<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 from __________ to__________
Commission File Number: 0-19758
ACCESS HEALTH, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0163589
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 July 31, 1998:
23,578,076 shares
<PAGE>
Access Health, Inc.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets (unaudited)- September 30, 1997
and June 30, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed consolidated statements of income (unaudited) - three months and
nine months ended June 30, 1997 and 1998 . . . . . . . . . . . . . . . . . . 5
Condensed consolidated statements of cash flows (unaudited) - nine months
ended June 30, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to condensed consolidated financial statements . . . . . . . . . . . . 7
Item 2. Management's discussion and analysis of financial
condition and results of operations. . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 20
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
3
<PAGE>
Access Health, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share and share amounts)
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998
------------- -----------
<S> <C> <C>
Assets:
Current assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,499 $ 46,704
Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . 41,969 30,052
Accounts and license fees receivable, net of allowance for doubtful
accounts of $1,073 at June 30, 1998, and $1,070 at September 30, 1997. . 16,919 26,253
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,295 9,671
Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 3,231 3,220
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,456 3,472
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,708 1,814
------------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 93,077 121,186
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . 17,766 19,354
Purchased intangibles, net of accumulated amortization of $5,312, at June
30, 1998, and $4,911 at September 30, 1997. . . . . . . . . . . . . . . . 2,894 2,493
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,042 1,042
Long term equity investment . . . . . . . . . . . . . . . . . . . . . . . . - 3,011
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773 522
------------- -----------
$115,552 $147,608
------------- -----------
------------- -----------
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,434 $ 5,964
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . 4,157 5,610
Accrued transaction, integration and restructuring costs . . . . . . . . 3,109 9,011
Taxes and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 4,874 7,134
Notes payable to related parties . . . . . . . . . . . . . . . . . . . . 1,264 0
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . 209 221
Current portion of capital lease obligation. . . . . . . . . . . . . . . 470 513
Deferred revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,782 16,926
------------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 34,299 45,379
Capital lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . 542 148
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 50
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, 23,550,997
shares issued and outstanding at June 30, 1998, and 22,786,159 shares
issued and outstanding at September 30, 1997 . . . . . . . . . . . . . . 23 24
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 80,934 89,752
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . . . . . . . (463) 12,255
------------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 80,494 102,031
------------- -----------
$115,552 $147,608
------------- -----------
------------- -----------
</TABLE>
See accompanying notes.
4
<PAGE>
Access Health, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Care management services. . . . . . . . . . . . $23,909 $29,785 $68,326 $84,217
Licensing and support services. . . . . . . . . 6,555 8,785 19,191 24,974
-------- -------- -------- --------
Total revenues. . . . . . . . . . . . . . 30,464 38,570 87,517 109,191
Costs and expenses:
Cost of revenues:
Care management services . . . . . . . . . . . 12,795 16,587 35,377 46,473
Licensing and support services . . . . . . . . 1,743 1,911 5,847 5,869
Product and other development. . . . . . . . . 2,812 3,223 8,627 8,652
Sales and marketing. . . . . . . . . . . . . . 2,866 3,277 8,424 9,694
General and administrative . . . . . . . . . . 3,187 3,482 9,858 11,510
Transaction costs. . . . . . . . . . . . . . . - 5,607 6,345 5,607
Integration and restructuring costs. . . . . . - 3,393 6,961 3,393
-------- -------- -------- --------
Total costs and expenses. . . . . . . . . 23,403 37,480 81,439 91,198
-------- -------- -------- --------
Income from operations. . . . . . . . . . . . . . 7,061 1,090 6,078 17,993
Other income. . . . . . . . . . . . . . . . . . . 514 910 1,214 2,571
-------- -------- -------- --------
Income before income taxes. . . . . . . . . . . . 7,575 2,000 7,292 20,564
Provision for income taxes . . . . . . . . . . . 1,872 725 1,915 7,814
-------- -------- -------- --------
Net income. . . . . . . . . . . . . . . . . . . . $5,703 $1,275 $5,377 $12,750
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . $0.26 $0.06 $0.25 $0.57
-------- -------- -------- --------
-------- -------- -------- --------
Diluted . . . . . . . . . . . . . . . . . . . . $0.24 $0.05 $0.23 $0.52
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share calculations:
Basic . . . . . . . . . . . . . . . . . . . . . 21,837 22,769 21,634 22,502
-------- -------- -------- --------
-------- -------- -------- --------
Diluted . . . . . . . . . . . . . . . . . . . . 23,558 24,659 23,503 24,661
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
Access Health, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------------------
1997 1998
--------------------
<S> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $5,377 $12,750
Adjustments to reconcile net income to net cash
provided by operations:
Allowance for doubtful accounts . . . . . . . . . . . . 134 23
Depreciation and amortization . . . . . . . . . . . . . 4,762 6,141
Deferred stock compensation . . . . . . . . . . . . . . 443 -
Common stock issued for services rendered . . . . . . . 2,233 -
Changes in:
Accounts and license fees receivable. . . . . . . . . (537) (10,272)
Prepaid expenses and other current assets . . . . . . (1,154) (2,089)
Accounts payable. . . . . . . . . . . . . . . . . . . (620) 1,860
Accrued payroll and related expenses. . . . . . . . . 540 1,285
Accrued transaction, integration, and restructure
costs . . . . . . . . . . . . . . . . . . . . . . . 2,901 5,902
Taxes and other accrued expenses. . . . . . . . . . . 1,221 1,764
Deferred revenues . . . . . . . . . . . . . . . . . . 2,309 3,660
-------- -------
Net cash provided by operating activities . . . . . 17,609 21,024
-------- -------
Cash flows from investing activities:
Sale of available-for-sale securities, net. . . . . . . . 208 11,917
Purchase of property and equipment. . . . . . . . . . . . (4,696) (7,367)
Notes receivable from AHN . . . . . . . . . . . . . . . . (5,000) -
Long term equity investment . . . . . . . . . . . . . . . - (3,011)
Other assets. . . . . . . . . . . . . . . . . . . . . . . 258 276
-------- -------
Net cash provided by (used in) by investing
activities. . . . . . . . . . . . . . . . . . . . (9,230) 1,815
-------- -------
Cash flows from financing activities:
Notes payable to related parties. . . . . . . . . . . . . (653) (1,264)
Payment of long-term debt and capital leases. . . . . . . (514) (581)
Sale of common stock. . . . . . . . . . . . . . . . . . . 1,559 8,818
-------- -------
Net cash provided by financing activities . . . . . 392 6,973
-------- -------
Net increase in cash and equivalents. . . . . . . . . . . . 8,771 29,812
Elimination of InterQual net cash activity for the
three months ended December 31, 1997. . . . . . . . . . . - (607)
Cash and equivalents at beginning of period . . . . . . . . 26,976 17,499
-------- -------
Cash and equivalents at end of period . . . . . . . . . . . $35,747 $46,704
-------- -------
-------- -------
</TABLE>
See accompanying notes.
6
<PAGE>
Access Health, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(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
September 30, 1997 and June 30, 1998, consolidated results of operations for
the three month and nine month periods ended June 30, 1997 and 1998 and cash
flows for the nine month periods ended June 30, 1997 and 1998. Results for
the periods ended June 30, 1998 are not necessarily indicative of the results
to be expected for the entire fiscal year.
The unaudited interim financial statements for all periods presented have
been restated to reflect the merger with InterQual, Inc. which has been
accounted for as a pooling of interests, effective June 30, 1998.
Accordingly, InterQual's December 31, 1997 balance sheet has been combined
with Access Health's September 30, 1997 balance sheet, InterQual's statement
of operations for three and nine months ended September 30, 1997 have been
combined with Access Health's statements of operations for the three and nine
months ended June 30, 1997, and InterQual's cash flows for the nine months
ended September 30, 1997 have been combined with Access Health's cash flows
for the nine months ended June 30, 1997.
For the quarter ended June 30, 1998, Access Health announced a strategic
relationship with MEDCAN Health Management, Inc. ("MEDCAN") of Toronto,
Canada. Access Health also made a minority preferred stock investment in
MEDCAN.
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.
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 certain of the Company's products
including InterQual Clinical Decision Support Criteria, ASK-A-NURSE,
FirstHelp, patient education software, Access Care Management System,
HealthSelect, and CANCER HELPLINK.
Program membership fees from Personal Health Advisor/FirstHelp contracts are
recognized ratably in accordance with contract terms typically on the basis
of per-member fees. Member communications fees are recognized upon
7
<PAGE>
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 InterQual Clinical Decision Support Criteria,
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 in the nine months ended June 30, 1997
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 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.
During the third quarter of fiscal 1998, transaction costs of $5.6 million
were recorded reflecting charges associated directly with the merger of the
Company with InterQual, Inc. and included professional fees of approximately
$4.7 million. Integration and restructuring costs related to the merger of
InterQual, Inc. are reflected in the third quarter of fiscal 1998 results in
the amount of $3.4 million. These costs reflect the integration of management
and sales teams of Access Health, Inc. and InterQual, Inc.
NEW ACCOUNTING PRONOUNCEMENTS
STATEMENT OF ACCOUNTING STANDARDS NO. 128
During fiscal 1998, Access Health, Inc. adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." This statement
establishes standards for computing and presenting basic and diluted earnings
per share. Under this statement, basic earnings or loss per share is computed
by dividing the net earnings or loss by the weighted average number of shares
of common stock outstanding. Diluted earnings or loss per share is determined
by dividing the net earnings or loss by the sum of (1) the weighted average
number of common shares outstanding, (2) if not anti-dilutive, the number of
shares of convertible preferred stock as if converted upon issuance, and (3)
if not anti-dilutive, the effect of outstanding stock options determined
utilizing the treasury stock method.
A reconciliation of the numerator and denominators used in computing per
share net income (loss) from continuing operations is as follows (in
thousands):
8
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
1997 1998 1997 1998
-----------------------------------------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted net income per share:
Net income $ 5,703 $ 1,275 $ 5,377 $ 12,750
-----------------------------------------------
-----------------------------------------------
Denominator for basic net income per share:
Weighted average common shares outstanding 21,837 22,769 21,634 22,502
-----------------------------------------------
-----------------------------------------------
Denominator for diluted net income per share:
Weighted average common shares outstanding 21,837 22,769 21,634 22,502
Dilutive effect of outstanding stock options 1,721 1,890 1,869 2,159
-----------------------------------------------
Denominator for diluted net income per share 23,558 24,659 23,503 24,661
-----------------------------------------------
-----------------------------------------------
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
In June 1997, the Financial Accounting Standards Board issued SFAS 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 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. The Company expects to adopt SFAS No. 130
beginning in the first quarter of fiscal 1999.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. This statement
requires that a public company report financial and descriptive information
about its reportable operating segments using the management approach. The
Company expects to adopt Statement No. 131 in the first quarter of fiscal
1999.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. It also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 may not be applied retroactively, and must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998).
Because the Company has not historically entered into such arrangements,
management believes that the impact of SFAS No. 133 will not significantly
affect its financial reporting.
9
<PAGE>
STATEMENT OF POSITION 98-1
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This statement is effective for fiscal years beginning after
December 15, 1998, although earlier application is permitted. In general,
SOP 98-1 requires that certain costs to develop software for internal use be
capitalized. These requirements are to be applied prospectively from the
date of the Company's adoption. To date, the Company has not historically
capitalized such costs.
STATEMENT OF POSITION 98-5
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities". This statement is effective for financial statements for fiscal
years beginning after December 15, 1998. In general, SOP 98-5 requires costs
of start-up activities and organization costs to be expensed as incurred.
Initial application of SOP 98-5 should be reported as the cumulative effect
of a change in accounting principle. Management believes that SOP 98-5 will
not have a material impact on its financial statements.
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, Inc. 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 Clinical Reference Systems, 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
historical financial statements of the Company have been restated to include
the consolidated financial statements of Access Health, Informed Access and
Clinical Reference Systems for all periods presented.
As of June 30, 1998, the Company consummated a business combination with
InterQual, Inc. of Marlborough, Massachusetts. Under the terms of the
acquisition, 4,540,000 shares of Access Health, Inc.'s common stock were
exchanged for the outstanding shares of InterQual, Inc. The business
combination was accounted for as a pooling-of-interests and, accordingly, the
historical financial statements of Access Health and InterQual, Inc. have
been restated as though the companies had been combined for all periods
presented.
The following table provides a reconciliation of revenues and earnings
reported by the Company to the combined amounts presented for, or included in
the period indicated (periods ended June 30, 1997 below include three and
nine month data for InterQual, Inc. for the respective three and nine month
periods ended September 30, 1997):
<TABLE>
<CAPTION>
Three months ended June 30, 1997
(Unaudited)
Access Health, Inc. InterQual, Inc. Total
-----------------------------------------------------
<S> <C> <C> <C>
Revenues $ 26,485,000 $ 3,979,000 $ 30,464,000
-----------------------------------------------------
-----------------------------------------------------
Net income $ 5,576,000 $ 127,000 $ 5,703,000
-----------------------------------------------------
-----------------------------------------------------
Three months ended June 30, 1998
(Unaudited)
Access Health, Inc. InterQual, Inc. Total
-----------------------------------------------------
<S> <C> <C> <C>
Revenues $ 32,414,000 $ 6,156,000 $ 38,570,000
-----------------------------------------------------
-----------------------------------------------------
Net income $ 383,000 $ 892,000 $ 1,275,000
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Nine months ended June 30, 1997
(Unaudited)
Access Health, Inc. InterQual, Inc. Total
-----------------------------------------------------
<S> <C> <C> <C>
Revenues $ 76,227,000 $ 11,290,000 $ 87,517,000
-----------------------------------------------------
-----------------------------------------------------
Net income $ 5,047,000 $ 330,000 $ 5,377,000
-----------------------------------------------------
-----------------------------------------------------
<CAPTION>
Nine months ended June 30, 1998
(Unaudited)
Access Health, Inc. InterQual, Inc. Total
-----------------------------------------------------
<S> <C> <C> <C>
Revenues $ 92,679,000 $ 16,512,000 $ 109,191,000
-----------------------------------------------------
-----------------------------------------------------
Net income $ 11,569,000 $ 1,181,000 $ 12,750,000
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
Note 3: Notes payable to related parties
Notes payable to related parties arising from bonuses were payable to members
of management, who are also stockholders of the Company. The final
installment was paid in January 1998.
Note 4: Long-term debt
The Company has a term facility agreement (the "Term Agreement") consisting
of note payable and capital lease facilities. At June 30, 1998, principal
balances under the note payable facility and capital lease facility totaled
$248,000 and $442,000, respectively. Principal balances under the Term
Agreement are secured by certain of the Company's equipment with an aggregate
carrying value of approximately $466,000 at June 30, 1998. 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. Payments due under the note payable
facility of the Term Agreement for the next twelve months are approximately
$557,000.
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 United
States to obtain benefit from the reversal of temporary differences and from
tax credit and state 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 the remainder of fiscal 1998, and for fiscal 1999, 2000, 2001,
2002 and thereafter are $1,023,000, $3,355,000, $3,143,000, $3,102,000,
$2,060,000 and $19,656,000 respectively. Rental expenses are recorded on a
straight-line basis over the respective lease terms.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS, INCLUDING BUT
NOT LIMITED TO STATEMENTS IDENTIFIED BY AN ASTERISK, 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/A FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 AS WELL AS
IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-4, AS AMENDED, FILED ON JUNE
10, 1998.
RESULTS OF OPERATIONS
REVENUES. Revenues consist of revenues from care management services and
licensing and support services. Revenues increased from $30.5 million during
the three months ended June 30, 1997 to $38.6 million during the three months
ended June 30, 1998, or 26.6%, and increased from $87.5 million for the nine
months ended June 30, 1997 to $109.2 million, or 24.8% for the nine months
ended June 30, 1998.
Revenues from care management services increased from $23.9 million during
the third quarter of fiscal 1997 to $29.8 million during the third quarter of
fiscal 1998, or 24.6%, and increased from $68.3 million during the first nine
months of fiscal 1997 to $84.2 million, or 23.3% during the first nine months
of fiscal 1998, due to increases in membership levels related to the
Company's contracts during these periods. As of June 30, 1998, approximately
27.5 million members were enrolled compared to approximately 19.8 million
members enrolled as of June 30, 1997. Average revenue per-member per-month
was $0.41 for the third quarter of fiscal 1997 compared to $0.37 for the
third quarter of fiscal 1998. Average revenue per-member per-month was $0.43
for the first nine months of fiscal 1997 compared to $0.38 for the first nine
months of fiscal 1998. The decrease in average revenue per-member was
primarily due to contract rationalizations where actual utilization was
meaningfully below the contract minimum. The Company believes that the
decline in average revenue per-member has ended 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 increased from $6.6 million
during the third quarter of fiscal 1997 to $8.8 million, or 34.0%, during the
third quarter of fiscal 1998, and from $19.2 million during the first nine
months of fiscal 1997 to $25.0 million, or 30.1%, for the first nine months
of fiscal 1998. This increase was primarily attributable to increases in
license revenue related to the InterQual Clinical Decision Support Criteria.
Licensing and support services revenues include licensing implementations and
program support activities for InterQual Clinical Decision Support Criteria,
FirstHelp, the ASK-A-NURSE-Registered Trademark- family of products, CANCER
HelpLink-Registered Trademark-, Access Care Management System-Registered
Trademark- ("ACMS"), the LIFE MATCH-Registered Trademark- family of products,
and patient education software.
COST OF REVENUES. The cost of care management services revenues includes the
costs of operating the Company's services centers, on-going client
consultation, and charges for providing care management member communications
services. The gross margins for care management services were 46.5% during
the third quarter of fiscal 1997 and 44.3% during the third quarter of fiscal
1998, and 48.2% during the first nine months of fiscal 1997 compared to 44.8%
for the first nine months of fiscal 1998. The decrease in gross margin
during the third quarter of fiscal 1998 and for the nine months ended June
30, 1998 compared to the same periods in fiscal 1997, is primarily due to
adjusting pricing terms on older contracts typically effective upon renewal
dates during fiscal 1997. The Company does not anticipate that downward price
adjustments to contracts during the remainder of fiscal 1998 will have a
material effect on operating results. * 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 Company
expects that gross margins for care management services will continue to be
lower during the fourth quarter of fiscal 1998 compared with the first nine
months of the fiscal 1998 due primarily to operating inefficiencies related
to the implementation of the common system platform and costs related to new
product initiatives.
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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 InterQual
Decision Support Criteria, FirstHelp, ASK-A-NURSE, CANCER HelpLink, Access
Care Management System, LIFE MATCH licensees, and patient education software
licensees. The gross margin percentages for licensing and support services
increased from 73.4% during the third quarter of fiscal 1997 to 78.2% during
the third quarter of fiscal 1998, and from 69.5% during the first nine months
of fiscal 1997 to 76.5% for the first nine months of fiscal 1998 due to
changes in product licensing mix and increased efficiency resulting from
organizational adjustments. While gross margins for licensing and support
services can fluctuate, the Company believes it is currently operating near
targeted gross margin levels for licensing and support services.
PRODUCT AND OTHER DEVELOPMENT EXPENSES. Product and other development
expenses were $2.8 million, or 9.2% of revenues, during the third quarter of
fiscal 1997 and $3.2 million, or 8.4% of revenues, during the third quarter
of fiscal 1998. For the first nine months of fiscal 1997, product and other
development expenses totaled $8.6 million, or 9.9% of revenues compared to
$8.7 million, or 7.9% of revenues during the first nine months of fiscal
1998. As a percent of revenue, product and other development expenses
decreased by 8.7% during the third quarter of fiscal 1998 and 20.2% for the
first nine months of fiscal 1998 when compared to the prior fiscal year due
to realizing costs savings from the integration of the development teams of
Access Health and Informed Access Systems. The Company expects product and
other development expenses to increase in coming quarters, but generally
consistent with the current percentage of revenues. *
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $2.9
million, or 9.4% of revenues, during the third quarter of fiscal 1997 and
$3.3 million, or 8.5% of revenues, during the third quarter of fiscal 1998.
For the first nine months of fiscal 1997, sales and marketing expenses
totaled $8.4 million, or 9.6% of revenues, compared to $9.7 million, or 8.9%
of revenues for the first nine months of fiscal 1998. As a percent of
revenue, sales and marketing expenses decreased by 9.6% during the third
quarter of fiscal 1998 and 7.3% for the first nine months of fiscal 1998 when
compared to the prior fiscal year due to cost savings from the integration of
the sales teams of Access Health and Informed Access Systems. The Company
expects sales and marketing expenses to increase in coming quarters, but
generally consistent with the current percentage of revenues. *
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $3.2 million, or 10.5% of revenues, during the third quarter of fiscal
1997 and $3.5 million, or 9.0% of revenues, during the third quarter of
fiscal 1998. For the first nine months of fiscal 1997, general and
administrative expenses totaled $9.9 million, or 11.3% of revenues, compared
to $11.5 million, or 10.5% of revenues for the first nine months of fiscal
1998. As a percent of revenue, general and administrative expenses decreased
by 14.3% during the third quarter of fiscal 1998 and 7.1% for the first nine
months of fiscal 1998 when compared to the prior fiscal year due to realizing
cost savings from 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 revenues. *
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.
Transaction costs of $5.6 million are one-time charges recorded in the third
quarter of fiscal 1998 associated directly with the merger of the Company
with InterQual, Inc. and consists primarily of professional fees and services
of approximately $4.7 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
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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 June
30, 1998 was approximately $1.5 million and includes $.9 million for
severance, outplacement and relocation costs: $0.4 million related to the
closure and elimination of duplicate leased facilities: and $0.2 million
related to the write-off of computer hardware and other assets. Total
expected cash expenditures relating to the merger charge are estimated to be
approximately $6.7 million of which approximately $5.2 million was disbursed
prior to June 30, 1998. Termination benefits received by employees
terminated through September 30, 1997 were approximately $5.6 million. The
remaining severance and outplacement amounts are expected to be paid during
the current fiscal year.
Integration and restructuring costs related to the merger of InterQual, Inc.
are reflected in the third quarter of fiscal 1998 results in the amount of
$3.4 million. These costs reflect the integration of management and sales
teams of Access Health, Inc and InterQual, Inc.
INCOME FROM OPERATIONS. Operating income decreased from $7.1 million during
the third quarter of fiscal 1997 to $1.1 million during the third quarter of
fiscal 1998 due to the transaction and restructuring charges related to the
InterQual merger, and increased from $6.1 million for the first nine months
of fiscal 1997 to $18.0 million during the same period in fiscal 1998. The
changes for the first nine months of fiscal 1997 to the first nine months of
fiscal 1998 are attributable to increasing revenues and decreased ongoing
operating expenses, and to the transaction, integration and restructuring
expenses recorded during the first nine months of fiscal 1997, which were
approximately $4.3 million greater than the transaction, integration, and
restructuring expenses recorded during the first nine months of fiscal 1998.
INCOME TAXES. The Company recorded an income tax provision of approximately
$1.9 million and $.7 million for the three months ended June 30, 1997 and
1998, respectively, an income tax provision of approximately $1.9 million for
the nine months ended June 30, 1997 and an income tax provision of
approximately $7.8 million for the nine months ended June 30, 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 allowance by $3,368,000. 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 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.
OTHER INCOME. The Company generates interest and other income from cash
balances and available-for-sale securities. Interest and other income
increased from $514,000 to $910,000, or 77.0% in the third quarter of fiscal
1997 and 1998, respectively, and from $1,214,000 to $2,571,000, or 111.8% for
the first nine months of fiscal 1997 and 1998, respectively due to the
increase in cash and equivalents and available for sale securities from $59.5
million at June 30, 1997 to $76.8 million at June 30, 1998.
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 June 30, 1998, the Company held cash and equivalents and
available-for-sale securities totaling $76.8 million compared to a balance of
$59.5 million as of September 30, 1997. Net cash provided by operating
activities during
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the first nine months of fiscal 1998 was $21.0 million compared with $17.6
million for the first nine 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 nine months of fiscal 1998, the Company purchased
approximately $7.4 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*.
IMPACT OF THE YEAR 2000 ON COMPUTER SYSTEMS.
The architectural design of the Company's computer systems and infrastructure
have taken into account the effect of integrating existing date data with
date data from the Year 2000 and beyond. As a result, the Company believes
it will address and resolve any possible issue associated with the
integration of Year 2000 date data in a timely fashion and will not
materially affect future financial results or cause reported financial
information to be inaccurate. * Nevertheless, unforeseen internal problems or
unanticipated events including the inability of third party vendors to
integrate Year 2000 date data could occur causing a material adverse effect
on the Company's business, results of operations and financial condition.
* 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."
RISK FACTORS THAT MAY AFFECT FUTURE OPERATING PERFORMANCE
The following factors should be carefully considered in evaluating the
Company and its business.
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 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, typically upon renewal, 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 nine months of fiscal 1998 contract
rationalizations decreased by approximately $4.3 million and for the balance
of the year, the Company expects contract rationalizations to reduce revenue
under such contracts by approximately $1.9 million. Any factors adversely
affecting the market for the care management product or the 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.
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 totaled 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
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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 the second half of fiscal year 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, and may
devote additional resources to the further development of care 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
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; Phoenix, Arizona; San Juan, Puerto Rico, and Great
Missenden, England. 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 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 implementing a new information system which combines
certain aspects of the different systems developed by Access Health and
Informed Access. The
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implementation of 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 merged with InterQual, Inc. effective June 30,
1998 and intends to evaluate acquisitions of other product lines and
businesses as part of its business strategy. 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 existing 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 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, the addition of unanticipated administrative and
other expense, 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.
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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,
nursing, technical, marketing, and sales 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 the Company'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.
The Company understands that state regulators in some states have informed
some entities that they are adopting such a construction. The Company has
taken steps to comply with such regulatory interpretation, but there can be
no assurance that such steps will be sufficient to protect the Company from
the effects of any such regulatory action. 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 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,
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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. Further, there can be no assurance that the
Company has appropriate or sufficient coverage under the existing insurance
plans or that they will be able to obtain appropriate or sufficient amounts
of insurance in the future to address the foregoing risks on terms that are
commercially reasonable.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) A special meeting of Stockholders of Access Health, Inc. was held on
June 30, 1998 to vote upon the approval of the issuance of shares of
Access Health Common Stock pursuant to the terms of an Amended and
Restated Agreement and Plan of Reorganization by and among Access
Health, Inc., Access Acquisition Corp. 98A, and InterQual, Inc.
b) The matters voted upon at the meeting and the results of the voting
with respect to those matters were as follows:
<TABLE>
<CAPTION>
Shares Entitled
To Vote Shares Voting For Against Abstain
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1) Approval of Issuance of Shares 18,993,742 13,905,822 13,864,135 32,062 9,625
% of Shares Voted 100.0 % 99.7% .2% .1%
</TABLE>
The foregoing matters are described in detail in the Registrant's
definitive proxy statement dated June 10, 1998 for the special meeting
of Stockholders held on June 30, 1998.
c) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT DESCRIPTION
<TABLE>
<CAPTION>
<S> <C> <C>
3.1 (A) Amended and Restated Certificate of Incorporation
3.2 (A) Amended and Restated Bylaws
3.3 (B) 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 (A) Specimen Stock Certificate
4.2 (C) 1998 Stock Option Plan
4.3 (A) Shareholder's Representation Statement and Registration Rights Agreement dated as of
November 25, 1996 between Registrant and various investors
4.4 (A) Registration Rights Agreement dated November 18, 1996
4.5 (C) Form of Preferred Shares Rights Agreement, dated as of March 12, 1997 as amended on December 8, 1997 between the
Company and First Chicago Trust Company of New York
4.6 (D) Amended and Restated Plan of Reorganization among Access Health, Inc., Access Acquisition Corp. 98A and InterQual,
Inc.
27 Financial Data Schedule.
(A) Incorporated by reference to Registrant's Form 10-K for the year ended September 30, 1996.
(B) Incorporated by reference to Registrant's Registration Statement on Form 8-A filed March 13, 1997 (No. 000-19758).
(C) Incorporated by reference to Registrant's Form 10-Q for the quarter ended March 31, 1998.
(D) Incorporated by reference to Registrant's Registration Statement on S-4/A filed June 10, 1998 (No. 333-56253).
b) Reports on Form 8-K. Form 8-K relating to the InterQual merger was filed on July 10, 1998.
</TABLE>
20
<PAGE>
Signature
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 thereunto duly authorized.
ACCESS HEALTH, INC.
Date: August 14, 1998 /s/ Timothy H. Connor
---------------------
Timothy H. Connor
Senior Vice President and Chief
Financial Officer (principal financial
officer of Registrant)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FY1998 Q3
UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 46,704
<SECURITIES> 30,052
<RECEIVABLES> 26,253
<ALLOWANCES> 1,073
<INVENTORY> 0
<CURRENT-ASSETS> 121,186
<PP&E> 38,513
<DEPRECIATION> 19,159
<TOTAL-ASSETS> 147,608
<CURRENT-LIABILITIES> 45,379
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 102,007
<TOTAL-LIABILITY-AND-EQUITY> 147,608
<SALES> 38,570
<TOTAL-REVENUES> 38,570
<CGS> 18,498
<TOTAL-COSTS> 37,480
<OTHER-EXPENSES> 18,982
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (910)
<INCOME-PRETAX> 2,000
<INCOME-TAX> 725
<INCOME-CONTINUING> 1,275
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,275
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.05
</TABLE>
