<PAGE> 1
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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 March 31, 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 (IRS Employer
or incorporation 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 May 8, 1998, there were 10,009,694 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.
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ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets -
March 31, 1998 (unaudited) and December 31, 1997....................1
Consolidated Statement of Operations-
Three months ended March 31, 1998 and 1997 (unaudited)..............2
Consolidated Statements of Cash Flows-
Three months ended March 31, 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...........................................6
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..........9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings...................................................9
SIGNATURES....................................................................10
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
As Of
March 31, December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,543 $ 7,534
Certificates of deposit 10,971 5,398
Investments in marketable securities 16,785 34,082
Accounts receivable, net 16,468 11,059
Deferred income taxes 3,240 4,093
Other current assets 1,329 736
----------------------
Total current assets 64,336 62,902
PROPERTY AND EQUIPMENT, net 4,092 3,664
INTANGIBLE ASSETS, net 9,317 9,415
INVESTMENTS IN AFFILIATES 7,000 7,000
OTHER ASSETS 12,847 11,377
----------------------
Total assets $ 97,592 $ 94,358
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,386 $ 933
Other current liabilities 61 325
----------------------
Total current liabilities 1,447 1,258
DEFERRED REVENUE 150 0
----------------------
Total liabilities 1,597 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;
10,009,964 and 9,869,719 shares issued and
outstanding, respectively 100 99
Additional paid-in capital 96,507 95,976
Accumulated deficit (715) (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 95,995 93,100
======================
Total liabilities and shareholders'
equity $ 97,592 $ 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 share and per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
REVENUE $24,204 $10,007
COST OF REVENUES 18,503 7,401
----------------------
Gross profit 5,701 2,606
OPERATING EXPENSES 2,843 2,082
----------------------
Operating income 2,858 524
OTHER INCOME, Net 812 202
----------------------
Net income before taxes 3,670 726
PROVISION FOR INCOME TAXES 1,301 66
======================
Net income $ 2,369 $ 660
======================
PER SHARE
INFORMATION
Net income per share:
Basic $ 0.23 $ 0.09
Diluted $ 0.21 $ 0.08
Common shares used in computing per share amounts:
Basic 10,082 7,169
Diluted 11,041 8,407
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
(2)
<PAGE> 5
<TABLE>
<CAPTION>
For the Three
Months Ended
---------------------
March 31, March 31,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,369 $ 660
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 707 228
Deferred income taxes 853 --
Changes in operating assets and liabilities
Accounts receivable (5,409) (6,253)
Other current assets (593) 70
Advances to affiliates -- (1,947)
Other assets (129) (1,328)
Accounts payable and accrued expenses 453 582
Other current liabilities (247) 0
Deferred revenue 150 (50)
--------------------
Net cash used in operating activities (1,846) (8,038)
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets (1,658) --
Net investment in certificates of deposit (5,573) --
Net proceeds from investment in marketable securities 17,291 --
Purchases of property and equipment, net (720) (247)
--------------------
Net cash provided by (used in)
investing activities 9,340 (247)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale and issuance of common stock 1 --
Net proceeds from exercise of stock options 531 9
Repayment of capital lease obligations (17) (62)
--------------------
Net cash provided by (used in)
financing activities 515 (53)
--------------------
Net change in cash and cash equivalents 8,009 (8,338)
CASH AND CASH EQUIVALENTS, beginning of period 7,534 12,086
====================
CASH AND CASH EQUIVALENTS, end of period $ 15,543 $ 3,748
====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for:
Interest $ 2 $ 4
====================
Income Taxes $ 1,301 $ 66
====================
</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
March 31, 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
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. Certain prior period expenses have been reclassified to conform
to the 1998 presentation. 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
------ ------ -----
For the Three Months Ended March 31, 1997
Basic EPS
<S> <C> <C> <C>
Net income attributable to common stock $ 660 7,169,444 $ 0.09
Effect of dilutive securities:
Stock options and warrants 1,237,468 $(0.01)
-------- ---------- -------
Diluted EPS
Net income attributable to common stock
and assumed options exercises $ 660 8,406,912 $ 0.08
======== ========== =======
For the Three Months Ended March 31, 1998
Basic EPS
Net income attributable to common stock $ 2,369 10,081,782 $ 0.23
Effect of dilutive securities:
Stock options and warrants 959,247 $(0.02)
-------- ---------- -------
Diluted EPS
Net income attributable to common stock
and assumed options exercises $ 2,369 11,041,029 $ 0.21
======== ========== =======
</TABLE>
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 March 31,
------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $2,369 $660
Unrealized gains on marketable
securities, net of $118 and $40
income tax 178 60
------ ----
Comprehensive Income $2,547 $720
====== ====
</TABLE>
(5)
<PAGE> 8
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 and physician networks. The Company also develops and provides health
care information technology solutions, including electronic commerce and disease
management tools, 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 long term
agreements with its Management Services Organizations (each, a "MSO") the
financial results of such MSOs are included in the Consolidated Financial
Statements.
Results of Operations
Three Months Ended March 31, 1998 and 1997
Net revenue for the three months ended March 31, 1998 increased to $24.2 million
from $10.0 million in the comparable period ended March 31, 1997, primarily as a
result of the addition of new physician group practices under management,
provision of incremental network management services and fees for the use and
support of clinical information systems. The provision of physician group
practice management and related services and network management services
accounted for approximately $21.1 million of the Company's net revenue for the
three months ended March 31, 1998 as compared to $6.6 million in the comparable
period ended March 31, 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 $3.1 million for the three
months ended March 31, 1998, as compared to $3.4 million in the comparable
period ended March 31, 1997.
Cost of revenues for the three months ended March 31, 1998 increased to $18.5
million from $7.4 million for the comparable period ended March 31, 1997. The
increase in cost of revenues related primarily to the non-medical and system
expenses outsourced to the Company from physician group practices under
management.
Operating expenses for the three months ended March 31, 1998 increased to $2.8
million from $2.1 million for the comparable period ended March 31, 1997 and
included approximately $.6 million and $.2 million of research and development
costs, respectively. The increase in operating expenses reflected costs related
to the incremental provision of physician group practice management and related
services.
Other income,net for the three months ended March 31, 1998 was $.8 million
as compared to $.2 million for the comparable period ending March 31, 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") and operating cash.
(6)
<PAGE> 9
Provision for income taxes represents the net effect of a full forty percent
effective income tax rate on the Company's pre-tax income for the quarter,
largely offset by a reduction in the Company's reserve on previously generated,
fully-reserved deferred income tax assets due to the Company's expectations with
regard to future taxable income.
The net income for the three months ended March 31, 1998 was $2.4 million
compared to net income of $.7 million for the three months ended March 31, 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 three months ended March 31, 1998, the Company had negative cash flow
from its operating activities of $1.8 million, compared with a negative $8.0 for
the comparable period ended March 31, 1997. Net cash provided by investing
activities was $9.3 million for the three months ended March 31, 1998,
principally attributable to the proceeds received from marketable securities
that were sold, or matured, and invested in cash equivalents. This was offset by
investments in certificates of deposit, purchases of property and equipment and
capitalized software development costs. Net cash used in investing activities
was ($.2) million for the comparable period ended March 31, 1997, relating to
the purchase of property and equipment. Net cash provided by (used in) financing
activities was $.5 million for the three months ended March 31, 1998 principally
attributable to net proceeds from the exercise of incentive stock options. Net
cash provided by (used in) financing activities for the three months ended March
31, 1997 was ($.1) million, and related primarily to the repayment of capital
lease obligations.
The Company's operating plan for the remainder of 1998 includes continued
development of the Company's integrated management services and clinical
information systems. The principal categories of expenditures include research
and development of the Company's clinical information systems 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. Subsequent to March 31,
1998, the Company acquired Integrated Medical Management, Inc., a physician
management company, that provides services complimentary to that which the
Company currently provides and made an additional investment in an affiliated
entity that the Company previously had a minority interest. 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.
(7)
<PAGE> 10
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,
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.
(8)
<PAGE> 11
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.
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 material adverse effect on the Company's business, results of
operations or financial condition.
(9)
<PAGE> 12
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.
May 15,1998 ADVANCED HEALTH CORPORATION
By: /s/ JONATHAN EDELSON
------------------------------------
Jonathan Edelson, M.D.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ MICHAEL W. ROGERS
------------------------------------
Michael W. Rogers
Executive Vice President,
Chief Financial and
Corporate Development Officer
(Principal Financial and Accounting
Officer)
(10)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,543
<SECURITIES> 16,785
<RECEIVABLES> 16,468
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 64,336
<PP&E> 4,092
<DEPRECIATION> 2,241
<TOTAL-ASSETS> 97,592
<CURRENT-LIABILITIES> 1,447
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 95,895
<TOTAL-LIABILITY-AND-EQUITY> 97,592
<SALES> 0
<TOTAL-REVENUES> 24,204
<CGS> 0
<TOTAL-COSTS> 18,503
<OTHER-EXPENSES> 2,843
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,670
<INCOME-TAX> 1,301
<INCOME-CONTINUING> 2,369
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,369
<EPS-PRIMARY> .23
<EPS-DILUTED> .21
</TABLE>
