-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RwiUroCSKW4PrFjZGzuJbZXo5Xqi8Mz+7yMY2uEbr6h/xYjuP5XHcxvUM5FDHfU4 oMCc3sxF6SZy0iPMkHdtCg== 0000950123-98-007519.txt : 19980814 0000950123-98-007519.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950123-98-007519 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED HEALTH CORP CENTRAL INDEX KEY: 0001002628 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 133893841 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21209 FILM NUMBER: 98686225 BUSINESS ADDRESS: STREET 1: 555 WHITE PLAINS RD CITY: TARRYTOWN STATE: NY ZIP: 10591 BUSINESS PHONE: 9145244200 MAIL ADDRESS: STREET 1: 560 WHITE PLAINS RD STREET 2: 2ND FLOOR CITY: TARRYTOWN STATE: NY ZIP: 10591 10-Q 1 ADVANCED HEALTH CORPORATION 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 1998. OR |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period__________________ to_________________________. Commission File Number: 0-21209 ADVANCED HEALTH CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3893841 (State or other jurisdiction or (IRS Employer ncorporation or organization) Identification No.) 555 White Plains Road Tarrytown, New York 10591 (Address of principal executive offices, including zip code) (914) 524-4200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| As of August 11, 1998, there were 10,066,577 shares outstanding of the registrant's Common Stock, $.01 par value. - -------------------------------------------------------------------------------- 2 ADVANCED HEALTH CORPORATION INDEX PART I - FINANCIAL INFORMATION Page No. ITEM 1. Consolidated Financial Statements Consolidated Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997 ....................1 Consolidated Statement of Operations- Three and six months ended June 30, 1998 and 1997 (unaudited).......2 Consolidated Statements of Cash Flows- Six months ended June 30, 1998 and 1997 (unaudited).................3 Notes to Consolidated Financial Statements..........................4 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................7 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.........13 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings..................................................13 ITEM 4. Submission of Matter to Vote of Security Holders...................14 SIGNATURES...................................................................15 3 PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ADVANCED HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
As Of June 30, December 31, 1998 1997 ---- ---- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $16,111 $7,534 Certificates of deposit 5,962 5,399 Investments in marketable securities 10,933 34,082 Accounts receivable, net 9,677 11,059 Deferred income taxes 0 4,092 Other current assets 1,608 736 ------------------------- Total current assets 44,291 62,902 PROPERTY AND EQUIPMENT, net 5,642 3,664 INTANGIBLE ASSETS, net 17,975 9,415 INVESTMENTS IN AFFILIATES 12,565 7,000 OTHER ASSETS 12,716 11,377 ------------------------- Total assets $93,189 $94,358 ========================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $6,173 $933 Other current liabilities 1,955 325 ------------------------- Total current liabilities 8,128 1,258 DEFERRED REVENUE 100 LONG TERM DEBT 151 CAPITAL LEASE OBLIGATIONS 226 - ------------------------- Total liabilities 8,605 1,258 ------------------------- COMMITMENTS SHAREHOLDERS' EQUITY Preferred stock, $.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding Common stock, $.01 par value; 15,000,000 shares authorized; 10,056,647 and 9,869,719 shares issued and outstanding, respectively 100 99 Additional paid-in capital 101,410 95,976 Accumulated deficit (17,029) (3,084) Unrealized gain on marketable securities, net of deferred income taxes 178 184 Less: Treasury stock, at cost (8,937 and 8,937 shares, respectively (75) (75) ------------------------- Total shareholders' equity 84,584 93,100 ------------------------- Total liabilities and shareholders' equity $93,189 $94,358 =========================
The accompanying notes are an integral part of these consolidated statements. (1) 4 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited)
For the For the Three Months Ended Six Months Ended ------------------------ ------------------- June 30, June 30, June 30, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- REVENUE $ 16,793 $ 13,021 $ 40,997 $ 23,028 COST OF REVENUES 18,761 9,908 37,264 17,309 ------------------------ ---------------------- Gross profit/(loss) (1,968) 3,113 3,733 5,719 OPERATING EXPENSES 10,800 2,103 13,643 4,185 RESTRUCTURING CHARGE 854 0 854 0 ------------------------ ---------------------- Operating income/(loss) (13,622) 1,010 (10,764) 1,534 OTHER INCOME, Net 724 141 1,536 343 ------------------------ ---------------------- Net income/(loss) before taxes (12,898) 1,151 (9,228) 1,877 PROVISION FOR INCOME TAXES 3,416 0 4,717 66 ------------------------ ---------------------- Net income/(loss) ($16,314) $ 1,151 ($13,945) $ 1,811 ======================== ====================== PER SHARE INFORMATION Net income/(loss) per share: Basic ($ 1.63) $ 0.16 ($ 1.40) $ 0.25 Diluted ($ 1.63) $ 0.14 ($ 1.40) $ 0.22 Common shares used in computing per share amounts: Basic 10,033 7,236 9,979 7,202 Diluted 10,033 8,338 9,979 8,190
The accompanying notes are an integral part of these consolidated statements. (2) 5 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
For the Six Months Ended ------------------------- June 30, June 30, 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) $ (13,945) $ 1,811 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization 1,427 483 Deferred income taxes 4,093 - Allowance for doubtful accounts 238 - Changes in operating assets and liabilities Accounts receivable 1,144 767 Other current assets (872) (2) Advances to affiliates - (125) Other assets - (2,085) Accounts payable and accrued expenses 5,239 (200) Other current liabilities 1,646 - Deferred revenue 100 (100) ------------------------- Net cash (used in) provided by operating activities (930) 549 ------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Other assets (1,339) - Minority investment in affiliated entities (5,565) (500) Net investment in certificates of deposit (563) - Net proceeds from investment in marketable securities 23,149 - Advances to affiliates - (2,600) Investment in affiliate - (3,763) Intangible assets (4,307) - Purchases of property and equipment, net (2,537) (1,020) ------------------------- Net cash provided by (used in) investing activities 8,838 (7,883) ------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale and issuance of common stock - - (Repayment of) proceeds from loans payable related to acquisitions - (23) Net proceeds from exercise of stock options 684 270 Repayment of capital lease obligations (15) (159) ------------------------- Net cash provided by financing activities 669 88 ------------------------- Net change in cash and cash equivalents 8,577 (7,246) CASH AND CASH EQUIVALENTS, beginning of period 7,534 12,086 ------------------------- CASH AND CASH EQUIVALENTS, end of period $ 16,111 $ 4,840 ========================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash Paid for: Interest $ 27 $ 7 ========================= Income Taxes $ 647 $ 66 ========================= SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Fair market value of Common Stock issued for acquisitions $ 4,750 $ - =========================
The accompanying notes are an integral part of these consolidated statements. (3) 6 ADVANCED HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 (in thousands, except per share data) (unaudited) 1. Reference is made to the Notes to Consolidated Financial Statements contained in the Company's December 31, 1997 audited consolidated financial statements as filed with the Securities and Exchange Commission on Form 10-K. In the opinion of Management, the interim unaudited consolidated financial statements included herein reflect all adjustments necessary, consisting of normal recurring adjustments, for a fair presentation of such data on a basis consistent with that of the audited data presented therein. The Company believes that its historical results of operations from period to period are not comparable and that such results are not necessarily indicative of results for any future periods. 2. Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." Basic net income per common share ("Basic EPS") is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share ("Diluted EPS") is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the consolidated statements of operations. The impact of the adoption of this statement was not material to all previously reported EPS amounts. (4) 7 A reconciliation between the numerator and denominator of Basic EPS and Diluted EPS is as follows:
Net Income (Loss) Net Income Common Per Common (Loss) Shares Share ------ ------ ----- For the Three Months Ended June 30, 1997 Basic EPS Net income attributable to common stock $ 1,151 7,235,908 $ 0.16 Effect of dilutive securities: Stock options and warrants 1,102,368 $ (0.02) ---------- --------- --------- Diluted EPS Net income attributable to common stock and assumed option exercises $ 1,151 8,338,276 $ 0.14 =========== ========= ========= For the Three Months Ended June 30, 1998 Basic EPS Net (loss) attributable to common stock $ (16,314) 10,033,306 $ (1.63) Effect of dilutive securities: Stock options and warrants $ (0.00) ---------- --------- --------- Diluted EPS Net income attributable to common stock and assumed option exercises $ (16,314) 10,033,306 $ (1.63) =========== ========= ========= For the Six Months Ended June 30, 1997 Basic EPS Net income attributable to common stock $ 1,811 7,201,600 $ 0.25 Effect of dilutive securities: Stock options and warrants 988,132 $ (0.03) ---------- --------- --------- Diluted EPS Net income attributable to common stock and assumed option exercises $ 1,811 8,189,732 $ 0.22 =========== ========= ========= For the Six Months Ended June 30, 1998 Basic EPS Net (loss) attributable to common stock $ (13,945) 9,978,777 $ (1.40) Effect of dilutive securities: Stock options and warrants $ (0.00) ---------- --------- --------- Diluted EPS Net income attributable to common stock and assumed option exercises $ (13,945) 9,978,777 $ (1.40) =========== ========= =========
(5) 8 3. During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income", which established standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. The components of comprehensive income are as follows:
For the Three Months Ended June 30, ----------------------------------- 1998 1997 ---- ---- Net income/(loss) $(16,314) $ 1,151 Unrealized gains on marketable securities, net of $118 and $40 income tax 178 60 --------- -------- Comprehensive Income $(16,136) $ 1,211 ========= ======== For the Six Months Ended June 30, --------------------------------- 1998 1997 ---- ---- Net income/(loss) $(13,945) $ 1,811 Unrealized gains on marketable securities, net of $118 and $40 income tax 178 60 --------- -------- Comprehensive Income $(13,767) $ 1,871 ========= ========
4. On May 11, 1998 the Company acquired, under a stock purchase agreement, Integrated Medical Management, Inc.("IMM") a physician management company focused on the hospital system-affiliated physician marketplace. IMM provides services which are complimentary to that which the Company currently provides. The purchase price of $6.6 million consisted of cash ($1.6 million) with the balance paid with the Company's stock. 5. The Company had previously recorded a deferred tax asset based on the Company's expectations with regard to future taxable income. Based on the current operating loss and net operating loss carryforwards ("NOLs") available to offset taxable income, the Company has taken a reserve against the previously recorded deferred tax benefit as it is more likely than not, that this asset will be realized. 6. The Company is restructuring both its management services and information technology businesses. The management services component will be restructured into an outsourcing services provider, three strategies resulting from the restructuring will be,: (i) better alignment of business lines with customers, (ii) greater emphasis on hospitals and large group customers, and (iii) more flexible service offerings. The information technology unit be restructured to place increased focus on product development and sales in areas such as electronic laboratory and prescription management while limiting product development efforts that do not benefit its work on electronic laboratory and prescription management. In addition, as part of its restructuring action, the Company has initiated broad headcount reductions in both business units as well as cuts in discretionary spending. A total of $9.6 million was incurred for non-recurring expenses, restructuring charges and non-capitalized software development costs. (6) 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview Advanced Health Corporation (the "Company") provides a full range of integrated management services and clinical information systems to physician group practices, hospitals and provider networks. The Company also develops and provides health care information technology solutions for use by integrated delivery systems and other managed care organizations. The Company generates revenues from (i) fees for managing and providing consulting services to physician group practices, (ii) fees for managing physician networks and (iii) fees for use and support of its clinical information systems, including license, software installation, software integration, training and data conversion fees. The Company contracts with its physician practice and network management clients pursuant to agreements with its Management Services Organizations (each, a "MSO"). The financial results of such MSOs are included in the Consolidated Financial Statements. For the quarter ended June 30, 1998, the Company reported an operating loss of $13.6 million, including non-recurring operating expenses, restructuring charges and non-capitalizable software development costs totaling $9.6 million. The Company further reported a net loss after tax of $16.3 million, which included a reversal of $3.2 million of deferred tax benefits previously recorded. The Company announced a plan to restructure both its management services and its information technology businesses in order to more effectively serve its customer base of physicians, hospitals and other health care organizations and to improve profitability. The restructuring actions described below contain forward-looking statements that may be significantly impacted by certain risks and uncertainties, including failure to meet operating objectives or to execute the operating plan and failure to successfully restructure the Company's business units. Management Services Restructuring The Company's management services business will be restructured into an outsourcing services provider. Three key strategies include: 1) Better Alignment of Business Lines with Customers: Management services will be structured into four business lines to better align its delivery of services to the needs of its customers: management and consulting services for large hospitals to assist them in the management of their affiliated physician groups; management and consulting services for select large independent physician practices; ancillary management and development services for physician group practices and hospitals; and administrative risk management services for Independent Physician Associations (IPAs) and hospital systems. 2) Greater Emphasis on Hospitals and Large Group Customers: The Company intends to place greater focus on hospitals as prospective customers. The Company believes that hospitals have an immediate financial need to better manage the physicians they now employ as a result of practice acquisitions, and they have the incentive to work more effectively with independent community physicians at practices with which they would like to affiliate but not purchase. The Company also believes that hospitals are motivated potential purchasers of its services and, as large business customers, are sophisticated consumers of management and outsourcing business services. The Company is also focusing its marketing efforts on larger independent practices, which the Company believes tend to have more business infrastructure and better governance, enabling them to be more effective and profitable customers versus smaller practices. (7) 10 3) Flexible Service Offerings: The Company plans to change its service offerings to provide customers with more flexibility in how they contract for services. The Company intends to provide a range of service offerings that extends from the complete outsourcing of the management of a physician practice, to management consulting services, to information technology products and services. For new customers, the Company intends to switch from a MSO model to a more flexible outsourcing services model that charges customers a usage-based fee for more discretely defined services. Information Technology Restructuring The Company's restructuring of its information technology unit includes placing increased focus on product development and sales in areas such as electronic laboratory and prescription management. The Company intends to limit product development efforts that do not benefit its work on electronic laboratory and prescription management. Further, the Company will be redirecting its sales efforts to increase sales for its product lines that offer laboratory and prescription functionality. Sales efforts will be focused on strategic sales initiatives that emphasize long-term, recurring revenue streams rather than large, one-time revenue events and better position the Company to benefit from what it believes is the rapidly gaining importance of electronic commerce. Results of Operations Three Months Ended June 30, 1998 and 1997 Net revenue for the three months ended June 30, 1998 increased to $16.8 million from $13.0 million in the comparable period ended June 30, 1997, primarily as a result of the addition of new physician group practices under management including the customer revenue derived from the company's recent acquisition of IMM and the provision of incremental network management services. The provision of physician group practice management and related services and network management services accounted for approximately $16.6 million of the Company's net revenue for the three months ended June 30, 1998 as compared to $10.4 million in the comparable period ended June 30, 1997. The Company earned fees for the use and support of its clinical information systems, including the recognition of license revenues and software and training revenues, of approximately $.2 million for the three months ended June 30, 1998, as compared to $2.6 million in the comparable period ended June 30, 1997. Cost of revenues for the three months ended June 30, 1998 increased to $18.8 million from $9.9 million for the comparable period ended June 30, 1997. The increase in cost of revenues related primarily to the non-medical and system expenses outsourced to the Company from physician group practices and networks under management and direct costs associated with providing practice and network management services including physician billing and collection efforts. (8) 11 Operating expenses for the three months ended June 30, 1998 increased to $10.8 million from $2.1 million for the comparable period ended June 30, 1997 and included non-recurring expenses and non-capitalized software development costs of approximately $8.8 million comprised of the following amounts: (i) $3.9 million for bad debts, (ii) $2.1 million for professional fees, (iii) $.4 million for previously terminated employees, (iv) $.9 million for miscellaneous items and (v) $1.5 million of non-capitalized software development costs. The Company is not capitalizing any software development costs in the second quarter ended June 30, 1998. Specifically, with the shortfall in information technology revenues in the second quarter, the Company initiated an evaluation of its various software products and related capitalized costs. While such evaluation is ongoing, no such costs were capitalized in the second quarter. Management expects to complete its evaluation of its software product lines prior to the issuance of its fiscal third-quarter Form 10-Q. Based on the results of this evaluation, management will determine the realizability of its capitalized software assets. As of June 30, 1998, the Company has recorded unamortized capitalized software development costs of approximately $7.1 million. The increase in operating expenses reflect costs related to the incremental provision of physician group practice management and related services and as described above. Restructuring charges, for the three months ended June 30, 1998 were recorded for approximately $.8 million and represent amounts primarily related to an acquisition (goodwill) the Company made in April 1996 and whereby the Company has decided to exit such business due to market conditions. The Company also anticipates taking an additional restructuring charge of approximately $2 million in the third quarter of 1998, relating to the further implementation of the Company's management services and information technology restructuring. This is not related to the review of capitalized software assets presently underway. Other income, net for the three months ended June 30, 1998 was $.7 million as compared to $.1 million for the comparable period ending June 30, 1997 and related primarily to interest earned from investments in marketable securities as a result of the investment of proceeds from the Company's follow-on and initial public offering ("IPO"), strategic investments, loans and operating cash. Provision for income taxes includes a reserve taken against a previously recorded deferred tax benefit as it is more likely than not that this asset will be realized. The provision also includes payments made for state and local income taxes based on amounts other than taxable income. The net loss for the three months ended June 30, 1998 was $16.4 million compared to net income of $1.2 million for the three months ended June 30, 1997 due to the factors described above. (9) 12 Results of Operations Six Months Ended June 30, 1998 and 1997 Net revenue for the six months ended June 30, 1998 increased to $41.0 million from $23.0 million in the comparable period ended June 30, 1997, primarily as a result of the addition of new physician group practices under management including the customer revenue derived from the company's recent acquisition of IMM and the provision of incremental network management services. The provision of physician group practice management and related services and network management services accounted for approximately $37.8 million of the Company's net revenue for the six months ended June 30, 1998 as compared to $17.0 million in the comparable period ended June 30, 1997. The Company earned fees for the use and support of its clinical information systems, including the recognition of license revenues and software and training revenues, of approximately $3.2 million for the six months ended June 30, 1998, as compared to $6.0 million in the comparable period ended June 30, 1997. Cost of revenues for the six months ended June 30, 1998 increased to $37.2 million from $17.3 million for the comparable period ended June 30, 1997. The increase in cost of revenues related primarily to the non-medical and system expenses outsourced to the Company from physician group practices and networks under management and direct costs associated with providing practice and network management services including physician billing and collection efforts. Operating expenses for the six months ended June 30, 1998 increased to $13.6 million from $4.2 million for the comparable period ended June 30, 1997 and included non-recurring expenses, restructuring charges and non-capitalized software development costs of approximately $8.8 million comprised of the following amounts: (i) $3.9 million for bad debts, (ii) $2.1 million for professional fees, (iii) $.4 million for previously terminated employees, (iv) $.9 million for miscellaneous items and (v) $1.5 million of non-capitalized software development costs. The Company is not capitalizing any software development costs in the second quarter ended June 30, 1998. However, it did capitalize certain software development costs during the first three months of 1998. Specifically, with the shortfall in information technology revenues in the second quarter, the Company initiated an evaluation of its various software products and related capitalized costs. While such evaluation is ongoing, no such costs were capitalized in the second quarter. Management expects to complete its evaluation of its software product line prior to the issuance of its fiscal third-quarter Form 10-Q. Based on the results of this evaluation, management will determine the realizability of its capitalized software assets. As of June 30, 1998, the Company has recorded unamortized capitalized software development costs of approximately $7.1 million. The increase in operating expenses reflect costs related to the incremental provision of physician group practice management and related services and as described above. Restructuring charges for the six months ended June 30, 1998 were recorded for approximately $.8 million and represent amounts primarily related to an acquisition (goodwill) the Company made in April 1996 and whereby the Company has decided to exit such business due to market conditions. The Company also anticipates taking an additional restructuring charge of approximately $2 million in the third quarter of 1998, relating to the further implementation of the Company's management services and information technology restructuring. This is not related to the review of capitalized software assets presently underway. (10) 13 Other income, net for the six months ended June 30, 1998 was $1.5 million as compared to $.3 million for the comparable period ending June 30, 1997 and related primarily to interest earned from investments in marketable securities as a result of the investment of proceeds from the Company's follow-on and initial public offering ("IPO"), strategic investments, loans and operating cash. Provision for income taxes includes a reserve taken against a previously recorded deferred tax benefit as it is more likely than not that this asset will be realized. This provision also includes payments made for state and local income taxes based on amounts other than taxable income. The net loss for the six months ended June 30, 1998 was $13.9 million compared to net income of $1.8 million for the six months ended June 30, 1997 due to the factors described above. Liquidity and Capital Resources Effective October 7, 1997, the Company completed its follow-on offering of 2,250,000 shares of Common Stock, including the underwriters' over-allotment option. The follow-on offering generated proceeds to the Company of approximately $46.0 million, net of underwriting expenses. For the six months ended June 30, 1998, the Company had negative cash flow from its operating activities of ($.9) million, compared with a positive $.5 million for the comparable period ended June 30, 1997. Accounts payable and accrued expenses increased $5.2 million principally attributable to amounts recorded ($1.2 million) with the acquisition of IMM, and ($4.0 million) in regard to certain non-recurring expenses and restructuring charges. Other current liabilities increased $1.6 million principally attributable to amounts recorded with the acquisition of IMM. Net cash provided by investing activities was $8.8 million, for the six months ended June 30, 1998, principally attributable to the net proceeds from investments in marketable securities ($23.1 million), investment in acquiring IMM ($8.0 million including $6.6 million purchase price of which approximately $1.6 million was in cash and remainder in the Company's common stock, and additional goodwill of $1.8 million including a restructuring action), a physician management company focused on the hospital system-affiliated physician marketplace that provides services complimentary to that which the Company currently provides, an additional investment ($5.6 million) in three separate affiliated entities in which the Company previously had a minority interest, increased capitalized software development costs (other assets) during the first quarter of 1998 ($1.1 million, net of amortization) and the purchase of property and equipment ($2.6 million). Net cash (used in) investing activities was ($7.9) million for the comparable period ended June 30, 1997, relating to a minority investment in an affiliated entity, advances to, and investments in affiliates, and the purchase of property and equipment. Net cash provided by financing activities was $.7 million for the six months ended June 30, 1998, principally attributable to net proceeds from the exercise of incentive stock options. Net cash provided by financing activities for the six months ended June 30, 1997 was ($.1) million, and related primarily to proceeds from the exercise of stock options and the repayment of capital lease obligations. (11) 14 The Company's operating plan for the remainder of 1998 includes the restructuring of its management services and information technology businesses including the continued development of the Company's electronic laboratory and prescription management products as described above. The principal categories of expenditures include research and development of the Company's electronic laboratory and prescription management products as well as ongoing business development and marketing. The Company believes that the net proceeds of the follow-on offering together with other cash and investments on hand, interest income and revenues from operations will be sufficient to fund planned operations of the Company through at least mid 1999. The Company has no other planned material capital expenditures or capital commitments. From time to time in the ordinary course of its business, the Company evaluates possible acquisitions of businesses, products and technologies that are complimentary to those of the Company. Year 2000 The Year 2000 date change issue is believed to affect virtually all companies and organizations. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. The Company has not completed its assessment of compliance issues for the Company's proprietary software products for its computer systems (both hardware and software), for equipment ancillary to the Company's business that contains computers or computer chips, or for the computer systems of other entities with which the Company does business. The Company has also not determined the cost of these compliance issues or the time it will take to complete compliance. The Company expects to complete its full assessment of the Year 2000 issue no later than December 31, 1998, which is prior to any anticipated impact on its operating systems. As part of the Year 2000 assessment, the Company expects to communicate with all of its physician practices and networks, as well as suppliers and third parties with which the Company does business, to determine the extent to which the Company's interface systems are vulnerable to those parties' failure to remedy their Year 2000 issues. There is no guarantee that the systems of other companies on which the Company relies will be corrected in a timely manner or that the failure to correct will not have a material adverse effect on the Company's systems. Year 2000 modifications and assessments are based on managements' best estimates, which are derived utilizing numerous assumptions of future events, including availability of certain resources and other factors. However, there can be no guarantee the estimates and assessments will be achieved or come to pass, and actual results could differ materially from those anticipated. (12) 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. PART II - Other Information ITEM 1. Legal Proceedings On September 23, 1997, the Company commenced an action against Synetic, Inc. ("Synetic") entitled Advanced Health Med-E-Systems Corporation v. Synetic, Inc. in the Supreme Court of the State of New York to collect $1 million owing by Synetic to the Company pursuant to a software license agreement dated as of March 31, 1997, as amended (the "License Agreement"), between Synetic and the Company, with respect to E-RxTM. On October 1, 1997, Synetic filed an answer to this lawsuit and asserted various counterclaims against the Company, in which Synetic alleges that the subject software and documentation was not timely delivered and installed in accordance with the License Agreement. As relief, Synetic seeks a declaratory judgment that Synetic is not obligated to make the $1 million payment, as well as unspecified damages. The Company believes that Synetic's defenses and counterclaims are without merit. Subsequent to June 30, 1998, a total of eleven stockholder Class Action Complaints have been filed against the Company. It is the Company's view that each of the Complaints is without merit, and it intends to defend against the actions vigorously. No assurance can be made that additional actions or proceedings arising out of the allegations in the current Class Action Complaints will not be commenced or filed in the future. From time to time, the Company is involved in litigation. Although the actual amount of any liability that could arise with respect to any such litigation cannot be accurately predicted, in the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the Company's business, results of operations or financial condition. (13) 16 ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS. (a) The Company's Annual Meeting of Stockholders was held on June 26, 1998. (b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Act of 1934. 9,049,084 shares, representing a majority of the votes cast at the Meeting by the holders of shares entitled to vote on the following matter, were voted in the election of each of the Board of Directors nominees named in the Company Proxy Statement for the Meeting. James T. Carney and Barry Kurokawa were listed in the proxy statement as management's nominees for election as directors of the Company and no candidates were offered in opposition to management's nominees and the nominees were elected based on the following vote. James T. Carney (i) 8,933,788 for, (ii) 115,296 against, and (iii) 0 abstain. Barry Kurokawa (i) 8,933,847 for, (ii) 115,237 against, and (iii) 0 abstain. There were 0 broker held non-voted shares represented at the Meeting with respect to this matter. The following directors' terms continued after the Annual Meeting: Jonathan Edelson M.D. and Alan B. Masarek. (c) The Company's stockholders did not approve the amendment of the Company's Stock Option Plan (the "Plan") to increase the number of shares available for grant under the Plan. 9,049,084 shares, which is more than a majority of the outstanding shares of the Company common stock on May 11, 1998, represented, in person or by proxy, were voted regarding the aforementioned proposal. The number of votes cast with respect to this matter was as follows: (i) 2,361,932 for, (ii) 3,875,610 against, and (iii) 298,626 abstentions. There were 2,512,916 broker held non-voted shares represented at the Meeting with respect to this matter. (d) 9,049,084 shares, which is more than a majority of the votes represented by the outstanding shares of common stock present, in person or by proxy, cast at the Meeting and entitled to vote on the following matter, were voted regarding the ratification of appointment of Arthur Andersen, LLP as the Company's independent auditor as follows: (i) 9,015,769 for, (ii) 26,993 against, and (iii) 6,322 abstentions. There were 0 broker held non-voted shares represented at the Meeting with respect to this matter. (14) 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned therewith duly authorized. August 12,1998 ADVANCED HEALTH CORPORATION By:/s/ Jonathan Edelson, M.D. -------------------------- Jonathan Edelson, M.D. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By:/s/Jeffrey M. Sauerhoff ----------------------- Senior Vice President Finance & Administration (Principal Financial and Accounting Officer) (15) EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 16,111 10,933 9,677 0 0 44,291 5,642 (2,508) 93,189 8,128 0 0 0 100 84,484 93,189 0 16,793 0 18,761 11,654 238 27 (12,898) 3,416 (16,314) 0 0 0 (16,314) (1.63) (1.63)
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