8-K 1 a74871e8-k.txt FORM 8-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report: August 8, 2001 (Date of earliest event reported) DRKOOP.COM, INC. (exact name of registrant as specified in its charter) DELAWARE 000-26275 95-4697615 (State or other jurisdiction (Commission File No.) (I.R.S. Employer of incorporation or Identification No.) organization) 225 ARIZONA AVENUE, SUITE 250 SANTA MONICA, CA 90401 (Address of Principal executive offices, including zip code) (310) 395-5700 (Registrant's telephone number, including area code) ================================================================================ 2 ITEM 5. OTHER EVENTS As we have previously reported, we have entered into an agreement to acquire substantially all of the operating assets of IVonyx Group Services, Inc., ("IVonyx"), a provider of home infusion therapy services, a transaction which we sometimes refer to as the "Asset Sale." In connection with the Asset Sale, we are providing the following financial information: - Unaudited Pro Forma Condensed Financial Statements of drkoop.com, Inc., and IVonyx; - Audited Financial Statements of IVonyx Group Services, Inc., and subsidiaries as of December 31, 2000 and 1999 and for the three year periods ended December 31, 2000; and - Unaudited Interim Financial Statements of IVonyx Group Services, Inc., and subsidiaries for the three month periods ended March 31, 2001 and 2000. The Asset Sale is subject to numerous closing conditions, including, but not limited to approval by IVonyx stockholders; IVonyx's receipt of the written consent of its secured creditors and other third parties (including the United States government); and drkoop's entering into a working capital credit facility. Many of these conditions have not yet been satisfied, and we cannot assure you that the Asset Sale will be consummated. 3 UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS Consideration to be provided by drkoop in the Asset Sale is approximately $3.2 million consisting of the issuance of approximately 5 million shares of drkoop common stock, approximately $2 million of cash consideration, assumption of capital leases of approximately $0.1 million and payment of acquisition costs of approximately $0.5 million. This consideration will be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed according to their respective fair values, with the excess purchase consideration being allocated to goodwill at the closing of the transaction. The Asset Sale is contingent upon IVonyx stockholder approval and satisfaction of other closing conditions. The unaudited pro forma statements of operations of drkoop for the year ended December 31, 2000, and the three months ended March 31, 2001, give effect to (i) the Asset Sale applying the purchase method of accounting and (ii) certain adjustments that are directly attributable to the Asset Sale as if the transaction was consummated as of January 1, 2000. The unaudited pro forma condensed balance sheet as of March 31, 2001, is presented as if the asset sale had occurred on March 31, 2001. In the opinion of drkoop and IVonyx management, all adjustments and/or disclosures necessary for a fair presentation of the pro forma data have been made. These unaudited pro forma condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or the financial position that would have been achieved had the Asset Sale been consummated as of the dates indicated or of the results that may be obtained in the future. These unaudited pro forma condensed financial statements and notes thereto should be read in conjunction with the IVonyx consolidated financial statements and the notes thereto as of and for the year ended December 31, 2000; the IVonyx consolidated financial statements and the notes thereto as of and for the three-month period ended March 31, 2001, included in this Report on Form 8-K; the drkoop consolidated financial statements and the notes thereto as of and for the year ended December 31, 2000, included in drkoop's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 which are incorporated herein by reference; and the drkoop consolidated financial statements and the notes thereto as of and for the three month period ended March 31, 2001, included in drkoop's Quarterly Report on Form 10-Q as of and for the period ended March 31, 2001 which are incorporated herein by reference. 2 4 PROFORMA STATEMENT OF OPERATIONS (UNAUDITED)

~~Table~~FOR THE YEAR ENDED DECEMBER 31, 2000 ---------------------------------------------------------------------- ($ in 000s) DRKOOP IVONYX PROFORMA PROFORMA (HISTORICAL) (HISTORICAL) ADJUSTMENTS REFERENCE BALANCES ------------ ------------ ----------- --------- --------- Revenues: Content subscription and software license ....... $ 3,505 $ 0 $ 0 $ 3,505 Home infusion revenues .......................... 0 28,481 0 28,481 Advertising and sponsorship ..................... 7,111 0 0 7,111 E-commerce and other ............................ 32 0 0 32 --------- --------- --------- --------- Total revenues ............................... 10,648 28,481 0 39,129 --------- --------- --------- --------- Operating expenses: Cost of ~~Contents~~home infusion revenues .................. 0 11,403 0 11,403 Compensation and benefits expense ............... 0 10,510 0 10,510 Production, content and product development ..... 18,420 0 0 18,420 Sales and marketing ............................. 74,393 0 0 74,393 General and administrative expenses ............. 17,242 2,616 0 19,858 Provision for doubtful accounts ................. 0 1,404 0 1,404 Depreciation and amortization ................... 5,797 203 334 Note 3 6,334 Impairment of assets ............................ 3,790 0 0 3,790 Write-off of investment and intangible assets ....................................... 7,444 0 0 7,444 Other ........................................... (2,000) 0 0 (2,000) --------- --------- --------- --------- Total operating expenses ..................... 125,086 26,136 334 151,556 --------- --------- --------- --------- Income (loss) from operations ....................... (114,438) 2,345 (334) (112,427) Interest expense, net ............................... (6,776) (1,371) 0 (8,147) Other income ........................................ 0 93 0 93 Loss on disposal of property and equipment .......... 0 (7) 0 (7) --------- --------- --------- --------- Net income (loss) ................................... (121,214) 1,060 (334) (120,488) Beneficial conversion feature related to Series D preferred stock ........................ (27,500) 0 0 (27,500) Cumulative effect of accounting change .............. 2,750 0 0 2,750 Provision for income taxes .......................... 0 (46) 0 (46) Net income (loss) attributable to common stock ................................. $(145,964) $ 1,014 $ (334) $(145,284) ========= ========= ========= ========= Net loss per common share: Basic and diluted loss .......................... $ (4.24) $ (3.70) Cumulative effect of accounting change .............. 0.08 .07 --------- --------- $ (4.16) $ (3.63) --------- --------- Basic and diluted weighted average shares outstanding ..................................... 35,077 5,000 40,077 ========= ========= ========= See accompanying notes to unaudited pro forma condensed financial statements.

3 5 PROFORMA STATEMENT OF OPERATIONS (UNAUDITED)

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

4 6 PROFORMA BALANCE SHEET (UNAUDITED)

~~Washington~~AS OF MARCH 31, D2001 ------------------------------------------------------------------ DRKOOP IVONYX PROFORMA PROFORMA ($ in 000s) (HISTORICAL) (HISTORICAL) ADJUSTMENTS REFERENCE BALANCES ------------ ------------ ----------- --------- -------- Assets: Current assets: Cash and cash equivalents ............................... $ 7,093 $ 96 $ (2,596) Note 3 $ 4,593 Accounts receivable ..................................... 1,839 16,653 (16,653) Note 3 1,839 Accounts receivable allowance ........................... (1,000) (4,340) 4,340 Note 3 (1,000) Inventories ............................................. 0 761 0 761 Prepaid and other assets ................................ 2,651 41 (11) Note 3 2,681 --------- --------- --------- --------- Total current assets ................................. 10,583 13,211 (15,095) 8,699 Property and equipment ..................................... 2,191 806 484 3,481 Intangible assets .......................................... 0 0 1,008 Note 3 1,008 Goodwill ................................................... 0 0 112 Note 3 112 Other assets ............................................... 236 78 (78) Note 3 236 --------- --------- --------- --------- Total assets ......................................... $ 13,010 $ 14,095 $ (13,394) $ 13,711 ========= ========= ========= ========= Liabilities: Current liabilities: Line of credit .......................................... $ 0 $ 5,671 $ (5,671) Note 3 $ 0 Note payable to financial institution ................... 0 2,006 (2,006) Note 3 0 Short term notes payable ................................ 0 2,703 (2,703) Note 3 0 Current portion of long term debt ....................... 0 168 (168) Note 3 0 Current portion of capital lease obligations ............ 704 99 (43) 760 Medicare settlement ..................................... 0 2,553 (2,553) Note 3 0 Trade accounts payable .................................. 2,676 4,215 (4,215) Note 3 2,676 Accrued liabilities ..................................... 2,242 3,142 (3,142) Note 3 2,242 Deferred credit ......................................... 2,000 0 0 2,000 Deferred revenue ........................................ 1,015 0 0 1,015 --------- --------- --------- --------- Total current liabilities ............................ 8,637 20,557 (20,501) 8,693 Long-term debt, less current portion ....................... 0 297 (297) Note 3 0 Capital lease obligations, less current portion ............ 822 168 (123) 867 Deferred credit ............................................ 2,500 0 0 2,500 Other liabilities .......................................... 0 9 (9) Note 3 0 --------- --------- --------- --------- Total liabilities .................................... 11,959 21,031 (20,930) 12,060 Preferred stock of IVonyx: Series A preferred stock ................................ 0 2,108 (2,108) Note 3 0 Series B preferred stock ................................ 0 6,306 (6,306) Note 3 0 Series C preferred stock ................................ ~~20549~~0 7,473 (7,473) Note 3 0 Series D preferred stock ................................ 0 340 (340) Note 3 0 --------- --------- --------- --------- Total preferred stock financing ...................... 0 16,227 (16,227) 0

5 7

~~FORM~~AS 8OF MARCH 31, 2001 -K ----------------------------------------------------------------- DRKOOP IVONYX PROFORMA PROFORMA ($ in 000s) (HISTORICAL) (HISTORICAL) ADJUSTMENTS REFERENCE BALANCES ------------ ------------ ----------- --------- -------- Commitments and contingencies Stockholders' equity: Series D convertible preferred stock, par value $.001; 15,000,000 shares authorized; liquidation value $41,250; 2,750,000 shares issued and outstanding at March 31, 2001 .......................................... 3 0 0 3 Common stock, par value $.001; 500,000,000 shares authorized at March 31, 2001; 39,986,032 shares issued and outstanding at March 31, 2001 ....................... 40 0 5 Note 2, 3 45 Common stock, par value $.0025; 52,203,163 shares authorized at March 31, 2001; 2,192,840 shares issued and outstanding at March 31, 2001 ....................... 0 5 (5) Note 3 0 Additional paid-in capital .............................. 211,467 3,168 (2,573) Note 2, 3 212,062 Deferred stock compensation ............................. (6,243) 0 0 (6,243) Accumulated deficit ..................................... (204,216) (26,336) 26,336 Note 3 (204,216) --------- --------- --------- --------- Total stockholders' equity ........................... 1,051 (23,163) 23,763 1,651 --------- --------- --------- --------- Total liabilities and stockholders' equity ................. $ 13,010 $ 14,095 $ (13,394) $ 13,711 ========= ========= ========= =========

See accompanying notes to unaudited pro forma condensed financial statements. NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION (1) BASIS OF PRESENTATION The purchase method of accounting has been used in the preparation of the accompanying unaudited pro forma condensed financial statements. Under this method of accounting, the purchase consideration is allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values, with the excess purchase consideration being allocated to goodwill. For purposes of the unaudited pro forma condensed financial statements, the preliminary fair values of IVonyx's assets and liabilities were estimated by IVonyx and drkoop management. The final allocation of the purchase price will be determined after the completion of the Asset Sale and will be based on appraisals and a comprehensive final evaluation of tangible and identifiable intangible assets acquired (including their estimated useful lives) and liabilities assumed. For the purposes of pro forma adjustments, IVonyx has adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Intangible Assets." (2) CONSIDERATION Pursuant to the Purchase Agreement, shareholders of IVonyx, in total, will receive 5 million shares of drkoop common stock (exclusive of contingent consideration). For purposes of the unaudited pro forma combined condensed financial statements, the $0.12 per share value of drkoop common stock to be issued was estimated based on its market price per share. Estimated value of drkoop.com, Inc, common stock to be issued (5 million shares at $0.12 per share): Common stock, $.001 par value (000's omitted)................. $ 5 Additional paid-in capital (000's omitted).................... 595 ---- Estimated net increase in drkoop.com, Inc. equity (000's omitted)......... $600 ====

6 8 (3) ASSET PURCHASE The preliminary allocation to the assets purchased is as follows (000's omitted): Inventory ................................... $ 761 Property and equipment ...................... 1,279 Prepaid assets .............................. 41 Contracts/customer lists .................... 672 Provider permits/licenses ................... 336 Goodwill .................................... 112 ------ Total consideration ......................... $3,201 ======

All IVonyx assets not included above (including cash and cash equivalents, accounts receivable and other assets) are removed in preparation of the unaudited pro forma condensed financial statements because they are not being acquired by drkoop in the Asset Sale. In addition, with the exception of $101 thousand of capital lease obligations assumed, all IVonyx liabilities are removed in preparation of the unaudited pro forma condensed financial statements because such liabilities are not being assumed by drkoop. The consideration will be paid as follows (000's omitted): Cash ........................................ $2,000 Common stock ................................ 600 Direct acquisition costs .................... 500 Capital lease obligations assumed ........... 101 ------ Total consideration ......................... $3,201 ======

Incremental depreciation and amortization expense of the increase in net book value of fixed assets acquired and identifiable intangible assets acquired (000's omitted): Twelve month amortization ................... $334 ==== Three month amortization .................... $ 83 ====

The above pro forma adjustments are based on preliminary estimates. The final allocation of the purchase price will be determined after the completion of the Asset Sale and will be based on appraisals and a comprehensive final evaluation of the fair value of IVonyx's tangible and identifiable intangible assets acquired and liabilities assumed at the time of the asset sale. For the purpose of these unaudited pro forma condensed financial statements, in accordance with SFAS No. 141, no amortization goodwill, of approximately $112 thousand, is included. drkoop believes that the intangible assets acquired from IVonyx included in the five year category are comprised principally of contracts, customer lists, provider permits and licenses. In addition, drkoop intends to continue to expand the combined company's existing lines of business, develop new businesses by leveraging the well known products of IVonyx, and take advantage of synergies that exist between drkoop and IVonyx to further strengthen existing lines of business. drkoop believes that it will benefit from the asset sale for an indeterminable period of time of at least five years and, therefore, a five-year amortization period is appropriate for purchase of the contracts, customer lists, provider permits and licenses. After the completion of the Asset Sale, drkoop will complete valuations and other studies of the significant assets, liabilities and business operations of IVonyx as of the time of the Asset Sale. Using this information, drkoop will make a final allocation of the purchase consideration, including allocation to tangible assets and liabilities, identifiable intangible assets and goodwill. Accordingly, depreciation and amortization, as presented in the pro forma condensed statements of operations for the year and three months ended December 31, 2000 and March 31, 2001, respectively, may fluctuate significantly from the preliminary estimate when the final appraisals of tangible and intangible assets are completed. 7 9 The preceding unaudited pro forma condensed financial statements do not include any pro forma adjustments for the following: - Any operating efficiencies and cost savings that may be achieved with respect to the combined companies. - Upon closing of the asset sale, the combined companies may incur integration related expenses as a result of the elimination of duplicate facilities and functions, operational realignment and related workforce reductions. Such IVonyx costs would generally be recognized as a liability assumed as of the asset sale date resulting in additional goodwill while drkoop related costs would be recognized as an expense through the statements of operations. - Transactions between drkoop and IVonyx have not been eliminated in the unaudited pro forma combined condensed financial statements, as the amounts are not material for the periods presented. 8 10 INDEX TO IVONYX FINANCIAL STATEMENTS A. Consolidated Financial Statements of IVonyx Group Services, Inc. and subsidiaries for the three year periods ended December 31, 2000 Report of Independent Accountants..........................................................................F-2 Consolidated Balance Sheets at December 31, 2000 and 1999..................................................F-3 Consolidated Statements of Operations for the three years ended December 31, 2000..........................F-4 Consolidated Statements of Changes in Stockholders' Deficit for the three years ended December 31, 2000....F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 2000..........................F-6 Notes to Consolidated Financial Statements.................................................................F-7 B. Unaudited Interim Consolidated Financial Statements of IVonyx Group Services, Inc. and subsidiaries for the three month periods ended March 31, 2001 and 2000 Consolidated Balance Sheets at March 31, 2001 and December 31, 2000.......................................F-17 Consolidated Statements of Operations for three month periods ended March 31, 2001 and March 31, 2000.....F-18 Consolidated Statements of Cash Flows for three month periods ended March 31, 2001 and March 31, 2000.....F-19 Notes to Interim Consolidated Financial Statements........................................................F-20

F-1 11 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of IVonyx Group Services, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' deficit and cash flows present fairly, in all material respects, the financial position of IVonyx Group Services, Inc. and Subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for the each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these consolidated financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has a significant accumulated deficit from operations since inception and a working capital deficit of approximately $6,000,000 as of December 31, 2000. These matters raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty. As discussed in Note 13, the Company has signed a purchase agreement to sell substantially all of the assets of the Company (other than accounts receivable and certain other excluded assets). The transaction is contingent on approval of the Company's shareholders. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from this transaction. PricewaterhouseCoopers LLP Austin, Texas July 19, 2001 F-2 12 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999

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

The accompanying notes are an integral part of the financial statements. F-3 13 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2000, 1999 and 1998

~~Pursuant~~2000 to1999 ~~Section 13~~1998 or------------ ------------ ------------ Revenue, net .......................................... $ 28,481,206 $ 25,875,842 $ 22,786,522 Cost of revenue ....................................... 11,402,890 8,734,630 7,084,611 ------------ ------------ ------------ Gross profit ................................. 17,078,316 17,141,212 15,701,911 ------------ ------------ ------------ Operating expenses: Selling and marketing .............................. 10,509,767 9,612,244 9,144,160 General and administrative ......................... 2,615,969 3,032,219 3,206,425 Bad debt expense ................................... 1,403,662 3,064,420 3,186,407 Depreciation and amortization ...................... 203,081 166,948 156,493 ------------ ------------ ------------ Total operating expenses ..................... 14,732,479 15,875,831 15,693,485 ------------ ------------ ------------ Income from operations ....................... 2,345,837 1,265,381 8,426 ------------ ------------ ------------ Other income (dexpense): Interest expense ................................... (1,370,757) (1,267,589) (1,135,772) Interest income .................................... 2,760 8,695 2,586 Loss on sale of ~~The~~ ~~Securities~~assets ~~Exchange~~............................. ~~Act~~(7,061) (23,958) (2,900) Other income, net .................................. 89,946 46,133 852,181 ------------ ------------ ------------ Income (loss) before provision for income taxes .... 1,060,725 28,662 (275,479) ------------ ------------ ------------ Income tax expense .................................... 46,440 98,948 217,764 ------------ ------------ ------------ Net income (loss) ............................ $ 1,014,285 $ (70,286) $ (493,243) ============ ============ ============ Net income (loss) per common share Basic ........................................ $ 0.46 $ (0.03) $ (0.22) Diluted ...................................... $ 0.03 $ (0.03) $ (0.22) Number of ~~1934~~weighted average shares outstanding Basic ........................................ 2,192,840 2,192,840 2,192,840 Diluted ...................................... 30,898,584 30,898,584 30,898,584

The accompanying notes are an integral part of the financial statements. F-4 14 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT For the Years Ended December 31, 2000, 1999 and 1998

~~Date~~ADDITIONAL ofTOTAL ~~Report:~~COMMON ~~July~~ STOCK PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT DEFICIT ------------ ------------ ------------ ------------ ------------- Balance, December 31, ~~2001~~ 1997 2,192,480 $ 5,482 $ 3,167,574 $(~~Date~~26,225,479) of$(23,052,423) ~~earliest~~Net ~~event~~loss ~~reported~~-- -- -- (493,243) (493,243) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1998 2,192,480 $ 5,482 $ 3,167,574 (26,718,722) $(23,545,666) Net loss -- -- -- (70,286) (70,286) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 1999 2,192,480 $ 5,482 $ 3,167,574 (26,789,008) $(23,615,952) Net loss -- -- -- 1,014,285 1,014,285 ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2000 2,192,480 $ 5,482 $ 3,167,574 $(25,774,723) $(22,601,667) ============ ============ ============ ============ ============

The accompanying notes are an integral part of the financial statements. F-5 15 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000, 1999 and 1998

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

The accompanying notes are an integral part of the financial statements. F-6 16 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION IVonyx Group Services, Inc. (the "Company"), a Delaware corporation, was incorporated on May 31, 1988. The Company is a healthcare company engaged in the business of providing home infusion and related health services throughout the United States of America. The Company is headquartered in Livonia, Michigan. The Company has generated significant operating losses from operations which have been financed in part by short-term or classified current borrowings. As of December 31, 2000, the Company had a working capital deficit of approximately $6,000,000. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management of the Company has developed and implemented certain plans to return the Company to profitability. These plans include strategies to increase revenues and reduce operating expenses. The Company's ability to execute these strategies may be adversely affected by the actions of third-party reimbursement sources, as well as market conditions beyond the control of the Company's management. (See Note 13). PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions are eliminated in consolidation. ACCOUNTS RECEIVABLE The Company's accounts receivable consist primarily of accounts due from patients, institutions, Medicare, Medicaid and various insurance companies. The Company performs ongoing credit evaluations at the subsidiary level and maintains contractual allowances and bad debt reserves for potential credit losses. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. INVENTORY Inventory consists of pharmaceuticals and supplies primarily used in the Company's infusion services and is stated at the lower of cost (first-in, first-out method) or market value. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of three to ten years. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvement or the term of the lease. When assets are retired or otherwise disposed, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period. The cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially expose the Company to concentrations of credit risk consisted of cash and accounts receivable at December 31, 2000 and 1999. The Company's cash policy limits credit F-7 17 exposure by requiring cash to be deposited in high-quality FDIC insured financial institutions. The Company has not experienced any losses in such accounts. Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company's customer base, thus spreading the trade credit risk. Significant concentrations of accounts receivable were as follows at December 31:

~~(exact~~2001 ~~name~~1999 of------ ~~registrant~~------ asCommercial ~~specified~~insurance incarriers ~~its~~............... ~~charter)~~60% 72% Medicaid .................................... 10% 10% Medicare .................................... 15% 7% Other ....................................... 15% 11% ------ ------ 100% 100% ====== ======

INCOME TAXES The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized and measured using enacted tax rates in effect for the year in which the differences are expected to be realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. REVENUE AND CONTRACTUAL ALLOWANCES Revenues are recognized as the related services are rendered and are recorded net of contractual allowances. Contractual allowances represent the difference between revenue at established rates and the amounts realizable from third-party reimbursement sources. A portion of the Company's revenues are billed to third-party reimbursement sources, and accordingly, the ultimate collectibility of a portion of the Company's accounts receivable is susceptible to changes in third-party reimbursement policies. The Company records a provision for bad debts for revenues estimated to be uncollectible. Net patient revenue is reported at estimated net realizable amounts from patients, third party payors, and others for services rendered and includes estimated retroactive revenue adjustments due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Revenue from the Medicare and Medicaid programs accounted for approximately 25% of the Company's net patient revenue for the year ended 2000. Laws and regulations governing Medicare and Medicaid are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. STOCK-BASED COMPENSATION The Company measures compensation expense relating to employee stock awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company measures compensation expense relating to non-employee stock awards in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation." F-8 18 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at December 31, 2000 and 1999 approximated the fair values of these instruments because of their short-term maturities. The carrying value of the Company's debt and capital lease obligations approximates fair value because interest rates on the Company's existing debt and capital lease obligations approximate market rates. RECLASSIFICATIONS Certain reclassifications were made to previously reported amounts in the accompanying financial statements and the related notes to make them consistent with the current presentation format of the Company. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:

~~Delaware~~DECEMBER ~~(State~~31, or----------------------------- ~~other~~2000 ~~jurisdiction~~1999 of----------- ~~incorporation~~----------- orFurniture ~~organization)~~and ~~000-26275~~equipment ~~(Commission~~...................... ~~File~~$ No443,123 $ 457,195 Medical equipment .)........................... ~~95-4697615~~880,666 (I915,511 Furniture and equipment .R.S.................... ~~Employer~~441,115 ~~Identification~~468,141 NoOther ........................................ 280,241 239,598 ----------- ----------- 2,045,145 2,080,445 Less accumulated depreciation and amortization (1,337,230) (1,153,301) ----------- ----------- Property and equipment, net ......... $ 707,915 $ 927,144 =========== ===========

Depreciation of property and equipment for the years ended December 31, 2000, 1999 and 1998 totaled approximately $203,081, $166,968 and $156,493, respectively. The Company leases certain equipment under agreements that are classified as capital leases. Leased capital assets included in property and equipment at December 31, 2000 and 1999 were as follows:

~~225~~2000 ~~Arizona~~1999 ~~Avenue~~--------- --------- Equipment under capital lease ......... $ 450,803 ~~Suite 250 Santa~~$ ~~Monica~~463,602 CALess ~~90401~~ accumulated amortization ......... (~~Address~~171,280) of(158,935) ~~Principal~~--------- ~~executive~~--------- ~~offices~~$ 279,523 ~~including~~$ ~~zip~~304,667 ~~code)~~ ========= =========

F-9 19 3. LINE OF CREDIT:

~~(310) 395~~DECEMBER 31, -~~5700~~ ------------------------- 2000 1999 ---------- ---------- Line of credit from a financial institution; interest at Prime plus 2.25% (~~Registrant’s~~11.75% ~~telephone~~and ~~number~~10.75% at December 31, ~~including~~2000 ~~area~~and ~~code~~1999, respectively) , payable monthly; collateralized by all assets of the Company; commitment fee of 1% of the unused balance, payable monthly; due January 2001 $5,963,951 $7,272,757

Available borrowings under the line of credit are based on certain accounts receivable and can be used for working capital requirements. The maximum credit limit under the line of credit ranged from $5,000,000 to $8,000,000 in fiscal years 2000 and 1999. The availability of funds under the line of credit is based on the amount of the accounts receivable balance outstanding. As of December 31, 2000 and 1999 the Company did not have any availability under the line of credit. In January 2001, the line of credit was renewed until July 2001. The credit agreement related to the line of credit has covenants and requires maintenance of certain financial ratios. Default on any covenant could affect the ability to borrow under the agreement, if not waived or corrected and could accelerate the maturity of any borrowings outstanding under the applicable agreement. As of December 31, 2000 and 1999, the Company was in violation of certain covenants contained in the line of credit agreement. The most significant of these violations relate to unpaid taxes, uncertainty with regard to obtaining certain long term financing by the required date and failure to maintain a required level of net worth. For fiscal years 2000 and 1999, the Company obtained a waiver for the covenant violations. 4. SHORT-TERM NOTES PAYABLE:

~~TABLE~~DECEMBER OF31, ~~CONTENTS~~-------------------------- 2000 1999 ---------- ---------- Short-term notes payable, including notes payable to related parties, consisted of the following: Subordinated notes, interest at 5%, payable on demand .. $1,438,000 $1,438,000 Subordinated notes, interest at Prime (9.50% at December 31, 2000), payable on demand ................ 500,000 500,000 Non-interest bearing note to vendor, payable on demand, collateralized by accounts receivable ................ 1,895,921 -- Notes payable to shareholders, interest from 8% to 10%, payable on demand .................................... 333,954 333,954 Non-interest bearing note payable to customer, principal due in 2001 .......................................... 608,000 -- Other short-term notes payable ......................... 63,115 100,411 ---------- ---------- $4,838,990 $2,372,365 ========== ==========

The subordinated notes were originally issued in 1993 with 494,332 common stock warrants, which expired October 15, 1999 and were exercisable at $0.10 per share. The notes originally matured in October 1995, however, the Company entered into agreements with the holders of the notes to extend the maturity date. As of December 31, 2000 and 1999, the Company had issued 4,187,066 common stock warrants, exercisable at $0.10 per share, of which 2,420,366 expire October 31, 2001 and 1,766,700 expire December 31, 2001, in consideration of extensions through May 1, 1999. These warrants were issued from F-10 20 1991 through 1998. The fair value of the warrants totaling $104,000 was calculated using the Black Scholes option pricing model with a term of 3.79 to 10.49 years, volatility of 70%, dividend yield of zero, and a risk-free interest ranging from 4.8% to 6.4%. During 1999, as part of a line of credit agreement the Company entered into contracts with notes holders, totaling $1,650,000 that are payable on demand. The Company has not entered into extension agreements with the holders of the remaining $288,000 in notes. These holders have not requested repayment of the notes. 5. LONG-TERM DEBT:

	ITEM 5. OTHER EVENTS
	ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.98

The scheduled maturities of long-term debt are as follows: 2001 ....................................................................... $119,146 2002 ....................................................................... 141,219 2003 ....................................................................... 80,609 -------- 340,974 ========

6. CAPITAL LEASE OBLIGATIONS: Capital lease obligations consisted of the following:

~~Table~~DECEMBER of31, ~~Contents~~------------------------- 2000 1999 --------- --------- Obligations under various capital leases collateralized by equipment; interest from 10.5% to 18.6%; due 2003 ........ $ 295,586 $ 354,295 Less current portion ..................................... (101,129) (86,437) --------- --------- $ 194,457 $ 267,858 ========= =========

The scheduled maturities of capital lease obligations are as follows: 2001 .................................................................... $ 102,129 2002 .................................................................... 101,087 2003 .................................................................... 93,804 --------- Total future minimum lease payments ..................................... 297,020 Less interest ........................................................... (1,434) --------- Present value of obligations ............................................ 295,586 Less current portion .................................................... (101,129) --------- Capital lease obligations ............................................... $ 194,457 =========

F-11 21 7. INCOME TAXES: The difference between the tax benefit derived by applying the Federal statutory income tax rate to net income (losses) and the expense recognized in the financial statements is as follows:

~~ITEM~~DECEMBER 531, ---------------------------------------- 2000 1999 1998 --------- --------- --------- Tax expense (benefit) derived by applying the Federal statutory income rate to net losses before income taxes ..................................... ~~OTHER~~$ ~~EVENTS~~ 360,646 $ 9,745 $ (93,663) State tax provision ................................. 21,689 1,152 217,764 Permanent differences and other ..................... 10,147 18,496 11,493 (Benefit) expense attributable to change in valuation allowances ............................. (346,042) 69,555 82,170 --------- --------- --------- $ 46,440 $ 98,948 $ 217,764 ========= ========= =========

Under the provisions of SFAS No. 109, the components of the net deferred tax amounts recognized in the accompanying balance sheets are:

~~drkoop~~DECEMBER 31, ----------------------------- 2000 1999 ----------- ----------- Deferred tax assets: Net operating losses .~~com~~.................. $ 5,503,311 ~~Inc~~$ 6,318,360 AMT tax credits ........................ ~~and IVonyx~~53,227 ~~Group~~-- ~~Services~~Accruals ............................... 1,808,689 ~~Inc~~1,309,344 Accrued taxes .......................... ~~have~~258,764 ~~entered~~232,874 ~~into~~Accrued ancompensation ~~amendment~~................... to103,953 ~~the~~25,270 ~~Asset Purchase~~Medicare ~~Agreement~~settlement ~~which~~.................... is921,732 ~~attached~~1,009,840 asCharitable ~~Exhibit 10~~contributions .98.............. to22,212 ~~this Form~~ 121,481 ----------- ----------- Current deferred tax asset ....... $ 8,671,888 $ 9,017,169 -K---------- ----------- Deferred tax liabilities: Basis of property and equipment . ....... (74,548) (73,787) Valuation allowance .......................... (8,597,340) (8,943,382) ----------- ----------- Net deferred tax asset (liability) ..... $ -- $ -- =========== ===========

Due to the uncertainty surrounding the realization of the benefits of its favorable tax attributes in future tax returns, the Company has placed a valuation allowance against all of its otherwise recognizable net deferred tax asset. The Company's net operating loss carryforward totaling approximately $15 million at December 31, 2000 expires in varying amounts through 2020. Under Section 382 of the Internal Revenue Code, changes in ownership exceeding certain levels result in an annual limitation on losses and tax credit carryforwards. Such limitation may limit the Company's ability to fully utilize its carryforwards prior to expiration. F-12 22 8. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases office space and laboratory facilities under operating leases. Rental expense under these operating leases aggregated approximately $824,226, $783,801 and $612,170 for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more consist approximately of the following: 2001 .................................. $ 770,731 2002 .................................. 579,745 2003 .................................. 376,185 Thereafter ............................ 7,122 ---------- Total ................................. $1,733,783 ==========

9. EMPLOYEE BENEFIT PLAN: Effective January 1, 1998, the Company established a 401(k) defined contribution plan (the "Plan") in which most of its employees were eligible to participate. The Plan provides for discretionary employer contributions. To date, the Company has made no contributions to the Plan. 10. LITIGATION: On June 12, 1998 the Company entered into an agreement with the United States Attorney for the District of Puerto Rico (the "Settlement"). The Settlement related to an investigation of the billing practices prior to 1998 of the Company's former branch in Puerto Rico for patients covered under the Federal government's Medicare program. Under the original term of the Settlement, the Company committed to pay $4,000,000 to the Medicare program. The Settlement called for an initial payment of $200,000 and for $3,800,000, bearing interest at a rate of 3.9%, to paid in monthly installments of principal and interest. In February 2000, the Company ceased making scheduled installment payments related to the Settlement. In March 2001, the Federal government informed the Company that is has elected to apply reimbursements that it owes the Company against the unpaid obligation. Such reimbursements would include amounts billed for patient services under Medicare or Medicaid. As of December 31, 2000 receivables from the federal government amounted to approximately $2.5 million. As of December 31, 2000 and 1999 the Company had outstanding liabilities of approximately $2.6 million and $3.4 million, respectively, relating to the settlement agreement. On September 5, 2000, Richard A. Breakie ("Breakie"), the former President and Chief Executive Officer of IVonyx, filed suit against IVonyx in the Wayne County Circuit Court of Michigan (Case No. 00-029056-CK). Breakie sought damages for breach of his employment agreement and failure to pay a $50,000 promissory note. On September 29, 2000, IVonyx filed a motion to dismiss Breakie's claims and to compel arbitration based on an arbitration clause in Breakie's employment agreement. On November 9, 2000, the court entered an order denying the motion. On November 30, 2000, IVonyx filed an answer denying all liability and a counterclaim against Breakie for, among other things, breaching his fiduciary duties to IVonyx ("Counterclaim"). On February 2, 2001, the court entered an order dismissing the Counterclaim on Breakie's motion, finding that the Counterclaim was subject to arbitration. On July 18, 2001, a demand for arbitration was filed by IVonyx, seeking in excess of $1,000,000 in damages from Breakie. Pursuant to Breakie's June 15, 2001 motion for summary disposition and motion for entry of judgment, the court, on July 19, 2001, entered an order granting Breakie summary disposition and entered judgment in favor of Breakie in the amount of approximately $250,000. The trial court also ordered that, in the event IVonyx sells its assets during the 21 day automatic stay period in which IVonyx must file a claim of appeal with the Michigan Court of Appeals, any proceeds from the Asset Sale, in the amount then due to Breakie, must be placed in an interest-bearing escrow account by IVonyx. IVonyx intends to appeal the trial court's judgment. Management and legal counsel are presently unable to determine the ultimate outcome of this matter on appeal, or the amount of loss to the Company, if any. F-13 23 The Company is subject to various legal and administrative proceedings in the ordinary course of business. Management believes the outcome of any such proceedings will not have a materially adverse effect on the Company's consolidated financial position or results of operations. As a health care provider, the Company is subject to government regulation. These regulations include laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. To ensure compliance with these regulations, insurance carriers and government entities often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of services rendered to patients. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties including disqualification from reimbursement under Medicare, Medicaid, or other programs. 11. REDEEMABLE CONVERTIBLE PREFERRED STOCK: The Series A, B, C, and D preferred stock have the following characteristics: VOTING Each holder of preferred stock shall be entitled to one vote for each share of common stock into which such shares of preferred stock are then convertible. The holders of each series of preferred stock and common stock together shall vote together as one class. Fractional shares, if any, shall not be entitled to any voting rights. DIVIDENDS The holders of preferred stock shall be entitled to receive in each fiscal year such dividends as may be declared from time to time by the Board of Directors, payable out of funds legally available therefor. No established rate of dividends need be payable on the preferred stock, but the preferred stock shall be entitled to a dividend preference as set forth in the next sentence with respect to common stock. Subject to the rights of series of preferred stock which may from time to time come into existence, cash dividends may be declared and paid upon common stock in any fiscal year of the Corporation only if in that year cash dividends in the same per share amount shall have been paid to or declared and set apart upon all preferred stock. LIQUIDATION RIGHTS In the event of any liquidation, deemed liquidation (including change in control or defined asset sales), Dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series A, B, C and D Shares are entitled to receive an amount per share equal to $2.00, $0.443, $1.00, and $1.50, respectively, plus an amount equal to 10% simple interest annual return on the preferred series base amount from the date of issuance to the date of distribution. In addition, the holders of each series of preferred stock is entitled to all declared and unpaid dividends, payable in preference and priority to any payments made to the holders of the then outstanding common stock. CONVERSION Each share of preferred stock, at the option of the holder, is convertible into a number of fully paid shares of common stock as determined by dividing the respective preferred stock issue price by the conversion price in effect at the time. The conversion price of Series A, B, C and D is $0.825, $0.443, $1.00, and $1.50 respectively, and is subject to adjustment in accordance with antidilution provisions contained in the Company's articles of incorporation. Conversion is automatic immediately upon the closing of a firm commitment underwritten public offering in which the public offering priced exceeds $2.00 per share (adjusted to reflect subsequent stock dividends, stock split or recapitalization) and the aggregate proceeds raised exceed $5,000,000. The company has reserved 28,128,390 shares of common stock for issuance upon conversion of the convertible preferred stock. F-14 24 12. STOCK OPTION PLANS: Stock-based compensation is governed by the 1989 and 1991 stock option plans (collectively, the Stock Option Plans). The Stock Option Plans provide for grants of incentive stock options or nonqualified options to employees, officers and directors, and consultants of the Company. The Company has reserved an aggregate of 4,300,000 shares of common stock for issuance under the Stock Option Plans. Options under the Stock Option Plans may be granted at prices less than, equal to, or greater than the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided that the exercise price of any incentive stock options granted to a participant who owns more than 10% of the voting power of all classes of the Company's outstanding capital stock must be equal to 110% of the fair market value of the common stock on the date of grant. The maximum term of options granted under the Stock Option Plans is ten years from the date of grant (five years in the case of a participant who owns more than 10% of the voting power of all classes of the Company's outstanding capital stock). Option under the Stock Option Plans generally vest over five years. A summary of the status of the Company's stock options as of December 31, 2000, 1999 and 1998 and the changes during the years then ended are presented below:

~~ITEM~~OPTIONS 7OUTSTANDING --------------------------------- WEIGHTED EXERCISE SHARES PRICES PER SHARE ---------- ----------------- BALANCE, JANUARY 1, 1998 3,236,250 $0.096 ~~FINANCIAL~~Granted ~~STATEMENTS~~300,000 ~~AND~~0.100 ~~EXHIBITS~~ Exercised -- -- Forfeited (888,000) 0.069 ---------- ------ BALANCE, DECEMBER 31, 1998 2,648,250 0.086 Granted 100,000 0.010 Exercised -- -- Forfeited (818,750) 0.091 ---------- ------ BALANCE, DECEMBER 31, 1999 1,929,500 0.081 Granted -- -- Exercised -- -- Forfeited (130,000) 0.078 ---------- ------ BALANCE, DECEMBER 31, 2000 1,799,500 $0.080 ---------- ------ Exercisable at December 31, 2000 1,399,500 $0.115 Exercisable at December 31, 1999 1,529,500 0.112 Exercisable at December 31, 1998 2,348,250 0.107 Exercisable at January 1, 1998 3,216,818 0.096 Weighted-average fair value options granted during 1998 0.100 Weighted-average fair value options granted during 1999 0.010 Weighted-average fair value options granted during 2000 --

F-15 25 The following table summarizes information about stock options outstanding at December 31, 2000:

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

PRO FORMA NET INCOME Had the compensation cost for the Company's plans been determined using the fair value of the option, the Company's net loss for 2000, 1999 and 1998 would approximate the unaudited pro forma amounts below:

~~10.98~~December ~~Amendment~~31, ~~No.~~2000 1December to31, ~~Asset~~1999 ~~Purchase~~December ~~Agreement~~31, by1998 ~~and~~------------------------- ~~among~~-------------------------- ~~IVonyx~~-------------------------- ~~Group~~As ~~Services,~~Reported ~~Inc.,~~Pro ~~IVonyx,~~Forma ~~Inc.,~~As ~~drkoop.com,~~Reported ~~Inc.,~~Pro ~~and~~Forma ~~drkoop~~As ~~LifeCare,~~Reported ~~Inc.~~Pro ~~(formerly~~Forma ~~known~~----------- as--------- ~~Infusion~~----------- ~~Acquisition~~--------- ~~Sub,~~----------- ~~Inc.~~--------- Net income (loss) $1,014,285 ~~dated~~$ as978,632 of$ ~~July~~(70,286) 30$ (109,483) ~~2001.~~$ (493,243) $ (557,488)

The effects of applying fair market value in this pro forma disclosure are not indicative of future amounts. The fair value of each stock option granted in 1998, 1999 and 2000 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: no dividend yield, risk-free interest rates from 4.9% to 9.26%, term of 10 years and volatility of 70%. 13. SUBSEQUENT EVENT: drkoop.com has signed a purchase agreement with the Company to acquire substantially all of the assets of the Company (other than cash, cash equivalents, accounts receivable and certain other excluded assets) for $2 million in cash and 5 million shares of drkoop.com common stock, plus additional contingent consideration. On April 12, 2001, the Board of Directors of the Company approved the asset sale, and an associated Dissolution as being fair and in the best interests of the Company and the holders of its capital stock. The transaction is contingent on approval of the Company's shareholders and subject to other contingencies. F-16 26 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)

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

The accompanying notes are an integral part of the unaudited financial statements. F-17 27 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

The accompanying notes are an integral part of the unaudited financial statements. F-18 28 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

The accompanying notes are an integral part of the unaudited financial statements. F-19 29 IVONYX GROUP SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION IVonyx Group Services, Inc. (the "Company"), a Delaware corporation, was incorporated on May 31, 1988. The Company is a healthcare company engaged in the business of providing home infusion and related health services throughout the United States of America. The Company is headquartered in Livonia, Michigan. The condensed financial statements included herein are unaudited and reflect all adjustments, which, in the opinion of management, are necessary to fairly state the Company's financial position, results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the Company's financial statements and notes thereto for the year ended December 31, 2000. The results of operations for the three month period ended March 31, 2001 and 2000 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions are eliminated in consolidation. 2. LITIGATION: On June 12, 1998 the Company entered into an agreement with the United States Attorney for the District of Puerto Rico (the "Settlement"). The Settlement related to an investigation of the billing practices prior to 1998 of the Company's former branch in Puerto Rico for patients covered under the Federal government's Medicare program. Under the original term of the Settlement, the Company committed to pay $4,000,000 to the Medicare program. The Settlement called for an initial payment of $200,000 and for $3,800,000, bearing interest at a rate of 3.9%, to paid in monthly installments of principal and interest. In February 2000, the Company ceased making scheduled installment payments related to the Settlement. In March 2001, the Federal government informed the Company that is has elected to apply reimbursements that it owes the Company against the unpaid obligation. Such reimbursements would include amounts billed for patient services under Medicare or Medicaid. As of March 31, 2001 and December 31, 2000, receivables from the federal government amounted to approximately $2.5 million. As of March 31, 2001 and December 31, 2000 the Company had outstanding liabilities of approximately $2.6 million, relating to the settlement agreement. On September 5, 2000, Richard A. Breakie ("Breakie"), the former President and Chief Executive Officer of IVonyx, filed suit against IVonyx in the Wayne County Circuit Court of Michigan (Case No. 00-029056-CK). Breakie sought damages for breach of his employment agreement and failure to pay a $50,000 promissory note. On September 29, 2000, IVonyx filed a motion to dismiss Breakie's claims and to compel arbitration based on an arbitration clause in Breakie's employment agreement. On November 9, 2000, the court entered an order denying the motion. On November 30, 2000, IVonyx filed an answer denying all liability and a counterclaim against Breakie for, among other things, breaching his fiduciary duties to IVonyx ("Counterclaim"). On February 2, 2001, the court entered an order dismissing the Counterclaim on Breakie's motion, finding that the Counterclaim was subject to arbitration. On July 18, 2001, a demand for arbitration was filed by IVonyx, seeking in excess of $1,000,000 in damages from Breakie. Pursuant to Breakie's June 15, 2001 motion for summary disposition and motion for entry of F-20 30 judgment, the court, on July 19, 2001, entered an order granting Breakie summary disposition and entered judgment in favor of Breakie in the amount of approximately $250,000. The trial court also ordered that, in the event IVonyx sells its assets during the 21 day automatic stay period in which IVonyx must file a claim of appeal with the Michigan Court of Appeals, any proceeds from the Asset Sale, in the amount then due to Breakie, must be placed in an interest-bearing escrow account by IVonyx. IVonyx intends to appeal the trial court's judgment. Management and legal counsel are presently unable to determine the ultimate outcome of this matter on appeal, or the amount of loss to the Company, if any. The Company is subject to various legal and administrative proceedings in the ordinary course of business. Management believes the outcome of any such proceedings will not have a materially adverse effect on the Company's consolidated financial position, results of operations or cash flows. As a health care provider, the Company is subject to government regulation. These regulations include laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. To ensure compliance with these regulations, insurance carriers and government entities often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of services rendered to patients. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties including disqualification from reimbursement under Medicare, Medicaid, or other programs. 3. SUBSEQUENT EVENT: drkoop.com has signed a purchase agreement with the Company to acquire substantially all of the assets of the Company (other than cash, cash equivalents, accounts receivable and certain other excluded assets) for $2 million in cash and 5 million shares of drkoop.com common stock, plus additional contingent consideration. On April 12, 2001, the Board of Directors of the Company approved the asset sale, and an associated Dissolution as being fair and in the best interests of the Company and the holders of its capital stock. The transaction is contingent on approval of the Company's shareholders and subject to other contingencies. F-21 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized, drkoop.com, Inc. Date: August 8, 2001 By /s/ EDWARD A. CESPEDES --------------------------------- Name: Edward A. Cespedes Title: President II-1

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized,

	drkoop.com, Inc.
Date: July 31, 2001	By	/s/ EDWARD A. CESPEDES
	Name: Edward A. Cespedes
	Title: President

II-1

EXHIBIT INDEX

Exhibit No.		Description
10.98		Amendment No. 1 to Asset Purchase Agreement, by and among IVonyx Group Services, Inc., IVonyx, Inc., drkoop.com, Inc., and drkoop LifeCare, Inc. (formerly known as Infusion Acquisition Sub, Inc.), dated as of July 30, 2001.

II-1

Table of Contents

Filing Compare · DRKOOP COM INC