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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K/A
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
November 29, 1999
(Date of earliest event reported)
OnHealth Network Company
(Exact name of registrant as specified in its charter)
Commission file number: 0-22212
Washington 41-1686038
(State of incorporation or organization) (IRS Employer Identification No.)
808 Howell Street, Suite 400 Seattle, Washington 98101
(Address of principal executive offices)
(206) 583-0100
(Registrant's telephone number, including area code)
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<PAGE>
Introduction
This Amendment Number 2 to OnHealth Network Company's Form 8-K, initially filed
December 14, 2000 and amended February 14, 2000 is being filed solely to attach
an un-redacted version of the Company's Merger Agreement with Health Decisions
International for which confidential treatment of certain provisions had been
sought.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On November 29, 1999, OnHealth Network Company, a Washington corporation (the
"Company"), acquired Health Decisions International, LLC, a Colorado limited
liability company ("HDI, LLC"). The acquisition of HDI, LLC was completed
through the merger of two wholly owned subsidiaries of the Company with and into
Demand Management, Inc., a Colorado corporation ("DMI") and Health Decisions,
Inc., a Colorado corporation ("HDINC"). DMI and HDINC are the sole members of
HDI, LLC (collectively "HDI").
In the two mergers, the Company issued 1,004,227 shares of its common stock,
subject to certain contingencies, to Donald M. Vickery, the sole shareholder of
HDINC and DMI. In addition, the Company is obligated to issue shares of the
Company's common stock or to pay in cash total consideration of approximately
$3,217,000 to satisfy obligations of HDI existing as of the closing of the
mergers. The acquisition will be accounted for using the purchase method of
accounting. Health Decisions International offers software tools and telephone
counseling by nurses that guide its six million members through the health
information maze to help them make more informed health choices.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
<TABLE>
<CAPTION>
Demand Management, Inc. and Health Decisions International, LLC
Audited Financial Statements:
<S> <C>
Report of Grant Thornton LLP, Independent Certified Public Accountants........................ 4
Consolidated Balance Sheet as of December 31, 1998............................................ 5
Consolidated Statement of Operations for the year ended December 31, 1998..................... 6
Consolidated Statement of Stockholder's Equity (Deficit) for the year ended
December 31, 1998........................................................................... 7
Consolidated Statement of Cash Flows for the year ended December 31, 1998..................... 8
Notes to Consolidated Financial Statements.................................................... 9
Health Decisions, Inc.
Audited Financial Statements:
Report of Grant Thornton LLP, Independent Certified Public Accountants........................ 14
Balance Sheet as of December 31, 1998....................................................... 15
Statement of Operations for the year ended December 31, 1998.................................. 16
Statement of Stockholders' Equity (Deficit) for the year ended December 31, 1998.............. 17
Statement of Cash Flows for the year ended December 31, 1998.................................. 18
Notes to Financial Statements................................................................. 19
Health Decisions, Inc. and Health Decisions International, LLC
Audited Financial Statements:
Report of Grant Thornton LLP, Independent Certified Public Accountants........................ 22
Consolidated Balance Sheet as of December 31, 1997............................................ 23
Consolidated Statement of Operations and Accumulated Deficit for the year ended
December 31, 1997........................................................................... 25
Consolidated Statement of Cash Flows for the year ended December 31, 1997 .................... 26
Notes to Consolidated Financial Statements.................................................... 27
2
<PAGE>
Demand Management, Inc. and Health Decisions International, LLC
Unaudited Financial Statements:
Consolidated Condensed Balance Sheet as of September 30, 1999 and December 31, 1998........... 33
Consolidated Condensed Statement of Operations for the nine month period ended
September 30, 1999 ......................................................................... 34
Consolidated Condensed Statement of Cash Flows for the nine month period ended
September 30, 1999 ......................................................................... 35
Notes to Consolidated Condensed Financial Statements.......................................... 36
Health Decisions, Inc.
Unaudited Financial Statements:
Balance Sheet as of September 30, 1999....................................................... 38
Condensed Statement of Operations for the nine month period ended September 30, 1999.......... 39
Condensed Statement of Cash Flows for the nine month period ended September 30, 1999.......... 40
Notes to Financial Statements................................................................. 41
Health Decisions, Inc. and Health Decisions International, LLC
Unaudited Financial Statements:
Consolidated Condensed Statement of Operations for the nine month period ended
September 30, 1998.......................................................................... 44
Consolidated Condensed Statement of Cash Flows for the nine month period ended
September 30, 1998.......................................................................... 45
(b) Unaudited Pro Forma Financial Information
Pro Forma Condensed Balance Sheet as of September 30, 1999.................................... 46
Pro Forma Condensed Statement of Operations for the nine month period ended
September 30, 1999.......................................................................... 47
Pro Forma Condensed Statement of Operations for the year ended December 31,1998............... 48
Notes to Pro Forma Condensed Financial Statements............................................. 49
</TABLE>
3
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Demand Management, Inc. and
Health Decisions International, LLC
We have audited the accompanying balance sheets of Demand Management, Inc. and
Health Decisions International, LLC, as of December 31, 1998 and the related
consolidated statements of operations, stockholder's equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit 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 Demand Management,
Inc. and Health Decisions International, LLC as of December 31, 1998, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
GRANT THORTON LLP
Denver, Colorado
January 14, 2000
4
<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED BALANCE SHEET
December 31, 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 467
Accounts receivable, net 500
Inventories 270
Prepaid expenses 88
---------------
Total current assets 1,325
PROPERTY AND EQUIPMENT - AT COST
Furniture and fixtures 949
Computer equipment and software 972
Leasehold improvements 365
---------------
2,286
Less accumulated depreciation and amortization 1,267
---------------
1,019
OTHER ASSETS
Product rights - net of accumulated amortization of $167,000 84
---------------
Total assets $ 2,428
===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable - trade $ 104
Accrued liabilities
Accrued interest payable to related parties 23
Accrued compensation 159
Reserve for performance guarantees 200
Other accrued liabilities 122
Deferred revenue 499
---------------
Total current liabilities 1,107
LONG-TERM OBLIGATIONS
Notes payable to related parties 2,700
COMMITMENTS AND CONTINGENCIES -
MINORITY INTEREST - HDINC 403
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock, no par value; 1,000 shares authorized; 500 shares
issued and outstanding -
Paid in capital (deficit) (1,685)
Accumulated deficit (97)
---------------
Total stockholder's equity (deficit) (1,782)
---------------
$ 2,428
===============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31, 1998
(In thousands)
<TABLE>
<S> <C>
Net revenue $ 4,478
Cost of revenue 3,074
-------------
Gross profit 1,404
Operating expenses:
Sales and marketing 816
General and administrative 2,840
Research and development 455
-------------
4,111
-------------
Operating loss (2,707)
Other income (expense)
Marketing fee - related party 900
Interest expense - related party (1,220)
Other 30
-------------
(290)
-------------
NET LOSS INCLUDING MINORITY INTEREST AND LOSS PRIOR TO
RECAPITALIZATION (2,997)
LOSS PRIOR TO RECAPITALIZATION 2,868
-------------
NET LOSS INCLUDING MINORITY INTEREST (129)
MINORITY INTEREST - HDINC 32
-------------
NET LOSS $ (97)
=============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
Year ended December 31, 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
Common stock
----------------------------------- ------------------- ------------------
Number of Accumulated
Shares Amount Paid in Capital Deficit
--------------- --------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 - $ - $ - $ -
Issuance of 500 shares of common
stock at $0.10/share 500 - - -
Paid in capital resulting from
recapitalization as of
December 18, 1998 - - (1,685) -
Net loss - - - (97)
=============== =============== =================== ==================
Balance, December 31, 1998 500 $ - $ (1,685) $ (97)
=============== =============== =================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss including minority interest and loss prior to recapitaliztion $ (2,997)
Adjustments to reconcile net loss to cash used in operating activities:
Interest expense converted to equity 1,189
Depreciation and amortization 573
Changes in assets and liabilities
Increase in accounts receivable (55)
Decrease in prepaid and other assets 10
Increase in inventory (48)
Decrease in accounts payable (11)
Increase in accrued liabilities 38
Decrease in deferred revenue (773)
---------------
Net cash used in operating activities (2,074)
Cash flows from investing activities:
Acquisition of property and equipment (237)
Cash flows from financing activities:
Payments on long-term debt (700)
Proceeds from long-term debt 2,700
Payments on capital lease obligations (22)
----------------
Net cash provided by financing activities 1,978
----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (333)
Cash and cash equivalents, beginning of year 800
----------------
Cash and cash equivalents, end of year $ 467
================
CASH PAID DURING THE YEAR FOR:
Interest $ 8
NON-CASH FINANCING ACTIVITIES:
Conversion of debt to equity $ 16,829
Note payable used to finance investment 2,000
</TABLE>
The accompanying notes are an integral part of these statements statements.
8
<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of demand management, inc. (DMI) and Health Decisions International,
LLC (HDILLC) significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. HISTORY AND BUSINESS ACTIVITY
DMI was incorporated on December 8, 1998 in the State of Colorado for the
purpose of consummating the transaction discussed in note (B) that would
result in DMI acquiring a 70% ownership in HDILLC.
HDILLC develops, provides and supports a broad range of personal health
information, referral and nurse counseling services to customers throughout
the United States. The five key target audiences for such services in the
health care market are consumers, payers, employers, providers and
pharmaceutical companies. HDILLC's focus is on understanding the psychosocial
factors that affect healthcare utilization and how this information can be
used to direct healthcare consumers to the appropriate source of care. The
key components of HDILLC'S health information services are (1) recruiting and
enrolling candidates, (2) capturing and integrating clinical and demographic
information, (3) developing and delivering coordinated consumer
interventions, (4) educating and supporting individuals in managing their
health from common everyday symptoms to chronic illness, (5) providing
valuable outcomes and demographic reporting, and (6) creating a portal
through which a customer, member or patient can access a variety of services
under a familiar identity.
HDILLC was organized and created on January 1, 1995, under the provisions of
the Colorado Limited Liability Company Act. At December 31, 1998, HDILLC was
owned, 70% by DMI and 30% by Health Decisions, Inc. (HDINC). One individual
owns 100% of DMI and 94% of HDINC at December 31, 1998. In January 1999,
DMI's sole shareholder became the sole shareholder of HDINC when HDINC bought
back 6,000 shares of its common stock. See note I.
2. GENERAL POLICY
The consolidated financial statements include the accounts of Demand
Management, Inc. and its 70% owned subsidiary, Health Decisions
International, LLC. All material intercompany accounts and transactions have
been eliminated.
3. REVENUE RECOGNITION
Revenue is recognized in the period in which services are performed or when
products are shipped. HDILLC has guaranteed certain performance criteria,
which varies from customer to customer. HDILLC has established an adequate
reserve for any potential failure to meet established performance criteria.
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally by the first-in, first-out method as follows:
Communication materials $ 150,000
Books for resale 120,000
===========
$ 270,000
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9
<PAGE>
5. DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated useful
lives. Leasehold improvements are amortized over the lives of the respective
leases, or the service lives of the improvements, whichever is shorter.
Intangible assets are amortized over their estimated useful lies. The
straight-line method of depreciation is followed for substantially all assets
for financial reporting purposes as follows:
Estimated Life
----------------------
Furniture and fixtures 5 years
Computer equipment and software 3-5 years
Leasehold improvements Life of lease
Intangible assets 5 years
6. INCOME TAXES
No income tax provision related to DMI has been included within the
accompanying financial statements, as net earnings or losses of DMI are
attributed to the stockholders pursuant to DMI's election with the Internal
Revenue Service to be treated as an S corporation for tax purposes.
No income tax provision related to HDIILC has been included within the
accompanying statements, as net earnings or losses of HDILLC are attributed
to the members pursuant to HDILLC's status as a limited liability company.
7. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period.
Actual results could differ from those estimates.
8. CASH EQUIVALENTS
For the purposes of the statement of cash flows, all highly liquid cash
investments with an original maturity of three months or less are considered
to be cash equivalents.
9. RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
10. FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The carrying amount of
notes payable approximates fair value because the stated interest rates on
the notes are the current rates being offered to DMI and HDILLC or due to the
related party nature of the notes.
NOTE B - SIGNIFICANT EVENT
On December 18, 1998, an assignment agreement was entered into between DMI
and HDILLC's former minority member and note holder. This agreement
transferred all HDILLC obligations with the former minority member to DMI for
$700,000 cash and a $2,000,000 note payable. Total obligations assigned to
DMI were $19,529,000, comprised of $4,000,000 in advances on a line of credit
facility, $2,779,000, and $12,750,000 in notes payable.
Upon assignment of these obligations the majority member exercised the right
to convert these obligations to members' capital. Because of the common
control of DMI, HDINC and HDILLC, the transaction was treated as a
10
<PAGE>
recapitalization and the excess purchase price of $1,759,000 over book value
was recorded to paid-in capital. HDILLC operations for the entire year will
be recognized in the consolidated statements; however, only losses subsequent
to recapitalization will be included in ending accumulated deficit. All
losses and equity prior to recapitalization will be considered paid in
capital.
NOTE C - MARKETING FEE
In 1995, HDILLC received $1,000,000 in relation to a marketing agreement with
HDILLC's former minority member and note holder. In exchange for the fee
paid, the member received exclusive marketing rights for HDILLC's products
and 10% commissions on all sales generated within a defined territory. This
agreement had a thirty-year term and required HDILLC and the former minority
member to work together to provide marketing materials and support. The
marketing fee was being amortized into income over the thirty-year term. This
agreement was cancelled on February 24, 1998 and the remaining unamortized
balance of $900,000 was recorded as income in 1998.
Upon cancellation, the former minority member was relieved of its obligation
to perform substantive current and future marketing obligations to HDILLC,
including the development and implementation of a marketing plan for their
territory and providing employees for these marketing efforts.
NOTE D - DEFERRED REVENUE
For certain contracts for services, HDILLC receives a portion of the service
and communication fees in advance. This revenue is deferred and amortized
over the period of the contract for which the advance was received.
NOTE E- LONG-TERM OBLIGATIONS
NOTES PAYABLE
In connection with the transaction discussed in note B, at December 31, 1998
DMI owed $2,000,000 under a secured note payable to HDILLC's former 12%
minority member. Interest on the note is stated at 30% per annum. Principal
and interest are due and payable in full on December 30, 2000. This note is
secured by DMI's and HDINC's ownership interest in HDILLC and all tangible
and intangible property of HDILLC. This note is guaranteed by HDINC.
At December 31, 1998, DMI owed $700,000 under an unsecured note payable to
HDINC. Interest on the note is stated at 5.25% per annum. Annual installments
of accrued and unpaid interest are due and payable on December 31, of each
calendar year, beginning December 31, 1999. Principal and all accrued and
unpaid interest are due and payable in full on December 31, 2003.
Maturities of notes payable are as follows as of December 31, 1998:
Year ending December 31,
1999 $ -
2000 2,000,000
2001 -
2002 -
2003 700,000
-----------
$ 2,700,000
===========
11
<PAGE>
COMMERCIAL LINE OF CREDIT
On December 24, 1997, HDILLC entered into a commercial line of credit
agreement with its former minority member, which provided up to $4,000,000
through December 31, 1998. Each $1,000,000 drawn was convertible into equity
in HDILLC. The interest rate on any borrowings was 8%. Interest was not due
until 2.5 years after the date of borrowing, at which time accrued interest
would be treated as additional principal. Interest on existing principal and
additional principal was payable quarterly. Principal was payable in a lump
sum on the fifth anniversary of the borrowing date.
During 1998, an additional $2,000,000 was drawn on the line. As discussed in
note B, the entire drawn balance of $4,000,000 was acquired by DMI and,
subsequently, converted to equity on December 18, 1998.
NOTE F - COMMITMENTS AND CONTINGENCIES
HDILLC leases office space, computer equipment and office equipment under
operating lease arrangements. The office space lease expired in March 1999.
The lease was renewed in April 1999 for a five-year term. Total lease
payments were $402,000 for the year ended December 31, 1998.
The minimum rental commitments under the non-cancelable lease agreements,
based on the five-year extension in April, 1999, are as follows:
Year ending December 31,
1999 $ 262,000
2000 242,000
2001 248,000
2002 265,000
2003 290,000
Thereafter 74,000
---------
$1,381,000
==========
NOTE G - RELATED PARTY TRANSACTIONS
HDILLC signed an agreement with HDINC whereby HDILLC purchases books and pays
an administration fee of 10% of the cost of all books ordered. HDILLC
incurred approximately $86,000 in total book and administrative fee expenses
in 1998. No related amounts were payable to this member at December 31, 1998.
HDILLC had approximately $676,000 in sales to its former 12% minority member
corporation in 1998. No amounts were receivable from this member at December
31, 1998.
In February 1996, HDILLC signed an agreement, which provided the parent
corporation of the former 12% minority member a discount of up to $100,000
annually on HDILLC's products and services. The discount was applicable for
up to fifteen years and shall not result in more than 50% off the yearly cost
of products and services provided. No discounts were given under this
agreement in 1998. This agreement was terminated in conjunction with the
assignment agreement discussed in note B.
NOTE H - MAJOR CUSTOMERS
The following is a summary of significant customers as a percentage of total
sales:
CUSTOMER 1998
-------- ----
A 16%
B 13
C 12
12
<PAGE>
NOTE I - SUBSEQUENT EVENTS
In January 1999, DMI's sole shareholder became the sole shareholder of HDINC
when HDINC bought back 6,000 shares of its common stock.
In November 1999, OnHealth Network Company (OnHealth) acquired Health
Decisions International, LLC (HDILLC). The acquisition of HDILLC was
completed through the merger of two wholly owned subsidiaries of OnHealth
with and into Demand Management, Inc. (DMI) and Health Decision, Inc.
(HDINC). DMI and HDINC are the sole members of HDILLC.
In the two mergers, OnHealth issued 1,004,227 shares of its common stock,
subject to certain contingencies, to the sole shareholder of HDINC and DMI
and is obligated to issue or has agreed to pay, subject to certain
contingencies, a total of $3,217,000 in shares of common stock of OnHealth to
satisfy existing obligations of HDINC, DMI, and HDILLC existing as of the
closing of the mergers.
13
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Health Decisions, Inc.
We have audited the accompanying balance sheet of Health Decisions, Inc. as of
December 31, 1998 and the related statements of operations and stockholders'
equity (deficit), and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 Health Decisions, Inc. as of
December 31, 1998, and the results of its operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
GRANT THORTON LLP
Denver, Colorado
February 7, 2000
14
<PAGE>
HEALTH DECISIONS, INC.
BALANCE SHEET
December 31, 1998
(In thousands, except share data)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 37
Interest receivable from related parties 30
---------------
Total current assets 67
PROPERTY AND EQUIPMENT - at cost 2
Less accumulated depreciation and amortization 1
---------------
1
OTHER ASSETS
Notes receivable from related parties 1,048
Investment in HDILLC 403
---------------
1,451
---------------
$ 1,519
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES $ -
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000,000 authorized; 100,000 shares
issued and outstanding 25
Additional paid in capital 17,885
Retained earnings (16,391)
---------------
Total stockholders' equity 1,519
---------------
$ 1,519
===============
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
HEALTH DECISIONS, INC.
STATEMENT OF OPERATIONS
Year ended December 31, 1998
(In thousands)
Commissions on sales to HDILLC (net of shipping costs) $ 12
Operating expenses:
General and administrative 73
----------------
Operating loss (61)
Other income (expenses)
Loss from HDILLC (2,521)
Interest from related parties 55
----------------
(2,466)
----------------
NET LOSS $ (2,527)
================
The accompanying notes are an integral part of these statements.
16
<PAGE>
HEALTH DECISIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Year ended December 31, 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
Common stock
------------------------------------ ------------------ ------------------
Number of Additional Paid Accumulated
Shares Amount in Capital Deficit
---------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 100,000 $ 25 $ - $ (13,864)
Additional paid in capital from
shareholders - - 700 -
Contribution from shareholder for
extinguishment of HDILLC debt - - 17,185 -
Net loss - - - (2,527)
================ =============== ================== ==================
Balance, December 31, 1998 100,000 $ 25 $ 17,885 $ (16,391)
================ =============== ================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
HEALTH DECISIONS, INC.
STATEMENTS OF CASH FLOWS
Year ended December 31, 1998
(In thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ (2,527)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 1
Net loss on investment in HDILLC 2,505
Changes in assets and liabilities:
Decrease in accounts receivable 43
Increase in interest receivable (29)
----------------
Net cash used in operating activities (7)
Cash flows from investing activities:
Increase in notes receivable (700)
Cash flows from financing activities:
Additional paid in capital 700
----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7)
Cash and cash equivalents, beginning of year 44
----------------
Cash and cash equivalents, end of year $ 37
================
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
HEALTH DECISIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31,1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of Health Decisions, Inc.'s (HDINC's) significant accounting policies
consistently applied in the preparation of the accompanying consolidated
financial statements follows:
1. HISTORY AND BUSINESS ACTIVITY
HDINC was incorporated as Vickson, Inc. on May 20,1991 in the State of
Colorado for any legal and lawful purpose pursuant to the Colorado
Corporation Code. On September 16, 1992, Vickson, Inc.'s name was legally
changed to Health Decisions, Inc. The primary purpose of HDINC is to be a
holding company for the shareholders' investment in Health Decisions
International, LLC (HDILLC) and the sale of books.
2. REVENUE RECOGNITION
Revenue is recognized in the period in which products are shipped.
3. DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
useful lives. The straight-line method of depreciation is followed for
substantially all assets for financial reporting purposes as follows:
Estimated Life
----------------------
Furniture and fixtures 5 years
Computer equipment and software 3-5 years
4. INCOME TAXES
No income tax provision related to HDINC has been included within the
accompanying financial statements, as net earnings or losses of HDINC are
attributed to the stockholders pursuant to HDINC's election with the Internal
Revenue Service to be treated as an S corporation for tax purposes.
5. USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and abilities, the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
6. CASH EQUIVALENTS
For purposes of the statement of cash flows, all highly liquid cash
investments with an original maturity of three months or less are considered
to be cash equivalents.
19
<PAGE>
7. INVESTMENTS
At December 31, 1998 HDILLC was owned 70% by Demand Management, Inc. (DMI)
and 30% by HDINC. One individual owns 100% of DMI and 94% of HDINC. The
investment in HDILLC is being accounted for using the equity method due to
the common control.
8. FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The carrying amount of
notes receivable approximates market because of the related party nature of
the notes.
NOTE B - SIGNIFICANT EVENT
ASSIGNMENT AGREEMENT
On December 18, 1998, in assignment agreement was entered into between Demand
Management, Inc. (DMI), a corporation wholly owned by HDINC's majority
shareholder, and HDILLC's minority member and note holder. This agreement
transferred all HDILLC obligations with the minority member, totaling
$19,529,000, to DMI for a price of $2,700,000.
CONVERSION OF DEBT
Upon assignment of these obligations DMI exercised its right to convert these
obligation to members' capital. Because of the common control of DMI, HDINC
and HDILLC, the transaction was considered a recapitalization. As a result of
this transaction, the Company went from an 88% member interest in HDILLC to a
30% member interest.
NOTE C - NOTE RECEIVABLE
The Company has a $400,000 unsecured 8% note receivable from it's majority
shareholder. At December 31, 1998, $348,000 was outstanding. This note is
receivable in full in April 2000.
The Company has a $700,000 unsecured 5.25% note receivable from DMI. At
December 31, 1998, the entire balance was outstanding. This note is
receivable in December 2003.
NOTE D - INVESTMENT IN HDILLC
Balance at December 31, 1997 $ (14,277,000)
Loss (2,521,000)
Contribution from shareholder for
extinguishment of debt 17,185,000
Interest 16,000
-------------
Balance at December 31, 1998 $ 403,000
=============
NOTE E- RELATED PARTY TRANSACTIONS
HDINC signed an agreement with HDILLC whereby HDILLC purchases books from
HDINC and pays an administration fee of 10% of the cost of all books ordered.
100% of HDINC's sales for the year ended December 31, 1998 were to HDILLC.
20
<PAGE>
In January, 1995, the HDILLC signed an employment agreement with the Company
in which the parties agreed that the Company's majority shareholder will be
employed by HDILLC until at least December 31, 1998.
NOTE F - SUBSEQUENT EVENTS
In January 1999, HDINC bought back 6,000 shares of its common stock for
$70,000. As a result of this transaction, HDINC is now owned by one
individual.
In November 1999, OnHealth Network Company (OnHealth) acquired Health
Decisions International, LLC (HDILLC). The acquisition of HDILLC was
completed through the merger of two wholly owned subsidiaries of OnHealth
with and into Demand Management, Inc. (DMI) and Health Decision, Inc.
(HDINC). DMI and HDINC are the sole members of HDILLC.
In the two mergers, OnHealth issued 1,004,227 shares of its common stock,
subject to certain contingencies, to the sole shareholder of HDINC and DMI
and is obligated to issue or has agreed to pay, subject to certain
contingencies, a total of $3,217,000 in shares of common stock of OnHealth to
satisfy existing obligations of HDINC, DMI, and HDILLC existing as of the
closing of the mergers.
21
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Health Decisions, Inc. and Health Decisions International, LLC
We have audited the accompanying consolidated balance sheets of Health
Decisions, Inc. and Health Decision International, LLC as of December 31, 1997
and the related consolidated statements of operations, and accumulated deficit
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 consolidated financial position of Health Decisions,
Inc. and Health Decision International, LLC as of December 31, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
GRANT THORTON LLP
Denver, Colorado
January 20, 2000
22
<PAGE>
HEALTH DECISIONS, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED BALANCE SHEET
December 31, 1997
(In thousands)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 853
Accounts receivable - trade, net 390
Accounts receivable - other 57
Inventories 210
Prepaid expenses 98
---------------
Total current assets 1,608
PROPERTY AND EQUIPMENT - at cost
Furniture and fixtures 947
Computer equipment and software 732
Leasehold improvements 365
Projects in progress 7
---------------
2,051
Less accumulated depreciation and amortization 744
---------------
1,307
OTHER ASSETS
Notes receivable from majority shareholder 347
Product rights - net of accumulated amortization of $117,000 134
---------------
481
---------------
$ 3,396
===============
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
HEALTH DECISIONS, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED BALANCE SHEET (CONTINUED)
December 31, 1997
(In thousands, except share data)
<TABLE>
<S> <C>
LIABILITIES
CURRENT LIABILITIES
Notes payable to minority member $ 750
Current maturities of capital lease obligation 22
Accounts payable - trade 139
Reserve for performance guarantees 200
Accrued interest payable to minority member 1,590
Other accrued liabilities 207
Deferred marketing fee revenue from minority member 33
Deferred revenue 372
---------------
Total current liabilities 3,313
LONG-TERM OBLIGATIONS, less current maturities
Notes payable to minority member 12,000
Commercial line of credit - minority member 2,000
Deferred revenue to minority member 867
---------------
14,867
COMMITMENTS AND CONTINGENCIES -
MINORITY INTEREST (947)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 1,000,000 shares authorized;
100,000 shares issued and outstanding 25
Accumulated deficit (13,862)
---------------
Total stockholders' equity (deficit) (13,837)
---------------
$ 3,396
===============
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
HEALTH DECISIONS, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Year ended December 31, 1997
(In thousands)
<TABLE>
<S> <C>
Net sales $ 5,671
Cost of goods sold 5,774
----------------------
Gross loss (103)
Operating expenses:
Sales and marketing 1,078
General and administrative 3,195
Research and development 672
----------------------
4,945
----------------------
Operating loss (5,048)
Other income (expense)
Marketing fee - minority member 33
Interest expense - minority member (1,000)
Other 126
----------------------
(841)
----------------------
Net loss before minority interest (5,889)
Minority interest 700
----------------------
NET LOSS (5,189)
Beginning accumulated deficit (8,673)
----------------------
Ending accumulated deficit $ (13,862)
======================
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
HEALTH DECISIONS, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31, 1997
(In thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (5,189)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 532
Minority interest (700)
Changes in assets and liabilities:
Decrease in accounts receivable 58
Increase in prepaid and other assets (18)
Decrease in inventory 68
Decrease in accounts payable (1,125)
Increase in accrued liabilities 921
Decrease in deferred revenue (1,055)
----------------
Net cash used in operating activities (6,508)
Cash flows from investing activities:
Acquisition of property and equipment (370)
Decrease in notes receivable 175
----------------
Net cash used in investing activities (195)
Cash flows from financing activities:
Proceeds from short-term debt 750
Proceeds from long-term debt 2,000
Payments on capital lease obligations (29)
----------------
Net cash provided by financing activities 2,721
----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,982)
Cash and cash equivalents, beginning of year 4,835
----------------
Cash and cash equivalents, end of year $ 853
================
CASH PAID DURING THE YEAR FOR:
Interest $ 10
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
HEALTH DECISIONS, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of Health Decisions, Inc. (HDINC) and Health Decision International,
LLC's (HDILLC) significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
I. HISTORY AND BUSINESS ACTIVITY
HDINC was incorporated as Vickson, Inc. on May 20,1991 in the State of
Colorado for any legal and lawful purpose pursuant to the Colorado
Corporation Code. On September 16, 1992, Vickson, Inc.'s name was legally
changed to Health Decisions, Inc. The primary purpose of HDINC is to be a
holding company for HDILLC and the sale of books to HDILLC.
HDILLC is a developer and provider of evidence based demand management
solutions that control rising costs by managing health care demand. Its
products include confidential 24-hour telephone assistance for plan members
facing health decisions, triage and support services. In addition, HDILLC
provides in-depth analysis of members' healthcare service utilization
patterns to discover when and how members use providers and services. HDILLC
also sells self-care books, which mobilize plan members to take
responsibility for their health.
HDILLC was organized and created on January 1, 1995, under the provisions of
the Colorado Limited Liability Company Act. At December 31, 1997, HDILLC was
owned 88% by HDINC, and 12% by another corporation. See note B for subsequent
transactions in which another corporation, Demand Management, Inc. (DMI),
acquired the 12% minority member's shares and HDILLC obligations. DMI then
exercised its rights to convert HDILLC's debt obligations to ownership
interest in HDILLC; thereby diluting HDINC's ownership in HDILLC to 30%. At
the date of the transactions, one individual owned 100% of DMI and 94% of
HDINC.
2. GENERAL POLICY
The consolidated financial statements include the accounts of HDINC and its
88% owned subsidiary, HDILLC. All material intercompany accounts and
transactions have been eliminated.
3. REVENUE RECOGNITION
Revenue is recognized in the period in which services are performed or when
products are shipped. HDILLC has guaranteed certain performance criteria,
which varies from customer to customer. HDILLC has established an adequate
reserve for any potential failure to meet established performance criteria.
27
<PAGE>
4. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally by the first-in, first-out method as follows:
1997
------------------
Communication materials $ 118,000
Books for resale 92,000
=================
$ 210,000
=================
5. DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
useful lives. Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements, whichever is
shorter. Intangible assets are amortized over their estimated useful lives.
The straight-line method of depreciation is followed for substantially all
assets for financial reporting purposes as follows:
Estimated Life
----------------------
Furniture and fixtures 5 years
Computer equipment and software 3-5 years
Leasehold improvements Life of lease
Intangible assets 5 years
6. INCOME TAXES
No income tax provision related to HDINC has been included within the
accompanying financial statements, as net earnings or losses of HDINC are
attributed to the stockholders pursuant to HDINC's election with the Internal
Revenue Service to be treated as an S corporation for tax purposes.
No income tax provision related to HDILLC has been included within the
accompanying financial statements, as net earnings or losses of HDIILC are
attributed to the members pursuant to HDILLC's status as a limited liability
company.
7. USE OF ESTIMATES
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and abilities, the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
8. CASH EQUIVALENTS
For purposes of the statement of cash flows, all highly liquid cash
investments with an original maturity of three months or less are considered
to be cash equivalents.
28
<PAGE>
9. FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The carrying amount of
notes receivable approximates market because the stated interest rates
offered are current market rates. The carrying amount of notes payable
approximates fair value because the stated interest rates on the notes are
the current rates being offered to HDINC and HDILLC.
NOTE B - TERMINATION OF AGREEMENTS WITH MINORITY MEMBER
MARKETING AGREEMENT
During February 1998, the minority member cancelled its marketing agreement
with HDILLC resulting in $900,000 reduction in deferred revenues.
ASSIGNMENT AGREEMENT
On December 18, 1998, an assignment agreement was entered into between DMI, a
corporation wholly owned by HDINC's majority shareholder, and HDILLC's
minority member and note holder. This agreement transferred all HDILLC
obligations with the minority member and the minority member's equity
interest in HDILLC to DMI for a price of $2,700,000. Total obligations
assigned to DMI were $19,529,000.
CONVERSION OF DEBT
Upon assignment of these obligations, DMI exercised its right under the debt
agreements to convert HDILLC debt obligations to members' capital. Because of
the common control of DMI, HDINC and HDILLC, the transaction was considered a
recapitalization.
NOTE C - NOTE RECEIVABLE
HDINC has an unsecured 8% note receivable with a face value of $400,000 from
its majority shareholder. At December 31, 1997, $347,000 is outstanding. The
entire principal balance outstanding and any accrued interest thereon are
receivable in full in April 2000.
NOTE D - NOTE PAYABLE
At December 31, 1997, HDILLC owes $750,000 in uncollateralized notes payable
to its minority rnember. $500,000 and $250,000 of the notes payable are due
September 4, 1998, and October 10. 1998, respectively. Interest expense on
these notes was $18,000 for 1997. See note B for subsequent assignment of
these obligations.
NOTE E - DEFERRED REVENUE
On certain contracts for services, HDILLC receives a portion of the service
and communication fees at the beginning of the contract. This revenue is
deferred and amortized over the period of the contract for which the advance
was received.
In addition, in 1995, HDILLC received $1,000,000 in relation to a marketing
agreement with an equity member. In exchange for the fee paid, the member
received exclusive marketing rights for HDILLC's products and 10% commissions
on all sales generated. This agreement has a thirty-year term and requires
HDILLC to provide all marketing materials and support. The marketing fee is
being amortized into income over the thirty-year term. The remaining balance
at December 31, 1997 was $900,000. See note B for discussion of cancellation
of this agreement for the benefit of the minority member.
29
<PAGE>
NOTE F- LONG-TERM OBLIGATIONS
NOTES PAYABLE - MINORITY MEMBER
Notes payable consist of the following at December 31, 1997:
8 1/2% convertible note, due May 1999, uncollateralized $ 1,000,000
8 1/2% convertible note, due November 1999, uncollateralized 1,000,000
8 % convertible note, due February 2001, uncollateralized 5,000,000
8 % convertible note, due October 2001, uncollateralized 5,000,000
-----------
$12,000,000
===========
The 8-1/2% convertible note payable due May 1, 1999, is due to the minority
member, and is convertible into an 8% ownership interest in HDILLC. The
conversion lights are exercisable until December 20, 1999. Commencing June
30, 1997, HDILLC was required to pay accrued interest quarterly, and
currently is in default on those payments.
The 8-1/2% convertible note payable due November 1, 1999, is due to the
minority member, and is convertible into a 10% ownership interest in HDILLC.
The conversion rights are exercisable until November 22, 1999. Commencing
December 31, 1997, HDILLC was required to pay accrued interest quarterly, and
currently is in default on those payments.
The 8% convertible note payable due February 2001, is due to the minority
member, and is convertible into a 15% ownership interest in HDILLC to a
minority member. The conversion rights are exercisable on or after February
14, 1997. HDILC is required to pay interest quarterly, and currently is in
default on those payments.
The 8% convertible note payable due October 2001, is due to the minority
member, and is convertible into a 6% ownership interest in HDILLC. The
conversion rights are exercisable on or after October 15, 1997. HDILLC is
required to pay interest quarterly, and currently is in default on those
payments.
If HDILLC should fail to pay these notes, the minority member has the right
to convert all of its convertible loans into additional ownership interests
in HDILLC. All additional indebtedness, including unpaid principal balances
and accrued interest, will be converted by the minority member into an
additional 3% ownership interest in HDILLC. See note B for assignment of
these obligations.
The original aggregate scheduled principal payments, assuming debt is not
converted by minority member, related to long-term notes payable are as
follows:
Year ending December 31,
1998 $ -
1999 2,000,000
2000 -
2001 10,000,000
------------
$ 12,000,000
============
30
<PAGE>
COMMERCIAL LINE OF CREDIT
On December 24, 1997, HDILLC entered into a commercial line of credit
agreement with the minority member, which provides up to $4,000,000 through
December 31, 1998. Each $1,000,000 drawn is convertible into a 4% ownership
interest in HDILLC. The interest rate on any borrowings is 8%. Interest will
not be due until 2.5 years after the date of borrowing, at which time accrued
interest will be treated as additional principal. Interest on existing
principal and additional principal will be payable quarterly. At December 31,
1997, HDILLC has borrowed $2,000,000 against this line of credit. Principal
is payable in a lump sum on the fifth anniversary of the borrowing date.
During 1998, an additional $2,000,000 was drawn on the line. See note B for
discussion of the assignment of these obligations.
CAPITAL LEASE OBLIGATION
During 1995, HDILLC entered into a three-year capital lease agreement for
computer software. Lease payments totaled $29,000 in 1997. At December 31,
1997, the recorded costs of assets under capital lease and accumulated
depreciation were $87,000 and $38,000, respectively.
Future Payments on the capital lease are $22,000, due in 1998.
NOTE G - COMMITMENTS AND CONTINGENCIES
HDILLC leases office space, computer equipment and office equipment under
operating lease arrangements. The office space lease expired in March 1999.
The lease was renewed in April 1999 for a five-year term. Total rent expense
was $573,000 for the year ended December 31, 1997.
The minimum rental commitments under the noncancelable lease agreements,
including the five-year extension entered into in April 1999, are as follows:
Year ending December 31,
1998 $ 365,000
1999 262,000
2000 242,000
2001 248,000
2002 265,000
Thereafter 364,000
----------
$ 1,746,000
===========
EQUITY AGREEMENT
In January 1995, HDINC entered into an agreement with HDILLC's minority
member that provides the minority member with the right of first refusal to
purchase the equity of HDILLC.
The aforementioned agreement does not apply to sales of up to 20% of equity
to present and future employees of HDILLC. During 1997, no sales of member's
equity were made to HDILLC employees.
NOTE H - RELATED PARTY TRANSACTIONS
In January, 1995, HDILLC and HDINC signed an employment agreement with the
principal shareholder in which the parties agreed that he would be employed
until at least December 31, 1998.
31
<PAGE>
HDILLC had approximately $53,000 in sales to its minority member corporation
in 1997. The amount receivable from this member was $53,000 at December 31,
1997.
In February 1996, HDILLC signed an agreement, which provides the parent
corporation of the minority member a discount of up to $100,000 annually, on
products and services. The discount is applicable for up to fifteen years and
shall not result in more than 50% off the yearly cost of products and
services provided. No discounts were given under this agreement in 1997.
NOTE I - MAJOR CUSTOMERS
The following is a summary of significant customers as a percentage of total
sales for the year ended December 31, 1997:
Customer Percentage
-------- ----------
A 21%
B 18
C 14
D 12
E 10
NOTE J- MAJOR VENDORS
For the year ended December 31, 1997, HDILLC purchased services from one
vendor related to call center operations. These purchases accounted for 32%
of total purchases. Subsequently, these services were brought in house and
the vendor is no longer being utilized.
NOTE K - SUBSEQUENT EVENTS
In January 1999, HDINC bought back 6,000 shares of its common stock for
$70,000. As a result of this transaction, HDINC is now owned by one
individual.
In November 1999, OnHealth Network Company (OnHealth) acquired Health
Decisions International, LLC (HDILLC). The acquisition of HDILLC was
completed through the merger of two wholly owned subsidiaries of OnHealth
with and into Demand Management, Inc. (DMI) and Health Decision, Inc.
(HDINC). DMI and HDINC are the sole members of HDILLC.
In the two mergers, OnHealth issued 1,004,227 shares of its common stock,
subject to certain contingencies, to the sole shareholder of HDINC and DMI
and is obligated to issue or has agreed to pay, subject to certain
contingencies, a total of $3,217,000 in shares of common stock of OnHealth to
satisfy existing obligations of HDINC, DMI, and HDILLC existing as of the
closing of the mergers.
32
<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 99 $ 467
Accounts receivable, net 511 500
Inventories 200 270
Prepaid expenses 100 88
----------------- ---------------
Total current assets 910 1,325
PROPERTY AND EQUIPMENT AT COST
Furniture and fixtures 949 949
Computer equipment and software 1,076 972
Leasehold improvements 365 365
----------------- ---------------
2,390 2,286
Less accumulated depreciation and amortization 1,605 1,267
----------------- ---------------
785 1,019
OTHER ASSETS
Product rights - net of accumulated amortization of $205,000
and $167,000, respectively 46 84
----------------- ---------------
Total assets $ 1,741 $ 2,428
================= ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Note payable $ 255 $ -
Current maturities of capital lease obligation 3 -
Accounts payable - trade 233 104
Accrued interest payable 499 23
Accrued compensation 162 159
Accrued liabilities 324 322
Deferred revenue 628 499
----------------- ---------------
Total current liabilities 2,104 1,107
LONG-TERM OBLIGATIONS, less current maturities
Notes payable 2,700 2,700
Capital lease obligation 28 -
----------------- ---------------
Total long-term obligations 2,728 2,700
MINORITY INTEREST - HDINC 32 403
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value; 1,000 shares authorized; 500 shares
issued and outstanding - -
Paid-in-capital (deficit) (1,685) (1,685)
Accumulated deficit (1,438) (97)
----------------- ---------------
Total stockholders' equity (deficit) (3,123) (1,782)
----------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 1,741 $ 2,428
================= ===============
</TABLE>
See notes to unaudited consolidated condensed financial statements.
33
<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
1999
----------------------
Net revenue $ 2,944
Cost of revenue 1,815
----------------------
Gross profit 1,129
Operating expenses:
Sales and marketing 380
General and administrative 1,774
Research and development 213
----------------------
2,367
----------------------
Operating loss (1,238)
Interest income/(expense) (474)
----------------------
NET LOSS INCLUDING MINORITY INTEREST (1,712)
MINORITY INTEREST 371
----------------------
NET LOSS $ (1,341)
======================
See notes to unaudited consolidated condensed financial statements.
34
<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1999
-----------------
<S> <C>
Cash flows from operating activities:
Net loss $ (1,712)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 376
Changes in assets and liabilities
Increase in accounts receivable (11)
Increase in prepaids and other current assets (12)
Decrease in inventory 70
Increase in accounts payable 129
Increase in accrued liabilities 4
Increase in accrued interest payable 476
Increase in deferred revenue 129
------------------
Net cash used in operating activities (551)
Cash flows from investing activities:
Acquisition of property and equipment (65)
------------------
Net cash used in investing activities (65)
Cash flows from financing activities:
Proceeds from short-term debt 255
Proceeds of loan from shareholder 1
Payments on capital lease obligations (8)
------------------
Net cash provided by financing activities 248
------------------
Net decrease in cash and cash equivalents (368)
Cash and cash equivalents at beginning of period 467
==================
Cash and cash equivalents at end of period $ 99
==================
CASH PAID DURING THE YEAR FOR:
Interest $ 2
NON-CASH FINANCING ACTIVITIES:
Acquisition of assets through capital lease $ 39
</TABLE>
See notes to unaudited consolidated condensed financial statements.
35
<PAGE>
DEMAND MANAGEMENT, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1999
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine-month period ended September 30, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
For further information, refer to the financial statements for the years
ended December 31, 1998 and 1997 and notes thereto included herein.
1. HISTORY AND BUSINESS ACTIVITY
Demand Management, Inc. ("DMI") was incorporated on December 8, 1998 in the
State of Colorado for the purpose of consummating a transaction which
resulted in DMI acquiring a 70% ownership in Health Decisions International,
LLC ("HDILLC").
HDILLC develops, provides and supports a broad range of personal health
information, referral and nurse counseling services to customers throughout
the United States. The five key target audiences for such services in the
health care market are consumers, payers, employers, providers and
pharmaceutical compar6cs. HDILLC's focus is on understanding the psychosocial
factors that affect healthcare utilization and how this information can be
used to direct healthcare consumers to the appropriate source of care. The
key components of HDILLC'S health information services are (1) recruiting and
enrolling candidates, (2) capturing and integrating clinical and demographic
information, (3) developing and delivering coordinated consumer
interventions, (4) educating and supporting individuals in managing their
health from common everyday symptoms to chronic illness, (5) providing
valuable outcomes and demographic reporting, and (6) creating a portal
through which a customer, member or patient can access a variety of services
under a familiar identity.
HDILLC was organized and created on January 1, 1995, under the provisions of
the Colorado Limited Liability Company Act. At September 30, 1999, HDILLC was
owned, 70% by DMI and 30% by Health Decisions, Inc. ("HDINC").
2. GENERAL POLICY
The consolidated financial statements include the accounts of Demand
Management, Inc. and its 70% owned subsidiary, Health Decisions
International, LLC. All material intercompany accounts and transactions have
been eliminated.
3. RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to
the 1999 presentation.
36
<PAGE>
4. NOTES PAYABLE
At September 30, 1999, the Company owed $255,000 in collateralized notes
payable to the Company's sole stockholder. The notes have due dates which
vary from 6/99 through 10/99.
5. CAPITAL LEASE
During February 1999, the Company signed a 36-month $38,000 capital lease for
computer equipment containing a bargain purchase option at the end of the
lease.
6. SUBSEQUENT EVENTS
On November 29, 1999, OnHealth Network Company, a Washington corporation (the
"Company"), acquired Health Decisions International, LLC, a Colorado limited
liability company ("HDI, LLC"). The acquisition of HDI, LLC was completed
through the merger of two wholly owned subsidiaries of the Company with and
into Demand Management, Inc., a Colorado corporation ("DMI") and Health
Decisions, Inc., a Colorado corporation ("HDINC"). DMI and HDINC are the sole
members of HDI, LLC (collectively "HDI").
In the two mergers, the Company issued 1,004,227 shares of its common stock,
subject to certain contingencies, to Donald M. Vickery, the sole shareholder
of HDINC and DMI. In addition, the Company is obligated to issue shares of
the Company's common stock or to pay in cash total consideration of
approximately $3,217,000 to satisfy obligations of HDI existing as of the
closing of the mergers. The acquisition will be accounted for using the
purchase method of accounting. Health Decisions International offers software
tools and telephone counseling by nurses that guide its six million members
through the health information maze to help them make more informed health
choices.
Subsequent to September 30, 1999, all of the $255,000 of notes payable
outstanding at September 30, 1999 were paid. The Company signed additional
unsecured notes totaling $150,000, payable to the sole stockholder, $100,000
of which have been paid and $50,000 of which was charged to additional paid
in capital.
37
<PAGE>
HEALTH DECISIONS, INC.
CONDENSED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2 $ 37
Interest receivable from related parties 78 30
------------------ --------------
Total current assets 80 67
PROPERTY AND EQUIPMENT - at cost 2 2
Less accumulated depreciation and amortization 1 1
------------------ --------------
1 1
OTHER ASSETS
Notes receivable from related parties 1,048 1,048
Investment in HDILLC 32 403
------------------ --------------
Total assets $ 1,161 $ 1,451
================== ==============
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES $ - $ -
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000,000 shares
authorized; 94,000 shares outstanding 23 25
Additional paid in capital 17,884 17,885
Retained earnings (16,746) (16,391)
------------------ --------------
Total stockholders' equity 1,161 1,519
------------------ --------------
Total liabilities and stockholders' equity $ 1,161 $ 1,519
================== ==============
</TABLE>
See notes to unaudited condensed financial statements.
38
<PAGE>
HEALTH DECISIONS, INC.
CONDENSED STATEMENT OF OPERATIONS
(In thousands)
(Unaudited)
Nine Months
Ended
September 30,
1999
------------------
Commissions on sales to HDILLC (net of shipping costs) $ -
Operating expenses:
General and administrative 2
------------------
Operating loss (2)
Other income/(expense)
Interest income/(expense) 48
Equity investment in HDILLC (371)
------------------
(323)
------------------
NET LOSS $ (325)
==================
See notes to unaudited condensed financial statements.
39
<PAGE>
HEALTH DECISIONS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1999
------------------
<S> <C>
Cash flows from operating activities:
Net loss $ (325)
Adjustments to reconcile net loss to cash used In operating activities:
Depreciation and amortization -
Net loss in investment in HDILLC 371
Changes in assets and liabilities:
Increase in interest receivable (48)
------------------
Net cash used in operating activities (2)
Cash flows from financing activities:
Capital contribution by stockholder 67
Purchase of common stock for retirement (70)
Cash dividends paid (30)
------------------
Net cash used by financing activities (33)
------------------
Net decrease in cash and cash equivalents (35)
Cash and cash equivalents at beginning of period 37
------------------
Cash and cash equivalents at end of period $ 2
==================
NON-CASH FINANCING ACTIVITY:
Note payable to stockholder converted to paid in capital $ 700
</TABLE>
See notes to unaudited condensed financial statements.
40
<PAGE>
HEALTH DECISIONS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
September 30, 1999
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999. For further information,
refer to the financial statements for the years ended December 31, 1998 and 1997
and notes thereto included herein.
I. HISTORY AND BUSINESS ACTIVITY
Health Decisions, Inc. ("HDINC") was incorporated as Vickson, Inc. on May
20,1991 in the State of Colorado for any legal and lawful purpose pursuant to
the Colorado Corporation Code. On September 16, 1992, Vickson, Inc.'s name
was legally changed to Health Decisions, Inc. The primary purpose of HDINC is
to be a holding company for the shareholders' investment in Health Decisions
International, LLC (HDILLC) and the sale of books.
2. NOTE RECEIVABLE
The Company has a $400,000 unsecured 8% note receivable from its majority
shareholder. At September 30, 1998, $348,000 was outstanding. This note is
receivable in full in April 2000.
The Company has a $700,000 unsecured 5.25% note receivable from DMI. At
September 30, 1998, the entire balance was outstanding. This note is
receivable in December 2003.
3. INVESTMENT IN HDILLC
Balance at December 31, 1998 $ 403,000
Loss from HDILLC (371,000)
----------
Balance at September, 1998 $ 32,000
==========
4. EQUITY TRANSACTION
In January 1999, HDINC bought back 6,000 shares of its common stock for
$70,000, which were retired. As a result of this transaction, HDINC is now
owned by one individual.
41
<PAGE>
5. SUBSEQUENT EVENT
On November 29, 1999, OnHealth Network Company, a Washington corporation (the
"Company"), acquired Health Decisions International, LLC, a Colorado limited
liability company ("HDI, LLC"). The acquisition of HDI, LLC was completed
through the merger of two wholly owned subsidiaries of the Company with and
into Demand Management, Inc., a Colorado corporation ("DMI") and Health
Decisions, Inc., a Colorado corporation ("HDINC"). DMI and HDINC are the sole
members of HDI, LLC (collectively "HDI").
In the two mergers, the Company issued 1,004,227 shares of its common stock,
subject to certain contingencies, to Donald M. Vickery, the sole shareholder
of HDINC and DMI. In addition, the Company is obligated to issue shares of
the Company's common stock or to pay in cash total consideration of
approximately $3,217,000 to satisfy obligations of HDI existing as of the
closing of the mergers. The acquisition will be accounted for using the
purchase method of accounting.
42
<PAGE>
HEALTH DECISIONS, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Nine Months
Ended
September 30,
1998
------------
Net revenue $ 3,348
Cost of revenue 2,414
-------------
Gross profit 934
Operating expenses:
Sales and marketing 630
General and administrative 2,235
Research and development 350
--------------
3,215
--------------
Operating loss (2,281)
Other income/(expense)
Interest income/(expense) (948)
Other income 58
--------------
(890)
NET LOSS INCLUDING MINORITY INTEREST (3,171)
MINORITY INTEREST 380
==============
NET LOSS $ (2,791)
==============
43
<PAGE>
HEALTH DECISIONS, INC. AND
HEALTH DECISIONS INTERNATIONAL, LLC
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
1998
------------------
<S> <C>
Cash flows from operating activities:
Net loss $ (3,171)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 400
Changes in assets and liabilities
Increase in accounts receivable (182)
Increase in prepaids and other current assets (25)
Increase in inventory (54)
Decrease in accounts payable (55)
Increase in accrued liabilities 1,063
Increase in deferred revenue 133
------------------
Net cash used in operating activities (1,891)
Cash flows from investing activities:
Acquisition of property and equipment (224)
------------------
Net cash used in investing activities (224)
Cash flows from financing activities:
Proceeds from line of credit 2,000
Payments on capital lease obligations (22)
------------------
Net cash provided by financing activities 1,978
------------------
Net decrease in cash and cash equivalents (137)
Cash and cash equivalents at beginning of period 853
==================
Cash and cash equivalents at end of period $ 716
==================
CASH PAID DURING THE YEAR FOR:
Interest $ 6
</TABLE>
44
<PAGE>
(b) Unaudited pro forma financial information
The following unaudited pro forma combined condensed financial
statements give effect to BabyData acquisition, which occurred on
September 9, 1999, and the HDI acquisition, which occurred on November
29, 1999. Under the purchase method of accounting, the purchase price
is allocated to the assets acquired and liabilities assumed based on
their estimated fair values. The estimated fair values of the assets
and liabilities of BabyData and HDI have been combined with the
recorded values of the assets and liabilities of OnHealth in the
unaudited pro forma combined condensed financial statements. The
unaudited pro forma combined condensed balance sheet gives effect to
the HDI merger as if it had occurred on September 30, 1999. The
unaudited pro forma combined condensed statement of operations for the
year ended December 31, 1998 and the nine months ended September 30,
1999 give effect to the BabyData and HDI acquisitions as if they had
occurred on January 1, 1998.
The unaudited pro forma combined condensed financial statements are for
illustrative purposes only and do not purport to represent what
OnHealth's financial position or results of operations would have been
if the acquisitions had occurred on such dates or to project OnHealth's
financial position or results of operations as of any future date or
for any future period. The unaudited pro forma combined condensed
financial statements, including the notes thereto, are qualified in
their entirety by reference to, and should be read in conjunction with,
the historical financial statements of OnHealth included in its: (a)
Annual Report on Form 10-K, as amended, for the year ended December 31,
1998 and (b) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, as well as the historical financial statements and
the related notes thereto of BabyData included in OnHealth's Current
Report on Form 8-K filed on November 23, 1999 and of HDI included in
this report.
The unaudited pro forma adjustments have been applied to the financial
information derived from the financial statements of OnHealth, BabyData
and HDI to account for the acquisitions as a purchase and, accordingly,
the assets acquired and liabilities assumed are reflected at their
estimated fair values.
The unaudited pro forma financial information has been prepared based
on the assumptions described in the notes thereto and includes
assumptions relating to the allocation of the consideration paid for
the assets of BabyData and HDI based on the estimates of their fair
value. In the opinion of OnHealth, all adjustments necessary to present
fairly such unaudited pro forma financial information have been made
based on the terms and structure of the acquisitions.
45
<PAGE>
PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of September 30, 1999
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
HDI
DMI Pro Forma Pro Forma
OnHealth Consolidated HD, Inc. Adjustments ref Balances
------------- ---------------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,973 $ 99 $ 2 $ - $ 5,074
Restricted cash 500 - - - 500
Accounts receivable 511 - - 1,357
846
Interest receivable - 78 (27) f 51
Inventories - 200 - - 200
Prepaid advertising 8,234 - - - 8,234
Other current assets 209 100 - - 309
------------- ---------------- ------------ --------------- -------------
Total current assets 14,762 910 80 (27) 15,725
Furniture and equipment, net 785 1 - 1,967
1,181
Goodwill and intangibles, net 3,482 46 - 6,559 e 10,087
Loans receivable - - 348 348
Notes receivable - - 700 (700) f -
Investment in LLC - - 32 (32) d -
Other non-current assets 46 - - - 46
============= ================ ============ =============== =============
Total assets $ 19,471 $ 1,741 $ 1,161 $ 5,800 $ 28,173
============= ================ ============ =============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,643 $ 233 $ - $ - $ 3,876
Interest payable - 499 - (27) f 472
Note payable - 255 - 255
Capital lease obligation - current - 3 - 3
Other accrued expenses 1,485 1,114 - 391 c 2,990
------------- ---------------- ------------ --------------- -------------
Total current liabilities 2,104 - 364 7,596
5,128
Notes payable - 2,700 - (700) f 2,000
Other non-current liabilities 36 28 - - 64
Minority interest - 32 - (32) d -
Shareholders' equity:
Preferred stock, $0.01 par value - - - - -
Common stock, $0.01 par value 203 - 23 (23) d
10 c 213
Additional paid-in-capital 133,668 (1,685) 17,884 (16,199) d
7,412 c 141,080
Accumulated deficit (118,122) (1,438) (16,746) 18,184 d (118,122)
Deferred compensation (1,442) - - (3,216) e (4,658)
------------- ---------------- ------------ --------------- -------------
Total shareholders' equity 14,307 (3,123) 1,161 6,168 18,513
------------- ---------------- ------------ --------------- -------------
Total liabilities and shareholders' equity $ 19,471 $ 1,741 $ 1,161 $ 5,800 $ 28,173
============= ================ ============ =============== =============
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Statements.
46
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For The Nine Months Ended September 30, 1999
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
DMI
OnHealth BabyData ref Consolidated HD, Inc.
------------ ------------ --- --------------- ----------------
<S> <C> <C> <C><C> <C> <C>
Net revenue $ 1,787 $ - $ 2,944 $ -
Cost of revenue 187 - 1,815 -
------------ ------------ --------------- ----------------
Gross margin 1,600 - 1,129 -
Operating expenses:
Product development, editorial and design 5,023 - 213 -
Sales and marketing 22,503 - 380 -
General and administrative 2,795 18 1,774 2
Acquisition related costs, including
amortization of goodwill and purchased
intangibles 73 - - -
Deferred compensation 92 - - -
------------ ------------ --------------- ----------------
Total operating expenses 30,486 18 2,367 2
------------ ------------ --------------- ----------------
Loss from operations (28,886) (18) (1,238) (2)
Interest income/(expense) 277 - (474) 48
Equity interest in HDILLC - - - (371)
Other income 2 - - -
------------ ------------ --------------- ----------------
Total interest income (expense) and other
income 279 - (474) (323)
------------ ------------ --------------- ----------------
Net loss including minority interest (28,607) (18) (1,712) (325)
Minority interest 371
============ ============ =============== ================
Net loss $ (28,607) $ (18) $ (1,341) $ (325)
============ ============ =============== ================
Net loss per common share-basic and diluted $ (1.77)
============
Weighted average number of common shares
outstanding 16,165
============
BabyData HDI
Pro Forma Pro Forma Pro Forma
Adjustments Adjustments Combined
------------- ------------- ----------------
Net revenue $ - $ - $ 4,731
Cost of revenue - - 2,002
------------- ------------ ---------------
Gross margin - - 2,729
Operating expenses:
Product development, editorial and design - - 5,236
Sales and marketing - - 22,883
General and administrative - - 4,589
Acquisition related costs, including
amortization of goodwill and purchased
intangibles 762 a 1,639 e 2,474
Deferred compensation (92) a - -
------------- ------------ ---------------
Total operating expenses 670 1,639 35,182
------------- ------------ ---------------
Loss from operations (670) (1,639) (32,453)
Interest income/(expense) - 449 g 300
Equity interest in HDILLC - 371 f -
Other income - - 2
-------------- ------------ ----------------
Total interest income/(expense) and other
income - 820 302
-------------- ------------ ----------------
Net loss including minority interest (670) (819) (32,151)
Minority interest (371)f -
=============== ============ ================
Net loss $ (670) $ (1,190) $ (32,151)
=============== ============ ================
Net loss per common share-basic and diluted $ (1.79)
================
Weighted average number of common shares
outstanding 643 1,110 17,918
=============== ============ ================
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Statements.
47
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
DMI
OnHealth BabyData Consolidated HD, Inc.
------------ ------------ --------------- ----------------
<S> <C> <C> <C><C> <C>
Net revenue $ 1,522 $ - $ 4,478 $ 12
Cost of revenue 767 - 3,074 -
------------ ------------ --------------- ----------------
Gross margin 755 - 1,404 12
Operating expenses:
Product development, editorial and design 3,744 - 455 -
Sales and marketing 5,626 - 816 -
General and administrative 2,404 9 2,840 73
Acquisition related costs, including
amortization of goodwill and purchased
intangibles - - - -
Deferred compensation - - - -
------------ ------------ --------------- ----------------
Total operating expenses 11,774 9 4,111 73
------------ ------------ --------------- ----------------
Loss from operations (11,019) (9) (2,707) (61)
Interest income/(expense) 84 - (1,220) 55
Loss from HDI,LLC - - - (2,521)
Other income (4) - 930 -
------------ ------------ --------------- ----------------
Total interest income/(expense) and other
income 80 - (290) (2,466)
------------ ------------ --------------- ----------------
Net loss (10,939) (9) (2,997) (2,527)
Preferred stock dividends (103) - - -
Preferred stock accretion (702) - - -
Preferred stock deemed dividend (220) - - -
------------ ------------ --------------- ----------------
Net loss including minority interest and loss
prior to recapitalization (11,964) (9) (2,997) (2,527)
Loss prior to recapitalization 2,868
------------ ------------ --------------- ----------------
Net loss including minority interest (11,964) (9) (129) (2,527)
Minority interest 32
------------ ------------ --------------- ----------------
Net Loss $ (11,964) $ (9) $ (97) $ (2,527)
============ ============ =============== ================
Net loss per common share-
Basic and diluted $ (1.12)
============
Weighted average number of common shares
outstanding 10,680
============
BabyData Pro HDI
Pro Forma Pro Forma Pro Forma
Adjustments Adjustments ref Combined
------------- ------------ --- ------------
Net revenue $ - $ (12) f $ 6,000
Cost of revenue - (12) f 3,829
------------- ------------- ------------
Gross margin - - 2,171
Operating expenses:
Product development, editorial and design - - 4,199
Sales and marketing - - 6,442
General and administrative - - 5,326
Acquisition related costs, including
amortization of goodwill and purchased
intangibles 1,113 a 2,186 e 3,299
Deferred compensation 1,406 a 3,215 e 4,621
------------- ------------ ------------
Total operating expenses 2,519 5,401 23,887
------------- ------------ ------------
Loss from operations (2,519) (5,401) (21,716)
Interest income/(expense) - - (1,081)
Loss from HDI,LLC - 2,521 f -
Other income - - 926
------------- ------------ ------------
Total interest income (expense) and other
income - 2,521 (155)
-------------- ------------ ------------
Net loss (2,519) (2,880) (21,871)
Preferred stock dividends - - (103)
Preferred stock accretion - - (702)
Preferred stock deemed dividend - - (220)
-------------- ------------ ------------
Net loss including minority interest and loss
prior to recapitalization (2,519) (2,880) (22,896)
Loss prior to recapitalization (2,489) f 379
------------- ------------- ------------
Net loss including minority interest (2,519) (5,369) (22,517)
Minority interest (32) f -
------------- ------------- ------------
Net Loss $ (2,519) $ (5,401) $ (22,517)
============= ============= ============
Net loss per common share-
Basic and diluted $ (1.87)
Weighted average number of common shares
outstanding 531 823 12,034
============= ============= ==============
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Statements.
48
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
The purchase price for BabyData was approximately $4.7 million and was
comprised of 681,534 shares of OnHealth common stock, par value $.01
per share, ("OnHealth Common Stock"), including approximately $60,000
of acquisition costs.
This purchase was accounted for under the purchase method of accounting
in accordance with APB No. 16, whereby the purchase price is allocated
to the assets acquired and liabilities assumed based on their estimated
fair values. Estimates of the fair values of the assets and liabilities
of have been combined with the OnHealth column in the unaudited pro
forma combined condensed financial statements. The $4.7 million
purchase price was allocated to goodwill, $3.3 million; deferred
compensation; $1.4 million, and other purchased intangibles, $39,000.
The purchase price for the HDI acquisition was approximately $7.8
million and was comprised of 797,033 shares of OnHealth Common Stock,
including approximately $391,000 of acquisition costs. In addition,
207,194 shares are contingently issuable based upon the occurrence of
certain future events.
This purchase was accounted for under the purchase method of accounting
in accordance with APB No. 16, whereby the purchase price is allocated
to the assets acquired and liabilities assumed based on their estimated
fair values. Estimates of the fair values of the assets and liabilities
of have been combined with the OnHealth column in the unaudited pro
forma combined condensed financial statements. The excess of the
purchase price paid over the fair market value of net assets acquired
was $10.8 million. The excess purchase price was allocated to
intangibles and goodwill, $7.6 million, and deferred compensation, $3.2
million.
PRO FORMA ADJUSTMENTS FOR BABYDATA
(a) To reverse the actual intangibles and goodwill amortization and
deferred compensation related to the BabyData acquisition,
recorded on OnHealth's books as of September 30, 1999, and to
record the pro forma intangibles and goodwill amortization and
deferred compensation. The intangible component of the
consideration for this transaction, which includes goodwill and
purchased intangibles, will be amortized on a straight-line basis
over three years. The deferred compensation, which was the result
of restricted shares issued pursuant to the employment agreement
entered into by OnHealth and one key employee of BabyData, will be
amortized over one year.
(b) To eliminate the historical proprietorship equity of BabyData.
PRO FORMA ADJUSTMENTS FOR HDI.
(c) To reflect the issuance of OnHealth Common Stock having an
aggregate value of approximately $7.8 million, including
approximately $391,000 of transaction costs, to consummate the HDI
acquisition.
(d) To eliminate the historical equity of HDINC and DMI Consolidated
minority interest.
49
<PAGE>
(e) To record the excess of the purchase price over the estimate fair
value of assets and liabilities acquired in connection with the
HDI, LLC acquisition and the related amortization. The intangible
component of the consideration for this transaction, which
includes goodwill, will be amortized on a straight-line basis over
three years. The deferred compensation, which was the result of
restricted shares issued pursuant to the employment agreement
entered into by OnHealth and one key employee of HDI will be
amortized over one year.
(f) To eliminate intercompany transactions and balances.
(g) To eliminate interest expense on the debt assumed by OnHealth, in
connection with the HDI acquistion, due to retirement of the debt
for OnHealth common stock.
PRO FORMA LOSS PER COMMON SHARE
Basic pro forma earnings per share is computed using the weighted
average number of OnHealth common shares outstanding during the period
plus shares of OnHealth Common Stock issued in connection with the
BabyData and HDI acquisitions. Diluted pro forma earnings per share is
computed using the weighted average number of common and common
equivalent shares outstanding during the period plus shares of OnHealth
Common Stock issued in connection with the BabyData and HDI
acquisitions. Common equivalent shares consist of the incremental
common shares issuable upon the exercise of stock options and warrants
(using the treasury stock method). Common equivalent shares are
excluded from the computation as their effect is antidilutive. Shares
issued in connection with the BabyData and HDI acquisitions, with
exception to the restricted shares, are assumed outstanding at the
beginning of the periods presented. Basic and diluted pro forma
earnings per share for the year ended December 31, 1998 exclude 332,446
outstanding restricted common shares.
CONTINGENT CONSIDERATION
In addition to the approximate $7.8 million purchase price for all of
the outstanding capital stock of HDI, 207,194 shares of OnHealth Common
Stock may be paid to Donald M. Vickery, the sole shareholder of HDI,
subject to the occurrence of certain future events. This contingent
consideration has not been reflected in the pro forma combined
condensed consolidated financial statements.
CONFORMING AND RECLASSIFICATION ADJUSTMENTS
There were no adjustments required to conform the accounting policies
of BabyData and HDI. All intercompany transactions and balances have
been eliminated.
(c) Exhibits
The following exhibits are filed herewith:
2.1 Agreement and Plan of Reorganization among OnHealth Network
Company, Demand Management, Inc., DMISub, Inc., Health
Decisions., Inc., HDISub, Inc., Health Decisions
International, LLC and Donald M. Vickery, the sole shareholder
of HDI and DMI dated as of November 19, 1999.
99.1* Press release of the Registrant.
-------------
* Incorporated by reference to the Company's Report on Form 8-K, as
filed with the Securities and Exchange Commission on December 14,
1999.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OnHealth Network Company
Date: August 3, 2000 By: \S\ RON STEVENS
-----------------------
Ron Stevens
Chief Financial Officer
