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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q/A
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-19758
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ACCESS HEALTH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0163589
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
335 INTERLOCKEN PARKWAY, BROOMFIELD, CO 80021
(Address of principal executive offices) (Zip code)
(303) 466-9500
(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 / /
Number of shares of Common Stock Outstanding at January 31, 1998: 18,643,345
shares
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ACCESS HEALTH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets--September 30, 1997 and December 31, 1997..................... 3
Condensed consolidated statements of income--three months ended December 31, 1996 and 1997.......... 4
Condensed consolidated statements of cash flows--three months ended December 31, 1996 and 1997...... 5
Notes to condensed consolidated financial statements................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................. 16
SIGNATURE............................................................................................... 17
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ACCESS HEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................................................. $ 15,991 $ 23,462
Available-for-sale securities..................................................... 41,969 44,594
Accounts and license fees receivable, net of allowance for doubtful accounts of
$963 ($768 at September 30, 1997)............................................... 12,453 14,342
Deferred income taxes............................................................. 5,012 5,012
Income taxes receivable........................................................... 3,231 3,220
Prepaid expenses.................................................................. 2,122 2,136
Other current assets.............................................................. 1,448 1,111
------------- ------------
Total current assets............................................................ 82,226 93,877
Property and equipment, net......................................................... 16,150 16,413
Purchased intangibles, net of accumulated amortization of $5,014 ($4,911 at
September 30, 1997)............................................................... 2,894 2,791
Deferred income taxes............................................................... 1,042 1,042
Other assets........................................................................ 342 380
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$ 102,654 $ 114,503
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------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 3,634 $ 4,533
Accrued payroll and related expenses.............................................. 3,664 3,538
Accrued integration and restructuring costs....................................... 3,109 2,538
Taxes and other accrued expenses.................................................. 4,360 7,910
Notes payable to related parties.................................................. 1,264 315
Current portion of long-term debt................................................. 198 203
Current portion of capital lease obligation....................................... 457 470
Deferred revenues................................................................. 4,954 5,184
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Total current liabilities....................................................... 21,640 24,691
Capital lease obligations........................................................... 481 348
Long-term debt...................................................................... 197 145
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value--5,000,000 shares authorized, no shares issued
and outstanding................................................................. -- --
Common stock, $.001 par value--75,000,000 shares authorized, 18,564,697 shares
issued and outstanding (18,246,159 at September 30, 1997)....................... 18 19
Additional paid-in capital........................................................ 80,806 84,374
Retained earnings................................................................. (488) 4,926
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Total stockholders' equity...................................................... 80,336 89,319
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$ 102,654 $ 114,503
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</TABLE>
See accompanying notes.
3
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ACCESS HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1997
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<S> <C> <C>
Revenues:
Care management services.................................................................. $ 21,872 $ 26,321
Licensing and support services............................................................ 2,769 2,728
--------- ---------
Total revenues.......................................................................... 24,641 29,049
Costs and expenses:
Cost of revenues:
Care management services................................................................ 11,040 14,405
Licensing and support services.......................................................... 1,128 675
Product and other development............................................................. 2,356 1,498
Sales and marketing....................................................................... 2,338 2,199
General and administrative................................................................ 2,367 2,298
Transaction costs......................................................................... 6,345 --
Integration and restructuring costs....................................................... 6,961 --
--------- ---------
Total costs and expenses................................................................ 32,535 21,075
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Income (loss) from operations............................................................... (7,894) 7,974
Other income................................................................................ 379 758
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Income (loss) before income taxes........................................................... (7,515) 8,732
Provision (credit) for income taxes......................................................... (1,503) 3,318
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Net income (loss)........................................................................... $ (6,012) $ 5,414
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Income (loss) per share
Basic................................................................................... $ (0.34) $ 29
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--------- ---------
Diluted................................................................................. $ (0.34) $ 27
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Shares used in per share calculations
Basic................................................................................... 17,570 18,425
Diluted................................................................................. 17,570 20,106
</TABLE>
See accompanying notes.
4
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ACCESS HEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................................... $ (6,012) $ 5,414
Adjustments to reconcile net income to net cash provided by operations:
Allowance for doubtful accounts......................................................... 6 20
Depreciation and amortization........................................................... 1,338 1,735
Deferred stock compensation............................................................. 443 --
Common stock issued for services rendered............................................... 2,233 --
Changes in:
Accounts and licenses receivable...................................................... 566 (1,909)
Prepaid expenses and other current assets............................................. 432 335
Accounts payable...................................................................... (547) 899
Accrued payroll and related expenses.................................................. (170) (126)
Accrued integration and restructuring costs........................................... 6,186 (571)
Other accrued expenses................................................................ (1,393) 3,550
Notes payable to related parties...................................................... 515 (949)
Deferred revenues..................................................................... (895) 230
--------- ---------
Net cash provided by operating activities........................................... 2,702 8,628
--------- ---------
Cash flows from investing activities:
Purchase of available-for-sale securities, net.......................................... (2,807) (2,625)
Purchase of property and equipment...................................................... (1,123) (1,896)
Other assets............................................................................ (155) (38)
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Net cash used by investing activities............................................... (4,085) (4,559)
--------- ---------
Cash flows from financing activities:
Payment of long-term debt and capital leases............................................ (116) (166)
Sale of common stock.................................................................... 338 3,568
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Net cash provided by financing activities........................................... 222 3,402
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Net increase (decrease) in cash and equivalents............................................. (1,161) 7,471
Cash and equivalents at beginning of period................................................. 26,533 15,991
--------- ---------
Cash and equivalents at end of period....................................................... $ 25,372 $ 23,462
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
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ACCESS HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated condensed interim financial statements have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The accompanying
consolidated condensed interim financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended September 30, 1997.
In the opinion of management the unaudited interim financial statements
reflect all adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the Company's consolidated financial position at
December 31, 1997, consolidated results of operations for the three month
periods ended December 31, 1996 and 1997 and cash flows for the three month
periods ended December 31, 1996 and 1997. Results for the period ended December
31, 1997 are not necessarily indicative of the results to be expected for the
entire fiscal year.
REVENUE RECOGNITION
Revenues include care management services, which consist of program
membership, member communications and teleservicing fees from the Company's
Personal Health Advisor/FirstHelp and ASK-A-NURSE contracts with managed care
organizations, self-insured employers and hospitals. Revenues also include
licensing and support services related to the Company's ASK-A-NURSE, FirstHelp,
patient education software, Access Care Management System, HealthSelect, and
CANCER HELPLINK.
Program membership fees from Personal Health Advisor and FirstHelp contracts
are recognized ratably in accordance with contract terms typically on the basis
of per-member fees. Member communications fees are recognized upon the delivery
of services. Teleservicing fees are recognized in accordance with contract terms
on the basis of per-call fees or fees based on phone counselor staffing.
License revenues from ASK-A-NURSE, FirstHelp, and CANCER Helplink products
are recognized ratably over the term of the contract. HealthSelect and patient
education software revenue is recognized upon delivery of the software. Support
revenues are comprised of ASK-A-NURSE, CANCER HELPLINK, and Access Care
Management System support revenue, LIFE MATCH software support revenue and
direct marketing fees. Revenue from support contracts and software maintenance
contracts is recognized ratably over the contract term. Direct marketing fees
are recognized upon the delivery of services.
PRODUCT AND OTHER DEVELOPMENT COSTS
Product and other development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services related to the development
of the Company's products and services.
TRANSACTION COSTS AND INTEGRATION AND RESTRUCTURING COSTS
Transaction costs of $6.3 million reflect charges associated directly with
the merger of the Company with Informed Access and CRS and included professional
fees of approximately $5.2 million. Also related to the mergers were integration
and restructuring costs recorded in the first and fourth quarters of fiscal
1997, which included approximately $6.3 million for severance and related
expenses, approximately $400,000 for elimination
6
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ACCESS HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of redundant technology, approximately $1.2 million for discontinuation of
facilities, approximately $900,000 for disposal of assets and approximately
$900,000 for relocation and other costs.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the difference between the carrying value and fair value of the
long-lived asset.
NEW ACCOUNTING PRONOUNCEMENTS
STATEMENT OF ACCOUNTING STANDARDS NO. 128
For the quarter ended December 31, 1997, the Company adopted Financial
Accounting Standards Board Statement 128 to report earnings per share. Basic EPS
is calculated based upon the weighted average of actual shares outstanding.
Diluted earnings per share is most similar to what was reported as earnings per
share under Accounting Principles Board Opinion ("APB") No. 15 which includes
the dilutive impact of stock options using the treasury stock method.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
is required to be adopted for fiscal years beginning after December 15, 1997.
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Management has determined
this change will not significantly affect its financial reporting. The Company
expects to adopt Statement No. 130 in the first quarter of fiscal 1999.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. The statement requires that a public company report financial
and descriptive information about its reportable operating segments using the
management approach. Management has determined this change will not
significantly affect its financial reporting. The Company expects to adopt
Statement No. 131 in the first quarter of fiscal 1999.
NOTE 2: BUSINESS COMBINATIONS
During November 1996 the Company consummated business combinations with
Informed Access which included the exchange of 5,375,000 shares of Access Health
common stock (including 4,778,317 shares issued to Informed Access shareholders
and 596,683 shares reserved for future grant to Informed Access option holders)
and CRS, which included the exchange of 170,000 shares of Access Health common
stock. These business combinations were accounted for as pooling-of-interests
and, accordingly, the
7
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ACCESS HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(UNAUDITED)
NOTE 2: BUSINESS COMBINATIONS (CONTINUED)
historical financial statements of the Company have been restated to include the
consolidated financial statements of Access Health, Informed Access and CRS for
all periods presented.
NOTE 3: NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties arising from bonuses are payable to members
of management, who are also stockholders of the Company. The final installment
of these notes was paid in January 1998.
NOTE 4: LONG-TERM DEBT
The Company has a term facility agreement (the "Term Agreement") whereby
through December 1996, the Company could borrow, in one or more borrowings, an
amount not to exceed $2.0 million in the aggregate, subject to certain
conditions set forth in the Term Agreement. At December 31, 1997, borrowings
under the note payable facility and capital lease facility totaled $347,000 and
$601,000, respectively. Borrowings under the Term Agreement are secured by
certain of the Company's equipment with an aggregate carrying value of
approximately $800,000 at December 31, 1997. Amounts payable under the Term
Agreement bear interest at 14.48%, are due at varying dates through September
1999, and require monthly payments of principal and interest totaling
approximately $52,000. Amount due under the note payable facility of the Term
Agreement for the next twelve months is approximately $531,000.
NOTE 5: INCOME TAXES
The Company's state net operating loss carryforwards of approximately $6.7
million as of September 30, 1997 expire between 2007 and 2011. The Company also
has approximately $161,000 of federal research and development tax credits
available, which expire between 2007 and 2011.
Realization of the Company's net deferred tax assets is dependent upon the
Company generating sufficient taxable income in future years in the appropriate
tax jurisdiction to obtain benefit from the reversal of temporary differences
and from tax credit and net operating loss carryforwards. The amount of deferred
tax assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are reduced.
NOTE 6: COMMITMENTS
OPERATING LEASES
The Company leases its offices under the terms of operating leases that
expire between September 1998 and December 2012. Annual minimum rental payments
for fiscal 1998, 1999, 2000, 2001, 2002 and thereafter are $3,032,000,
$2,920,000, $2,695,000, $2,641,000, $1,597,000 and $17,381,000 respectively.
Rental expenses are recorded on a straight-line basis over the respective lease
terms.
NOTE 7: SUBSEQUENT EVENT
As of February 17, 1998, the Company announced a definitive agreement to
acquire privately held InterQual, Inc. of Marlborough, Massachusetts. InterQual
is the leading provider of clinical decision support criteria to health care
insurers, plans and providers. The transaction will be accounted for as a
pooling of interests under APB Opinion No. 16 and is expected to close in the
second calendar quarter of this year. The merger transaction is subject to
stockholder approval by both companies and customary closing conditions.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS SET FORTH HEREUNDER AND IN THE COMPANY'S ANNUAL REPORT AS FILED ON FORM
10-K.
GENERAL. The Company completed mergers with Informed Access Systems, Inc.
("Informed Access") and Clinical Reference Systems, LTD ("CRS") during November
1996. Both transactions were accounted for as pooling-of-interests and,
accordingly, Management's Discussion and Analysis of Financial Condition and
Results of Operations refers to the historical financial statements of the
Company that have been restated to include the consolidated financial statements
of Access Health, Informed Access and CRS, and the combined results of
operations and financial position of all three companies for the first quarter
of fiscal 1997.
RESULTS OF OPERATIONS
REVENUES. Revenues consist of revenues from care management services and
licensing and support services. Revenues increased from $24.6 million during the
three months ended December 31, 1996 to $29.0 million during the three months
ended December 31, 1997.
Revenues from care management services increased from $21.9 million during
the first quarter of fiscal 1997 to $26.3 million during the first quarter of
fiscal 1998 due to increases in membership levels related to the Company's
contracts during these periods. As of December 31, 1997, approximately 23.1
million members were enrolled compared to approximately 16.5 million members
enrolled as of December 31, 1996. Average revenue per-member per-month was $0.38
for the first quarter of fiscal 1998 compared to $0.46 for the first quarter of
fiscal 1997. The decrease in average revenue per-member was primarily due to
contract renewals and renegotiations where actual utilization was meaningfully
below the contract minimum. The Company believes that the decline in average
revenue per-member will end during the second fiscal quarter and average revenue
per-member will stabilize during the remainder of fiscal 1998. Revenue from the
Company's contracts is recognized ratably in accordance with contract terms on
the basis of per-member fees.
Revenues from licensing and support services decreased slightly from $2.8
million during the first quarter of fiscal 1997 to $2.7 million during the first
quarter of fiscal 1998. Licensing and support services revenues include
licensing implementations and program support activities for FirstHelp, the
ASK-A-NURSE-Registered Trademark- family of products, CANCER
HelpLink-Registered Trademark-, Access Care Management
System-Registered Trademark- ("ACMS") and the LIFE MATCH-Registered Trademark-
family of products.
COST OF REVENUES. The cost of care management services revenues includes
the costs of operating the Company's care centers, on-going client consultation
and charges for providing care management member communications services. The
gross margins for care management services were 49.5% during the first quarter
of fiscal 1997 and 45.3% during the first quarter of fiscal 1998. The decrease
in gross margin during the first quarter of fiscal 1998 compared to the first
quarter of fiscal 1997 is primarily due to adjusting pricing terms on older
contracts during fiscal 1997. The Company does not anticipate material price
adjustments to contracts during the remainder of fiscal 1998.* Additional
factors contributing to the decrease in gross margin were operational
inefficiencies experienced as a result of implementing a common service platform
in all care centers and absorbing the costs associated with new product beta
sites.
The cost of licensing and support services revenues includes the costs of
license implementations, on-going client consultation, annual users'
conferences, advertising materials, and other support services for FirstHelp,
ASK-A-NURSE, CANCER HelpLink, Access Care Management System ("ACMS") and LIFE
MATCH licensees. The gross margin percentages for licensing and support services
increased from 59.3%
9
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during the first quarter of fiscal 1997 to 75.3% during the first quarter of
fiscal 1998 due to changes in product licensing mix and increased efficiency
resulting from organizational adjustments. While gross margins for licensing and
support can fluctuate, the Company believes it is operating near targeted gross
margin levels for licensing and support services.
PRODUCT AND OTHER DEVELOPMENT EXPENSES. Product and other development
expenses totaled $2.4 million, or 9.6% of revenues, during the first quarter of
fiscal 1997 and $1.5 million, or 5.2% of revenues, during the first quarter of
fiscal 1998. The decrease is due to the integration of the development teams of
Access Health and Informed Access Systems. In order to meet consumer needs and
demands for new products, the Company expects to continue to increase spending
on development in future quarters.*
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.3
million, or 9.5% of revenues, and $2.2 million, or 7.6% of revenues, during the
first quarter of fiscal 1997 and 1998, respectively. As a percentage of revenue,
sales and marketing expenses declined due to the integration of the sales teams
of Access Health and Informed Access. In future periods, the Company expects to
maintain a generally consistent relationship of sales and marketing expenses to
revenues.*
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $2.4 million, or 9.6% of revenues, and $2.3 million, or 7.9% of revenues,
during the first quarter of fiscal 1997 and 1998, respectively. As a percent of
revenue, general and administrative expenses decreased due to the integration of
Access Health and Informed Access Systems' management teams. The Company expects
general and administrative expenses to increase in coming quarters, but
generally consistent with the current percentage of revenue.*
TRANSACTION COSTS. Transaction costs of $6.3 million were one-time charges
recorded in the first quarter of fiscal 1997 associated directly with the merger
of the Company with Informed Access and CRS and consists primarily of
professional fees and services of approximately $5.2 million.
INTEGRATION AND RESTRUCTURING COSTS. Integration and restructuring costs
related to the mergers of Informed Access and CRS were recorded in the amounts
of $7.0 million and $2.7 million during the first and fourth quarters of fiscal
1997, respectively. Integration and restructuring costs include: $7.1 million
for severance, outplacement and relocation costs specifically related to the
merger; $1.2 million related to the closure and elimination of duplicate leased
facilities, primarily corporate headquarters, a sales office and a call center;
and $1.3 million related to the write-off of computer hardware and other assets
which were made obsolete as a result of the merger and duplicate information
systems. The remaining merger-related accrual at December 31,1997 was
approximately $2.5 million. Total expected cash expenditures relating to the
merger charge are estimated to be approximately $6.7 million of which
approximately $4.2 million was disbursed prior to December 31, 1997. Termination
benefits received by employees terminated though September 30, 1997 were
approximately $5.1 million. The remaining severance and outplacement amounts are
expected to be paid during the current fiscal year.
INCOME FROM OPERATIONS. Operating income increased from a loss of $7.9
million during the first quarter of fiscal 1997 to a profit of $8.0 million
during the first quarter of fiscal 1998. As indicated above, the change is
attributable to increasing revenues and decreased ongoing operating expenses,
and to the transaction, integration and restructuring expenses recorded in the
first quarter of fiscal 1997.
OTHER INCOME. The Company generates interest and other income from cash
balances and available-for-sale securities. Interest and other income increased
from $379,000 to $758,000 in the first quarter of fiscal 1997 and 1998,
respectively due to the increase in cash and equivalents and available for sale
securities from $58.0 million at December 31, 1996 to $68.1 million at December
31, 1997.
INCOME TAXES. The Company recorded an income tax benefit of approximately
$1.5 million in the first quarter of fiscal 1997 and an income tax provision of
approximately $3.3 million in the first quarter of fiscal 1998, respectively.
During fiscal 1997, the Company, for tax purposes, liquidated one of its
subsidiaries, allowing it to utilize the net operating loss of the subsidiary
and reduce the valuation
10
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allowance by $3,368,000. Additionally, during fiscal 1997, the Company recorded
a deferred tax asset of approximately $6.0 million resulting from temporary
differences in the recognition of certain expenses for book and tax purposes.
Realization of the Company's net deferred tax asset is dependent upon Access
Health generating sufficient United States federal taxable income (approximately
$17.0 million) in future years to obtain benefit from the reversal of net
deductible temporary differences and from tax credit carryforwards. The
Company's management believes that, on a more likely than not basis, the
Company's recorded net deferred tax asset is realizable. The amount of deferred
tax assets considered realizable is subject to adjustment in future periods if
estimates of future United States federal taxable income are reduced.
EFFECTS OF INFLATION AND CHANGING PRICES. Inflation and changing prices
have not had a material effect on the Company's operations and, at current
levels, are not expected to in future years*.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company held cash and equivalents and
available-for-sale securities totaling $68.1 million compared to a balance of
$58.0 million as of September 30, 1997. Cash provided by operations during the
first three months of fiscal 1998 was $8.6 million compared with $2.7 million
for the first three months of fiscal 1997.
The Company believes its current capital resources are adequate to fund cash
needs for anticipated operating levels for at least the next twelve months*. The
Company also may use capital resources in connection with business expansion
that may include the acquisition of complementary product lines or businesses
during fiscal 1998 or beyond*.
During the first three months of fiscal 1998, the Company purchased
approximately $1.9 million of property and equipment. The Company expects to
purchase additional capital equipment during the balance of fiscal 1998 to
further integrate and expand call centers and system capacity, and to expand the
Company's corporate infrastructure*.
* THIS STATEMENT IS A FORWARD-LOOKING STATEMENT REFLECTING CURRENT
EXPECTATIONS. THERE CAN BE NO ASSURANCE THAT THE COMPANY'S ACTUAL FUTURE
PERFORMANCE WILL MEET THE COMPANY'S CURRENT EXPECTATIONS.
INVESTORS ARE STRONGLY ENCOURAGED TO REVIEW THE SECTION ENTITLED "RISK
FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE."
FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
UNCERTAINTY RELATED TO OBTAINING, EXPANDING AND RETAINING CONTRACTS MAY
IMPACT RESULTS OF OPERATIONS. The Company's ability to increase revenues and
profitability is largely dependent on the Company's ability to secure additional
care management contracts and to retain and expand existing contracts. The
Company could be adversely affected by the termination or non-renewal of any of
the Company's contracts, or by renegotiation of the terms of the contracts,
particularly if the affected contracts cover a large number of members or
represent a significant portion of the Company's care management revenue. For
example, in fiscal 1997, the Company renegotiated various older care management
contracts to bring price terms based on minimum membership and utilization rates
previously negotiated in line with actual membership and utilization rates. Such
rationalizations resulted in a decrease of revenue by approximately $7.0 million
in fiscal 1997. During the first quarter of fiscal 1998, contract
rationalizations decreased revenue by approximately $1.3 million and for the
balance of the year the Company expects contract rationalizations to reduce
revenue under such contracts by approximately $4.6 million. Any factors
adversely affecting the market for the Company's care management products or
licensing and support services products, including factors outside of the
Company's control, such as adverse publicity or government regulatory action,
could have a material adverse effect on the Company.
11
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DEPENDENCE ON PRINCIPAL CUSTOMERS. Significant portions of the Company's
revenues are generated by a limited number of customers. The Company's care
management contracts range from approximately 800 members to 3.0 million members
per contract. In fiscal 1997, the five largest single care management
enrollments total 3.0 million, 2.4 million, 1.9 million, 1.5 million and 1.5
million members. In fiscal 1997, the Company's three largest customers accounted
for approximately 8.0%, 7.8%, and 6.9% of the Company's total revenues and the
Company's top five customers, in the aggregate, accounted for approximately
33.4% of the Company's total revenues. After an initial term of approximately
one to four years, contracts generally can be terminated upon 60 to 360 days
notice to the Company. Three of the Company's five largest contracts are up for
renewal in 1998. The Company's contracts could be subject to early termination
by its customers if the Company were not in compliance with any applicable
government regulation. The termination, non-renewal or renegotiation of any such
agreements could have a material adverse effect on the Company's operating
results. See "Government Regulation."
UNCERTAINTY OF FUTURE OPERATING RESULTS. The Company's quarterly operating
results may fluctuate significantly in the future as a result of a variety of
factors, many of which are outside the Company's control. There can be no
assurance that the Company's revenues and profitability will increase during
fiscal 1998 and beyond. The Company's revenues may be materially adversely
affected by the termination or non-renewal of the Company's contracts or by the
renegotiation of the terms of such contracts. The Company may incur
significantly increased sales, marketing, and promotional expenses during fiscal
1998, and may devote additional resources to the further development of care
management, disease management or other new products. To the extent that the
Company incurs increased expenses, the Company's operating results will be
adversely affected unless revenues and operating margins increase sufficiently
to offset such expenditures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION. The market for the Company's products and services is highly
competitive. There are a number of competitors that offer products or services
that compete with some or all of those offered by the Company. Existing and
potential clients may also evaluate the Company's products or services against
internally developed programs. Increased competition could result in pricing
pressure and margin erosion. In its existing business and as the Company offers
new products or services, or enters new markets, it may face increased
competition from competitors, some of which may have substantially greater
financial, marketing and technical resources than the Company. In particular,
several small competitors have recently been acquired or are expected to be
acquired by companies with substantially greater financial, marketing and
technical resources than the Company, and this could lead to increased
competition. There can be no assurance that the Company will continue to compete
successfully.
CHANGING HEALTH CARE MARKET AND NEW PRODUCT DEVELOPMENT. The health care
industry has undergone significant changes in recent years, and changes are
expected to continue. Containing health care costs has become a national
priority. As a result, the health care industry has become increasingly
dominated by managed health care plans, causing cost containment pressure to
rise. To address these changes, the Company shifted its business focus in 1993
to payors from providers and developed its personal health management services.
There is no assurance that the Company's existing products and services will
achieve continued success or that its new products and services will succeed.
There also can be no assurance that continued industry change will not adversely
affect the Company's ability to compete. Continued change may cause the Company
to incur significant product development and marketing expenses. The Company's
future success will depend on the Company's ability to adapt to the changing
needs of the health care industry.
CARE CENTER OPERATIONS. The Company maintains member service and data
centers ("care centers") in Rancho Cordova, California; Chicago, Illinois;
Broomfield, Colorado; and Phoenix, Arizona. The Company's operations depend on
the adequate functioning of the computer and telephone systems in its call
centers. Although the Company has taken precautions to provide for power,
computer, and telephone
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systems redundancy, there can be no assurance that a fire or other disaster
affecting the centers or an equipment failure would not disable the Company's
systems for a significant period of time. Any significant damage to the
Company's facilities or an equipment failure could have a material adverse
effect on the Company's results of operations.
The successful operation of the Company's care centers is based on a
networked information system. The information system provides care center nurses
and health care counselors with access to care management applications and a
database of information including member information, plan rules, physician
information and clinical algorithms and guidelines. The Company is in the
process of developing a new information system which combines certain aspects of
the different systems developed by Access Health and Informed Access. Failure to
successfully develop and implement this new information system could delay
revenues or increase operating costs and could have a material adverse effect on
the Company. The ability to continue to develop, implement and support the
Company's information systems is dependent on its ability to employ and retain
experienced technical personnel. If the Company is unable to hire and retain
required personnel or is required to pay compensation at significantly higher
levels to attract and retain technical personnel it could have a material
adverse effect on the Company's financial results.
LIMITATIONS ON PROTECTION OF PROPRIETARY RIGHTS. The Company regards its
software, clinical algorithms and nursing assessment tools, clinical operational
expertise and marketing and program operation materials as proprietary and takes
action to protect its intellectual property with patents, copyrights,
trademarks, trade secret laws and restrictions on disclosure, copying and
transferring title. Despite the Company's precautions, it may be possible for
unauthorized third parties to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. There can be
no assurance that competitors, some of which have substantial resources and have
made substantial investments in competing technologies, will not seek to apply
for and obtain patents that will prevent, limit or interfere with the Company's
ability to market its products and services either in the United States or in
international markets. The Company could incur substantial costs defending
itself in suits against the Company or its proprietary rights or in bringing
suits against those parties to enforce the Company's proprietary rights. The
Company has been issued patents on its clinical algorithms in the United States
and has filed for patent protection in some foreign countries. There is no
assurance that such patents will not be challenged or invalidated. Existing
copyright laws afford only limited practical protection. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States, which could be a factor
depending upon into which countries outside the United States the Company
expands.
MANAGEMENT OF GROWTH. The Company has experienced rapid growth in recent
years. Continued rapid growth may place a significant strain on the Company's
management, telecommunications systems, operational infrastructure, working
capital and financial and management control systems. The difficulties of
managing growth may be increased by the necessity of coordinating geographically
separated organizations. In order for the Company to manage its client base
successfully, management will be required to anticipate the changing demands of
their growing operations and to adopt systems and procedures accordingly.
Failure to effectively implement or maintain such systems and procedures could
adversely affect the Company's business, results of operation and financial
condition. Further, there can be no assurance that the Company's current
information systems, telecommunications systems and operational infrastructure
will be adequate for its future needs, or that the Company will be successful in
implementing new systems. Failure to upgrade its information systems,
telecommunications systems and operational infrastructure or unexpected
difficulties encountered with these systems during expansion could adversely
affect the Company's business, financial condition and results of operations.
ACQUISITION-RELATED RISKS. The Company has grown in part through mergers
and acquisitions. The Company intends to evaluate acquisitions of product lines
and businesses as part of its business strategy.
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The process of integrating an acquired company's business into the Company's
operations may result in unforeseen operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for the ongoing development of the Company's business. Moreover, there can be no
assurance that the anticipated benefits of an acquisition will be realized.
Future acquisitions by the Company could result in potentially dilutive
issuance's of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect the Company's operating results
and financial condition. In addition, acquisitions involve numerous risks,
including difficulties in managing diverse geographic operations, the diversion
of management's attention from other business concerns, risks of entering
markets in which the Company has no or limited direct prior experience and the
potential loss of key employees of the acquired company. The inability of the
Company's management to respond to changing business conditions effectively,
including the changes associated with its acquired businesses and product lines,
could have a material adverse effect on the Company's results of operations.
KEY EMPLOYEES AND MANAGEMENT OF CHANGE. The Company's success depends on a
limited number of key management employees, most of whom are subject to
post-employment non-competition restrictions. The loss of the services of one or
more of these employees could have a material adverse effect on the Company. The
Company believes that its continued success also will depend in large part on
its ability to attract and retain highly-skilled management, marketing, sales
and nursing personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting and retaining
such personnel as necessary. Furthermore, the Company's ability to manage change
and growth successfully will require the Company to continue to improve its
management expertise as well as its financial systems and controls.
VOLATILITY OF STOCK PRICE. The market for the Company's stock is highly
volatile. The trading price of Access Health's common stock is subject to wide
fluctuations in response to a variety of factors including the signing or loss
of a major contract, changes in market analyst estimates and recommendations for
the Company's common stock, fluctuations in operating results, the failure of
operating results to meet market analyst's estimates, changes in government
regulation and general conditions in the health care industry and the economy,
any of which could cause the price of the Company's common stock to fluctuate,
perhaps substantially. In addition, in recent years stock prices have
experienced significant fluctuations, which have particularly affected the
market price for the securities of health care companies and which often have
been unrelated to the operating performance of these companies.
GOVERNMENT REGULATION. The health care industry is subject to extensive and
evolving government regulation at both the Federal and state levels relating to
many aspects of the Company's and its clients' businesses in use of the
Company's programs, including the provision of health care services,
teleservicing, and health care referral programs. These statutes and regulations
in many cases predate the development of telephone-based health care information
and other interstate transmission and communication of medical information and
services. The literal language of certain of these statutes and regulations
governing the provision of health care services, including the practice of
nursing and the practice of medicine, could be construed by regulatory
authorities to apply to certain of the Company's activities, including without
limitation teleservicing activities which use California, Illinois, Arizona, and
Colorado registered nurses to provide out-of-state care management services such
as nursing assessments and information regarding appropriate sources of care and
treatment time frames. These statutes and regulations could also apply to
certain activities of the Company's health service customers when operating the
Company's programs. In addition, the literal language of the statutes and
regulations governing health maintenance organizations and other plans that
provide or arrange for the provision of health care services for a prepaid or
periodic charge could be construed by regulatory authorities to apply to certain
activities of the Company that are provided on a per-member, per-month basis.
The Company has not been made, nor is it aware that any other company providing
out-of-state teleservicing has ever been made, the subject of such requirements
by a regulatory authority. However, if regulators seek to enforce any of the
foregoing
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statutory and regulatory requirements, the Company, its employees and/or its
clients could be required to obtain additional licenses or registrations, to
modify or curtail the operation of the Company's programs, to modify the method
of payment for the Company's programs, or to pay fines or incur other penalties.
The payment of remuneration to induce the referral of health care business
has been a subject of increasing governmental and regulatory focus in recent
years. Section 1128B(b) of the Social Security Act (sometimes referred to as the
"Federal anti-kickback statute") provides criminal penalties for individuals or
entities that knowingly and willfully offer, pay, solicit or receive
remuneration in order to induce referrals for items or services for which
payment may be made under the Medicare and Medicaid programs and certain other
government-funded programs. The Social Security Act provides authority to the
Office of the Inspector General through civil proceedings to exclude an
individual or entity from participation in the Medicare and state health
programs if it is determined any such party has violated Section 1128B(b) of the
Social Security Act. Regulations have been promulgated specifying certain
payment practices, which will not be subject to criminal prosecution or civil
exclusion. These regulations, commonly referred to as the "safe harbor"
regulations, do not expand the scope of the Federal anti-kickback statute, and
the fact that a business arrangement does not fit within a safe harbor does not
mean the business arrangement violates the Federal anti-kickback statute. The
Company's programs do not meet the requirements of the safe harbor for referral
services. A number of states in which the Company operates have anti-kickback
statutes similar to the Federal statute as well as statutory and regulatory
requirements governing referral agencies and regulating franchising and business
opportunity ventures. In addition, the Federal government and a number of states
have enacted statutes which contain outright prohibitions on referrals for
specified services which are made by referring providers who have an ownership
interest in, or compensation arrangement with, the entity to which the referral
is made. If the Company or the use of its products and services were to be found
in violation of such statutes, the Company or its clients could be required to
modify or curtail the operation of the Company's programs, or to pay fines or
incur other penalties, and the Company's clients could be excluded from
participation in the Medicare and Medicaid programs and could be precluded from
charging fees and obtaining reimbursement for specified services.
There can be no assurance that the Company or the use of its products and
services will not be subject to review or challenge by government regulators
under any of the foregoing statutes and regulations that apply to health care
services and products. In addition, additional laws and regulations could be
enacted in the future that would regulate the Company or the use of its products
and services. Any government investigative or enforcement actions with respect
to the Company or the use of its products or services could generate adverse
publicity irrespective of the final outcome, and could have a material adverse
effect on the Company.
RISK MANAGEMENT. In recent years, participants in the health care industry,
including physicians, nurses and other health care professionals, have been
subject to an increasing number of lawsuits alleging malpractice, product
liability and related legal theories, many of which involve large claims and
significant defense costs. Due to the nature of its business, the Company could
become involved in litigation regarding the telephone information given by its
registered nurses or those of its licensees with the risk of adverse publicity,
significant defense costs and substantial damage awards. The Company has
established policies and procedures that limit the information provided by its
registered nurses to that contained in its clinical algorithms and protocols and
in other approved reference sources. In connection with its teleservices
operations, the Company has a quality assurance program that includes real-time
audits of calls and post call reviews to monitor compliance with established
policies and procedures. Generally, clients review and approve the Company's
clinical algorithms, protocols and guidelines prior to program implementation
and do not modify them without medical approval. To date, the Company has not
been the subject of any claim involving either its clinical assessment systems,
the operation of its teleservicing centers or the operation by hospital or other
clients of on-site call centers. However, there can be no assurance that claims
will not be brought against the Company. Even if such claims ultimately prove to
be without merit, defending against them can be time consuming and expensive,
and any adverse publicity associated with such claims could have a material
adverse effect on the Company.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT DECRIPTION
- ----------- ------------------------------------------------------------------------------------------------------
<C> <S>
2.1(B) Conformed Agreement and Plan of Reorganization by and among the Registrant, Access Acquisition Corp.
and Informed Access Systems, Inc. dated as of September 3, 1996
3.1(C) Amended and Restated Certificate of Incorporation
3.2(C) Amended and Restated Bylaws
3.2(D) Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred
Stock of Access Health, Inc. filed on March 13, 1997.
4.1(C) Specimen Stock Certificate
4.2(A) Registration Rights Agreement dated June 26, 1990 between Registrant and certain parties named therein
4.3(C) Shareholder's Representation Statement and Registration Rights Agreement dates as of November 25, 1996
between Registrant and various investors
4.4(C) Registration Rights Agreement dated November 18, 1996
4.5(D) Form of Preferred Shares Rights Agreement, dated as of March 12, 1997 between the Company and The
First National Bank of Boston, including exhibits
10.26(E) AHN Partners, L.P. 8% Convertible Subordinated Debenture due 2001
27* Financial Data Schedule.
</TABLE>
- ------------------------
(A) Incorporated by reference to Registrant's Form S-1 Registration No.
33-44604.
(B) Incorporated by reference to Registrant's Registration Statement on Form S-4
(No. 333-13931).
(C) Incorporated by reference to Registrant's Form 10-K for the year ended
September 30, 1996.
(D) Incorporated by reference to Registrant's Registration Statement on Form 8-A
filed March 13, 1997 (No. 000-19758).
(E) Incorporated by reference to Registrant's Form 10-Q for the quarter ended
March 31, 1997.
b) Reports on Form 8-K. No reports on Form 8-K were filed during the
current quarter.
* Previously filed
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
ACCESS HEALTH, INC.
/s/ TIMOTHY H. CONNOR
------------------------------------------
Timothy H. Connor
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL OFFICER OF
Date: June 5, 1998 REGISTRANT)
</TABLE>
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