<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended June 30, 1998.
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period__________________
to_________________________.
Commission File Number: 0-21209
ADVANCED HEALTH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3893841
(State or other jurisdiction or (IRS Employer
ncorporation or organization) Identification No.)
555 White Plains Road
Tarrytown, New York 10591
(Address of principal executive offices, including zip code)
(914) 524-4200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of August 11, 1998, there were 10,066,577 shares outstanding of the
registrant's Common Stock, $.01 par value.
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<PAGE> 2
ADVANCED HEALTH CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page No.
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets -
June 30, 1998 (unaudited) and December 31, 1997 ....................1
Consolidated Statement of Operations-
Three and six months ended June 30, 1998 and 1997 (unaudited).......2
Consolidated Statements of Cash Flows-
Six months ended June 30, 1998 and 1997 (unaudited).................3
Notes to Consolidated Financial Statements..........................4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.........13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................13
ITEM 4. Submission of Matter to Vote of Security Holders...................14
SIGNATURES...................................................................15
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
As Of
June 30, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $16,111 $7,534
Certificates of deposit 5,962 5,399
Investments in marketable securities 10,933 34,082
Accounts receivable, net 9,677 11,059
Deferred income taxes 0 4,092
Other current assets 1,608 736
-------------------------
Total current assets 44,291 62,902
PROPERTY AND EQUIPMENT, net 5,642 3,664
INTANGIBLE ASSETS, net 17,975 9,415
INVESTMENTS IN AFFILIATES 12,565 7,000
OTHER ASSETS 12,716 11,377
-------------------------
Total assets $93,189 $94,358
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $6,173 $933
Other current liabilities 1,955 325
-------------------------
Total current liabilities 8,128 1,258
DEFERRED REVENUE 100
LONG TERM DEBT 151
CAPITAL LEASE OBLIGATIONS 226 -
-------------------------
Total liabilities 8,605 1,258
-------------------------
COMMITMENTS
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value,
5,000,000 shares authorized; 0 shares issued
and outstanding
Common stock, $.01 par value; 15,000,000
shares authorized; 10,056,647 and 9,869,719
shares issued and outstanding, respectively 100 99
Additional paid-in capital 101,410 95,976
Accumulated deficit (17,029) (3,084)
Unrealized gain on marketable securities,
net of deferred income taxes 178 184
Less: Treasury stock, at cost
(8,937 and 8,937 shares, respectively (75) (75)
-------------------------
Total shareholders' equity 84,584 93,100
-------------------------
Total liabilities and shareholders' equity $93,189 $94,358
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
(1)
<PAGE> 4
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
------------------------ -------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE $ 16,793 $ 13,021 $ 40,997 $ 23,028
COST OF REVENUES 18,761 9,908 37,264 17,309
------------------------ ----------------------
Gross profit/(loss) (1,968) 3,113 3,733 5,719
OPERATING EXPENSES 10,800 2,103 13,643 4,185
RESTRUCTURING CHARGE 854 0 854 0
------------------------ ----------------------
Operating income/(loss) (13,622) 1,010 (10,764) 1,534
OTHER INCOME, Net 724 141 1,536 343
------------------------ ----------------------
Net income/(loss) before taxes (12,898) 1,151 (9,228) 1,877
PROVISION FOR INCOME TAXES 3,416 0 4,717 66
------------------------ ----------------------
Net income/(loss) ($16,314) $ 1,151 ($13,945) $ 1,811
======================== ======================
PER SHARE
INFORMATION
Net income/(loss) per share:
Basic ($ 1.63) $ 0.16 ($ 1.40) $ 0.25
Diluted ($ 1.63) $ 0.14 ($ 1.40) $ 0.22
Common shares used in computing per
share amounts:
Basic 10,033 7,236 9,979 7,202
Diluted 10,033 8,338 9,979 8,190
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
(2)
<PAGE> 5
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
-------------------------
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $ (13,945) $ 1,811
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 1,427 483
Deferred income taxes 4,093 -
Allowance for doubtful accounts 238 -
Changes in operating assets and liabilities
Accounts receivable 1,144 767
Other current assets (872) (2)
Advances to affiliates - (125)
Other assets - (2,085)
Accounts payable and accrued expenses 5,239 (200)
Other current liabilities 1,646 -
Deferred revenue 100 (100)
-------------------------
Net cash (used in) provided by
operating activities (930) 549
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets (1,339) -
Minority investment in affiliated entities (5,565) (500)
Net investment in certificates of deposit (563) -
Net proceeds from investment in marketable securities 23,149 -
Advances to affiliates - (2,600)
Investment in affiliate - (3,763)
Intangible assets (4,307) -
Purchases of property and equipment, net (2,537) (1,020)
-------------------------
Net cash provided by (used in)
investing activities 8,838 (7,883)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale and issuance of common stock - -
(Repayment of) proceeds from loans payable related
to acquisitions - (23)
Net proceeds from exercise of stock options 684 270
Repayment of capital lease obligations (15) (159)
-------------------------
Net cash provided by financing activities 669 88
-------------------------
Net change in cash and cash equivalents 8,577 (7,246)
CASH AND CASH EQUIVALENTS, beginning of period 7,534 12,086
-------------------------
CASH AND CASH EQUIVALENTS, end of period $ 16,111 $ 4,840
=========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for:
Interest $ 27 $ 7
=========================
Income Taxes $ 647 $ 66
=========================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Fair market value of Common Stock issued for acquisitions $ 4,750 $ -
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
(3)
<PAGE> 6
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(in thousands, except per share data)
(unaudited)
1. Reference is made to the Notes to Consolidated Financial Statements
contained in the Company's December 31, 1997 audited consolidated
financial statements as filed with the Securities and Exchange Commission
on Form 10-K. In the opinion of Management, the interim unaudited
consolidated financial statements included herein reflect all adjustments
necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited
data presented therein. The Company believes that its historical results
of operations from period to period are not comparable and that such
results are not necessarily indicative of results for any future periods.
2. Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share." Basic net income per common share ("Basic EPS") is computed by
dividing net income by the weighted average number of common shares
outstanding. Diluted net income per common share ("Diluted EPS") is
computed by dividing net income by the weighted average number of common
shares and dilutive potential common shares then outstanding. SFAS No. 128
requires the presentation of both Basic EPS and Diluted EPS on the face of
the consolidated statements of operations. The impact of the adoption of
this statement was not material to all previously reported EPS amounts.
(4)
<PAGE> 7
A reconciliation between the numerator and denominator of Basic EPS and Diluted
EPS is as follows:
<TABLE>
<CAPTION>
Net
Income (Loss)
Net Income Common Per Common
(Loss) Shares Share
------ ------ -----
<S> <C> <C> <C>
For the Three Months Ended June 30, 1997
Basic EPS
Net income attributable to common stock $ 1,151 7,235,908 $ 0.16
Effect of dilutive securities:
Stock options and warrants 1,102,368 $ (0.02)
---------- --------- ---------
Diluted EPS
Net income attributable to common stock
and assumed option exercises $ 1,151 8,338,276 $ 0.14
=========== ========= =========
For the Three Months Ended June 30, 1998
Basic EPS
Net (loss) attributable to common stock $ (16,314) 10,033,306 $ (1.63)
Effect of dilutive securities:
Stock options and warrants $ (0.00)
---------- --------- ---------
Diluted EPS
Net income attributable to common stock
and assumed option exercises $ (16,314) 10,033,306 $ (1.63)
=========== ========= =========
For the Six Months Ended June 30, 1997
Basic EPS
Net income attributable to common stock $ 1,811 7,201,600 $ 0.25
Effect of dilutive securities:
Stock options and warrants 988,132 $ (0.03)
---------- --------- ---------
Diluted EPS
Net income attributable to common stock
and assumed option exercises $ 1,811 8,189,732 $ 0.22
=========== ========= =========
For the Six Months Ended June 30, 1998
Basic EPS
Net (loss) attributable to common stock $ (13,945) 9,978,777 $ (1.40)
Effect of dilutive securities:
Stock options and warrants $ (0.00)
---------- --------- ---------
Diluted EPS
Net income attributable to common stock
and assumed option exercises $ (13,945) 9,978,777 $ (1.40)
=========== ========= =========
</TABLE>
(5)
<PAGE> 8
3. During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", which established standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. The
components of comprehensive income are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income/(loss) $(16,314) $ 1,151
Unrealized gains on marketable
securities, net of $118 and $40
income tax 178 60
--------- --------
Comprehensive Income $(16,136) $ 1,211
========= ========
For the Six Months Ended June 30,
---------------------------------
1998 1997
---- ----
Net income/(loss) $(13,945) $ 1,811
Unrealized gains on marketable
securities, net of $118 and $40
income tax 178 60
--------- --------
Comprehensive Income $(13,767) $ 1,871
========= ========
</TABLE>
4. On May 11, 1998 the Company acquired, under a stock purchase agreement,
Integrated Medical Management, Inc.("IMM") a physician management company
focused on the hospital system-affiliated physician marketplace. IMM
provides services which are complimentary to that which the Company
currently provides. The purchase price of $6.6 million consisted of cash
($1.6 million) with the balance paid with the Company's stock.
5. The Company had previously recorded a deferred tax asset based on the
Company's expectations with regard to future taxable income. Based on the
current operating loss and net operating loss carryforwards ("NOLs")
available to offset taxable income, the Company has taken a reserve
against the previously recorded deferred tax benefit as it is more likely
than not, that this asset will be realized.
6. The Company is restructuring both its management services and information
technology businesses. The management services component will be
restructured into an outsourcing services provider, three strategies
resulting from the restructuring will be,: (i) better alignment of
business lines with customers, (ii) greater emphasis on hospitals and
large group customers, and (iii) more flexible service offerings.
The information technology unit be restructured to place increased focus
on product development and sales in areas such as electronic laboratory
and prescription management while limiting product development efforts
that do not benefit its work on electronic laboratory and prescription
management. In addition, as part of its restructuring action, the Company
has initiated broad headcount reductions in both business units as well as
cuts in discretionary spending. A total of $9.6 million was incurred for
non-recurring expenses, restructuring charges and non-capitalized software
development costs.
(6)
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
Advanced Health Corporation (the "Company") provides a full range of integrated
management services and clinical information systems to physician group
practices, hospitals and provider networks. The Company also develops and
provides health care information technology solutions for use by integrated
delivery systems and other managed care organizations. The Company generates
revenues from (i) fees for managing and providing consulting services to
physician group practices, (ii) fees for managing physician networks and (iii)
fees for use and support of its clinical information systems, including license,
software installation, software integration, training and data conversion fees.
The Company contracts with its physician practice and network management clients
pursuant to agreements with its Management Services Organizations (each, a
"MSO"). The financial results of such MSOs are included in the Consolidated
Financial Statements.
For the quarter ended June 30, 1998, the Company reported an operating loss of
$13.6 million, including non-recurring operating expenses, restructuring charges
and non-capitalizable software development costs totaling $9.6 million. The
Company further reported a net loss after tax of $16.3 million, which included a
reversal of $3.2 million of deferred tax benefits previously recorded. The
Company announced a plan to restructure both its management services and its
information technology businesses in order to more effectively serve its
customer base of physicians, hospitals and other health care organizations and
to improve profitability. The restructuring actions described below contain
forward-looking statements that may be significantly impacted by certain risks
and uncertainties, including failure to meet operating objectives or to execute
the operating plan and failure to successfully restructure the Company's
business units.
Management Services Restructuring
The Company's management services business will be restructured into an
outsourcing services provider. Three key strategies include:
1) Better Alignment of Business Lines with Customers: Management services will
be structured into four business lines to better align its delivery of services
to the needs of its customers: management and consulting services for large
hospitals to assist them in the management of their affiliated physician groups;
management and consulting services for select large independent physician
practices; ancillary management and development services for physician group
practices and hospitals; and administrative risk management services for
Independent Physician Associations (IPAs) and hospital systems.
2) Greater Emphasis on Hospitals and Large Group Customers: The Company intends
to place greater focus on hospitals as prospective customers. The Company
believes that hospitals have an immediate financial need to better manage the
physicians they now employ as a result of practice acquisitions, and they have
the incentive to work more effectively with independent community physicians at
practices with which they would like to affiliate but not purchase. The Company
also believes that hospitals are motivated potential purchasers of its services
and, as large business customers, are sophisticated consumers of management and
outsourcing business services. The Company is also focusing its marketing
efforts on larger independent practices, which the Company believes tend to have
more business infrastructure and better governance, enabling them to be more
effective and profitable customers versus smaller practices.
(7)
<PAGE> 10
3) Flexible Service Offerings: The Company plans to change its service
offerings to provide customers with more flexibility in how they contract for
services. The Company intends to provide a range of service offerings that
extends from the complete outsourcing of the management of a physician practice,
to management consulting services, to information technology products and
services. For new customers, the Company intends to switch from a MSO model to a
more flexible outsourcing services model that charges customers a usage-based
fee for more discretely defined services.
Information Technology Restructuring
The Company's restructuring of its information technology unit includes placing
increased focus on product development and sales in areas such as electronic
laboratory and prescription management. The Company intends to limit product
development efforts that do not benefit its work on electronic laboratory and
prescription management. Further, the Company will be redirecting its sales
efforts to increase sales for its product lines that offer laboratory and
prescription functionality. Sales efforts will be focused on strategic sales
initiatives that emphasize long-term, recurring revenue streams rather than
large, one-time revenue events and better position the Company to benefit from
what it believes is the rapidly gaining importance of electronic commerce.
Results of Operations
Three Months Ended June 30, 1998 and 1997
Net revenue for the three months ended June 30, 1998 increased to $16.8 million
from $13.0 million in the comparable period ended June 30, 1997, primarily as a
result of the addition of new physician group practices under management
including the customer revenue derived from the company's recent acquisition of
IMM and the provision of incremental network management services. The provision
of physician group practice management and related services and network
management services accounted for approximately $16.6 million of the Company's
net revenue for the three months ended June 30, 1998 as compared to $10.4
million in the comparable period ended June 30, 1997. The Company earned fees
for the use and support of its clinical information systems, including the
recognition of license revenues and software and training revenues, of
approximately $.2 million for the three months ended June 30, 1998, as compared
to $2.6 million in the comparable period ended June 30, 1997.
Cost of revenues for the three months ended June 30, 1998 increased to $18.8
million from $9.9 million for the comparable period ended June 30, 1997. The
increase in cost of revenues related primarily to the non-medical and system
expenses outsourced to the Company from physician group practices and networks
under management and direct costs associated with providing practice and network
management services including physician billing and collection efforts.
(8)
<PAGE> 11
Operating expenses for the three months ended June 30, 1998 increased to $10.8
million from $2.1 million for the comparable period ended June 30, 1997 and
included non-recurring expenses and non-capitalized software development costs
of approximately $8.8 million comprised of the following amounts: (i) $3.9
million for bad debts, (ii) $2.1 million for professional fees, (iii) $.4
million for previously terminated employees, (iv) $.9 million for miscellaneous
items and (v) $1.5 million of non-capitalized software development costs. The
Company is not capitalizing any software development costs in the second quarter
ended June 30, 1998. Specifically, with the shortfall in information technology
revenues in the second quarter, the Company initiated an evaluation of its
various software products and related capitalized costs. While such evaluation
is ongoing, no such costs were capitalized in the second quarter. Management
expects to complete its evaluation of its software product lines prior to the
issuance of its fiscal third-quarter Form 10-Q. Based on the results of this
evaluation, management will determine the realizability of its capitalized
software assets. As of June 30, 1998, the Company has recorded unamortized
capitalized software development costs of approximately $7.1 million. The
increase in operating expenses reflect costs related to the incremental
provision of physician group practice management and related services and as
described above.
Restructuring charges, for the three months ended June 30, 1998 were recorded
for approximately $.8 million and represent amounts primarily related to an
acquisition (goodwill) the Company made in April 1996 and whereby the Company
has decided to exit such business due to market conditions. The Company also
anticipates taking an additional restructuring charge of approximately $2
million in the third quarter of 1998, relating to the further implementation of
the Company's management services and information technology restructuring. This
is not related to the review of capitalized software assets presently underway.
Other income, net for the three months ended June 30, 1998 was $.7 million as
compared to $.1 million for the comparable period ending June 30, 1997 and
related primarily to interest earned from investments in marketable securities
as a result of the investment of proceeds from the Company's follow-on and
initial public offering ("IPO"), strategic investments, loans and operating
cash.
Provision for income taxes includes a reserve taken against a previously
recorded deferred tax benefit as it is more likely than not that this asset will
be realized. The provision also includes payments made for state and local
income taxes based on amounts other than taxable income.
The net loss for the three months ended June 30, 1998 was $16.4 million compared
to net income of $1.2 million for the three months ended June 30, 1997 due to
the factors described above.
(9)
<PAGE> 12
Results of Operations
Six Months Ended June 30, 1998 and 1997
Net revenue for the six months ended June 30, 1998 increased to $41.0 million
from $23.0 million in the comparable period ended June 30, 1997, primarily as a
result of the addition of new physician group practices under management
including the customer revenue derived from the company's recent acquisition of
IMM and the provision of incremental network management services. The provision
of physician group practice management and related services and network
management services accounted for approximately $37.8 million of the Company's
net revenue for the six months ended June 30, 1998 as compared to $17.0 million
in the comparable period ended June 30, 1997. The Company earned fees for the
use and support of its clinical information systems, including the recognition
of license revenues and software and training revenues, of approximately $3.2
million for the six months ended June 30, 1998, as compared to $6.0 million in
the comparable period ended June 30, 1997.
Cost of revenues for the six months ended June 30, 1998 increased to $37.2
million from $17.3 million for the comparable period ended June 30, 1997. The
increase in cost of revenues related primarily to the non-medical and system
expenses outsourced to the Company from physician group practices and networks
under management and direct costs associated with providing practice and network
management services including physician billing and collection efforts.
Operating expenses for the six months ended June 30, 1998 increased to $13.6
million from $4.2 million for the comparable period ended June 30, 1997 and
included non-recurring expenses, restructuring charges and non-capitalized
software development costs of approximately $8.8 million comprised of the
following amounts: (i) $3.9 million for bad debts, (ii) $2.1 million for
professional fees, (iii) $.4 million for previously terminated employees, (iv)
$.9 million for miscellaneous items and (v) $1.5 million of non-capitalized
software development costs. The Company is not capitalizing any software
development costs in the second quarter ended June 30, 1998. However, it did
capitalize certain software development costs during the first three months of
1998. Specifically, with the shortfall in information technology revenues in the
second quarter, the Company initiated an evaluation of its various software
products and related capitalized costs. While such evaluation is ongoing, no
such costs were capitalized in the second quarter. Management expects to
complete its evaluation of its software product line prior to the issuance of
its fiscal third-quarter Form 10-Q. Based on the results of this evaluation,
management will determine the realizability of its capitalized software assets.
As of June 30, 1998, the Company has recorded unamortized capitalized software
development costs of approximately $7.1 million. The increase in operating
expenses reflect costs related to the incremental provision of physician group
practice management and related services and as described above.
Restructuring charges for the six months ended June 30, 1998 were recorded for
approximately $.8 million and represent amounts primarily related to an
acquisition (goodwill) the Company made in April 1996 and whereby the Company
has decided to exit such business due to market conditions. The Company also
anticipates taking an additional restructuring charge of approximately $2
million in the third quarter of 1998, relating to the further implementation of
the Company's management services and information technology restructuring. This
is not related to the review of capitalized software assets presently underway.
(10)
<PAGE> 13
Other income, net for the six months ended June 30, 1998 was $1.5 million as
compared to $.3 million for the comparable period ending June 30, 1997 and
related primarily to interest earned from investments in marketable securities
as a result of the investment of proceeds from the Company's follow-on and
initial public offering ("IPO"), strategic investments, loans and operating
cash.
Provision for income taxes includes a reserve taken against a previously
recorded deferred tax benefit as it is more likely than not that this asset will
be realized. This provision also includes payments made for state and local
income taxes based on amounts other than taxable income.
The net loss for the six months ended June 30, 1998 was $13.9 million compared
to net income of $1.8 million for the six months ended June 30, 1997 due to the
factors described above.
Liquidity and Capital Resources
Effective October 7, 1997, the Company completed its follow-on offering of
2,250,000 shares of Common Stock, including the underwriters' over-allotment
option. The follow-on offering generated proceeds to the Company of
approximately $46.0 million, net of underwriting expenses.
For the six months ended June 30, 1998, the Company had negative cash flow from
its operating activities of ($.9) million, compared with a positive $.5 million
for the comparable period ended June 30, 1997. Accounts payable and accrued
expenses increased $5.2 million principally attributable to amounts recorded
($1.2 million) with the acquisition of IMM, and ($4.0 million) in regard to
certain non-recurring expenses and restructuring charges. Other current
liabilities increased $1.6 million principally attributable to amounts recorded
with the acquisition of IMM. Net cash provided by investing activities was $8.8
million, for the six months ended June 30, 1998, principally attributable to the
net proceeds from investments in marketable securities ($23.1 million),
investment in acquiring IMM ($8.0 million including $6.6 million purchase price
of which approximately $1.6 million was in cash and remainder in the Company's
common stock, and additional goodwill of $1.8 million including a restructuring
action), a physician management company focused on the hospital
system-affiliated physician marketplace that provides services complimentary to
that which the Company currently provides, an additional investment ($5.6
million) in three separate affiliated entities in which the Company previously
had a minority interest, increased capitalized software development costs (other
assets) during the first quarter of 1998 ($1.1 million, net of amortization) and
the purchase of property and equipment ($2.6 million). Net cash (used in)
investing activities was ($7.9) million for the comparable period ended June 30,
1997, relating to a minority investment in an affiliated entity, advances to,
and investments in affiliates, and the purchase of property and equipment. Net
cash provided by financing activities was $.7 million for the six months ended
June 30, 1998, principally attributable to net proceeds from the exercise of
incentive stock options. Net cash provided by financing activities for the six
months ended June 30, 1997 was ($.1) million, and related primarily to proceeds
from the exercise of stock options and the repayment of capital lease
obligations.
(11)
<PAGE> 14
The Company's operating plan for the remainder of 1998 includes the
restructuring of its management services and information technology businesses
including the continued development of the Company's electronic laboratory and
prescription management products as described above. The principal categories of
expenditures include research and development of the Company's electronic
laboratory and prescription management products as well as ongoing business
development and marketing. The Company believes that the net proceeds of the
follow-on offering together with other cash and investments on hand, interest
income and revenues from operations will be sufficient to fund planned
operations of the Company through at least mid 1999. The Company has no other
planned material capital expenditures or capital commitments.
From time to time in the ordinary course of its business, the Company evaluates
possible acquisitions of businesses, products and technologies that are
complimentary to those of the Company.
Year 2000
The Year 2000 date change issue is believed to affect virtually all companies
and organizations. If not corrected, many computer applications could fail or
create erroneous results by or at the year 2000. The Company has not completed
its assessment of compliance issues for the Company's proprietary software
products for its computer systems (both hardware and software), for equipment
ancillary to the Company's business that contains computers or computer chips,
or for the computer systems of other entities with which the Company does
business. The Company has also not determined the cost of these compliance
issues or the time it will take to complete compliance.
The Company expects to complete its full assessment of the Year 2000 issue no
later than December 31, 1998, which is prior to any anticipated impact on its
operating systems. As part of the Year 2000 assessment, the Company expects to
communicate with all of its physician practices and networks, as well as
suppliers and third parties with which the Company does business, to determine
the extent to which the Company's interface systems are vulnerable to those
parties' failure to remedy their Year 2000 issues. There is no guarantee that
the systems of other companies on which the Company relies will be corrected in
a timely manner or that the failure to correct will not have a material adverse
effect on the Company's systems. Year 2000 modifications and assessments are
based on managements' best estimates, which are derived utilizing numerous
assumptions of future events, including availability of certain resources and
other factors. However, there can be no guarantee the estimates and assessments
will be achieved or come to pass, and actual results could differ materially
from those anticipated.
(12)
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II - Other Information
ITEM 1. Legal Proceedings
On September 23, 1997, the Company commenced an action against
Synetic, Inc. ("Synetic") entitled Advanced Health Med-E-Systems
Corporation v. Synetic, Inc. in the Supreme Court of the State of
New York to collect $1 million owing by Synetic to the Company
pursuant to a software license agreement dated as of March 31, 1997,
as amended (the "License Agreement"), between Synetic and the
Company, with respect to E-RxTM. On October 1, 1997, Synetic filed
an answer to this lawsuit and asserted various counterclaims against
the Company, in which Synetic alleges that the subject software and
documentation was not timely delivered and installed in accordance
with the License Agreement. As relief, Synetic seeks a declaratory
judgment that Synetic is not obligated to make the $1 million
payment, as well as unspecified damages. The Company believes that
Synetic's defenses and counterclaims are without merit.
Subsequent to June 30, 1998, a total of eleven stockholder Class
Action Complaints have been filed against the Company. It is the
Company's view that each of the Complaints is without merit, and it
intends to defend against the actions vigorously. No assurance can
be made that additional actions or proceedings arising out of the
allegations in the current Class Action Complaints will not be
commenced or filed in the future.
From time to time, the Company is involved in litigation. Although
the actual amount of any liability that could arise with respect to
any such litigation cannot be accurately predicted, in the opinion
of management, the resolution of these matters is not expected to
have a material adverse effect on the Company's business, results of
operations or financial condition.
(13)
<PAGE> 16
ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS.
(a) The Company's Annual Meeting of Stockholders was held on June 26,
1998.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation
14 under the Securities Act of 1934. 9,049,084 shares, representing
a majority of the votes cast at the Meeting by the holders of shares
entitled to vote on the following matter, were voted in the election
of each of the Board of Directors nominees named in the Company
Proxy Statement for the Meeting. James T. Carney and Barry Kurokawa
were listed in the proxy statement as management's nominees for
election as directors of the Company and no candidates were offered
in opposition to management's nominees and the nominees were elected
based on the following vote. James T. Carney (i) 8,933,788 for, (ii)
115,296 against, and (iii) 0 abstain. Barry Kurokawa (i) 8,933,847
for, (ii) 115,237 against, and (iii) 0 abstain. There were 0 broker
held non-voted shares represented at the Meeting with respect to
this matter. The following directors' terms continued after the
Annual Meeting: Jonathan Edelson M.D. and Alan B. Masarek.
(c) The Company's stockholders did not approve the amendment of the
Company's Stock Option Plan (the "Plan") to increase the number of
shares available for grant under the Plan. 9,049,084 shares, which
is more than a majority of the outstanding shares of the Company
common stock on May 11, 1998, represented, in person or by proxy,
were voted regarding the aforementioned proposal. The number of
votes cast with respect to this matter was as follows: (i) 2,361,932
for, (ii) 3,875,610 against, and (iii) 298,626 abstentions. There
were 2,512,916 broker held non-voted shares represented at the
Meeting with respect to this matter.
(d) 9,049,084 shares, which is more than a majority of the votes
represented by the outstanding shares of common stock present, in
person or by proxy, cast at the Meeting and entitled to vote on the
following matter, were voted regarding the ratification of
appointment of Arthur Andersen, LLP as the Company's independent
auditor as follows: (i) 9,015,769 for, (ii) 26,993 against, and
(iii) 6,322 abstentions. There were 0 broker held non-voted shares
represented at the Meeting with respect to this matter.
(14)
<PAGE> 17
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 therewith duly authorized.
August 12,1998 ADVANCED HEALTH CORPORATION
By:/s/ Jonathan Edelson, M.D.
--------------------------
Jonathan Edelson, M.D.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By:/s/Jeffrey M. Sauerhoff
-----------------------
Senior Vice President Finance &
Administration
(Principal Financial and Accounting Officer)
(15)
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