro forma
Basic (1.09) (0.18)
Diluted (1.09) (0.18)
Because SFAS 123 is applicable only to options granted subsequent to
October 1, 1995, its pro forma effect will not be fully reflected until 2000.
30
A summary of the Company's stock option activity, and related
information for the years ended September 30, 1995, 1996 and 1997 follows:
OPTIONS WEIGHTED-AVERAGE
------- EXERCISE PRICE
----------------
Balance, September 30, 1994 1,467,537
---------
Options granted 705,181
Options exercised (192,632)
Options cancelled (102,195)
---------
Balance, September 30, 1995 1,877,891
Options granted 2,284,382 $17.77
Options exercised (510,869) 2.53
Options cancelled (358,854) 17.37
---------
Balance, September 30, 1996 3,292,550
Options granted 3,040,627 22.27
Options exercised (659,731) 4.06
Options cancelled (1,517,524) 30.36
---------
Balance, September 30, 1997 4,155,922
---------
---------
The weighted-average grant date fair value of options granted in 1996
and 1997 was $25.81 and $22.27, respectively.
The following summarized information related to options outstanding and
options exercisable at September 30, 1997:
RANGE OF OPTIONS WEIGHTED AVERAGE OPTIONS
EXERCISE PRICES OUTSTANDING REMAINING CONTRACTUAL EXERCISABLE
--------------- ----------- LIFE (IN YEARS) -----------
---------------------
$ 0.08 - $ 4.16 1,131,757 7.76 1,105,941
$ 4.33 - $14.12 345,556 4.73 204,989
$14.37 - $14.37 1,509,487 9.45 59,135
$15.33 - $17.83 435,260 8.04 279,060
$18.66 - $29.45 61,362 9.02 15,674
$30.00 - $30.00 450,000 9.53 5,000
$33.12 - $34.62 115,000 9.13 53,750
$39.00 - $39.00 500 8.72 100
$50.62 - $50.62 92,000 3.60 46,000
$54.25 - $54.25 15,000 8.83 8,750
--------- ---------
4,155,922 1,778,399
--------- ---------
--------- ---------
COMMON STOCK WARRANTS AND OPTIONS
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, 1997, 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, 1997, 15,000 shares of common stock
have been purchased pursuant to these options and 3,000 of the remaining
7,500 shares are exercisable.
31
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 left
the Company during the first year after the grant date and half of the shares
if the officer left the Company during the second year after the grant date.
That officer left the Company April 1, 1997 and all shares were vested
pursuant to agreement with such officer. The value of the shares, at the
market price on the date of grant ($50.625 per share), was charged to
operations at that time.
During 1996, the Company granted nonqualified stock options to purchase
230,000 shares of common stock at $50.625 per share to an officer. That
officer left the Company April 1, 1997. Pursuant to the separation agreement
and consistent with the option agreement, options for 92,000 shares become
exercisable in equal installments over a two-year period commencing on the
first anniversary of the date of grant. As of September 30, 1997, 46,000
shares are exercisable through April 1999. The remainders have been canceled.
During 1997, the Company granted nonqualified stock options to purchase
33,000 shares of common stock at $14.375 per share to an officer. The options
will become exercisable in equal installments over a five-year period
commencing on the first anniversary of the date of grant. As of September 30,
1997, none of the shares are exercisable.
NOTE 10: BUSINESS SEGMENTS
The Company operates in two business segments: The care management
products and services sector, consisting primarily of services provided
through its four nurse staffed, telephonic call centers to the health care
industry; and clinical decision support information ("Criteria") which are
marketed primarily through licenses to the health care industry.
Revenue, operating income, capital expenditures, depreciation and
identifiable assets are set forth in the following table. Identifiable
assets are those assets used exclusively in the operations of each business
segment. All assets of the Company were identifiable to either segment.
Business Segments
(In Thousands)
Care management
products & Clinical decision
services support information Consolidated
1995 --------------- ------------------- ------------
- ----
Sales to Customers $36,010 $6,755 $42,765
Operating Income (1,650) (888) (2,538)
Identifiable Assets 37,082 5,298 42,380
Capital Expenditures 5,163 321 5,484
Depreciation & Amortization 2,181 70 2,251
1996
Sales to Customers $72,103 $10,733 $82,836
Operating Income 5,697 201 5,898
Identifiable Assets 84,292 7,853 92,145
Capital Expenditures 11,063 712 11,775
Depreciation & Amortization 4,228 150 4,378
1997
Sales to Customers $104,327 $16,315 $120,642
Operating Income 10,397 708 11,105
Identifiable Assets 102,654 12,897 115,551
Capital Expenditures 5,696 938 6,634
Depreciation & Amortization 6,310 312 6,622
32
NOTE 11: SUBSEQUENT EVENTS
On September 28, 1998, Access Health entered into a merger agreement
with HBO & Company ("HBOC"). The merger, which is subject to regulatory
approval, Access Health stockholder approval, customary closing conditions
and consents is intended to be accounted for as pooling-of-interests and is
anticipated to close during the fourth calendar quarter of 1998.
Stockholders of Access Health will receive shares of HBOC common stock, in a
tax-free transaction, with the exchange ratio to be determined by averaging
the closing HBOC stock price for a period ending shortly before Access
Health's stockholder meeting. If the HBOC average price during this period
is $30.00 or below, Access Health stockholders will receive 1.45 HBOC shares
for each Access Health share. If the price is greater than $30.00 during
this period, Access Health Stockholders will receive shares of HBOC stock
equal to a value of $43.50 per Access Health share.
33