1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended NOVEMBER 30, 1997
Commission File Number 000-19364
AMERICAN HEALTHCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1117144
- ------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Burton Hills Boulevard, Nashville, TN 37215
-----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(615) 665-1122
----------------------------------------------------
(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 twelve 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 January 13, 1998 there were outstanding 8,061,624 shares of the
Registrant's Common Stock, par value $.001 per share.
2
PART I.
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, August 31,
1997 1997
------------ ------------
Current assets:
Cash and cash equivalents $ 10,237,478 $ 12,226,821
Accounts receivable, net 3,731,704 3,469,839
Other current assets 1,340,552 1,307,075
Deferred tax asset 1,306,000 1,306,000
------------ ------------
Total current assets 16,615,734 18,309,735
------------ ------------
Net assets of discontinued operations 16,476,161 16,407,271
------------ ------------
Property and equipment:
Leasehold improvements 77,434 77,434
Equipment 3,734,739 3,581,093
------------ ------------
3,812,173 3,658,527
Less accumulated depreciation (2,003,694) (1,851,087)
------------ ------------
Net property and equipment 1,808,479 1,807,440
------------ ------------
Long-term deferred tax asset 2,881,000 691,000
------------ ------------
Other assets, net 275,751 309,998
------------ ------------
Excess of cost over net assets
of purchased companies, net 11,751,804 11,847,358
------------ ------------
$ 49,808,929 $ 49,372,802
============ ============
2
3
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
November 30, August 31,
1997 1997
----------- -----------
Current liabilities:
Accounts payable $ 853,651 $ 785,674
Accrued salaries and benefits 878,087 1,457,139
Accrued liabilities 1,033,880 1,240,660
Unearned contract fees 1,834,345 2,251,176
Income taxes payable 262,438 885,950
Current portion of other long-term liabilities 314,458 125,000
----------- -----------
Total current liabilities 5,176,859 6,745,599
----------- -----------
Other long-term liabilities 2,083,522 2,186,481
----------- -----------
Stockholders' equity
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,061,624 and 8,051,559
shares outstanding 8,062 8,052
Additional paid-in capital 23,998,482 18,142,278
Retained earnings 18,542,004 22,290,392
----------- -----------
Total stockholders' equity 42,548,548 40,440,722
----------- -----------
$49,808,929 $49,372,802
=========== ===========
3
4
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
November 30,
-----------------------------
1997 1996
------------ ----------
Revenues $ 7,745,652 $7,979,420
------------ ----------
Expenses
Salaries and benefits 5,530,516 5,261,024
Other operating expenses 2,194,827 2,008,719
Depreciation and amortization 321,180 330,522
Interest -- 1,036
Spin-off stock option adjustment 5,770,000 --
------------ ----------
Total expenses 13,816,523 7,601,301
------------ ----------
Income (loss) before income taxes and discontinued operations (6,070,871) 378,119
Income tax expense (benefit) (2,266,000) 171,000
------------ ----------
Income (loss) from continuing operations (3,804,871) 207,119
Income from discontinued operations, net of income taxes 56,483 255,989
------------ ----------
Net income (loss) $ (3,748,388) $ 463,108
============ ==========
Income (loss) per share from continuing operations $ (0.47) $ 0.03
Income per share from discontinued operations 0.01 0.03
------------ ----------
Net income (loss) per share $ (0.46) $ 0.06
============ ==========
Weighted average common shares and equivalents 8,057,184 8,198,857
4
5
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1997
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------- ----------- ------------ ------------
Balance, August 31, 1997 $8,052 $18,142,278 $ 22,290,392 $ 40,440,722
Exercise of stock
options 10 86,204 -- 86,214
Spin-off stock
option adjustment -- 5,770,000 -- 5,770,000
Net loss -- -- (3,748,388) (3,748,388)
------ ----------- ------------ ------------
Balance, November 30, 1997 $8,062 $23,998,482 $ 18,542,004 $ 42,548,548
====== =========== ============ ============
5
6
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
November 30,
---------------------------
1997 1996
------------- -----------
Cash flows from operating activities:
Net income (loss) $ (3,748,388) $ 463,108
Income from discontinued operations 56,483 255,989
------------- -----------
Net income (loss) from continuing operations (3,804,871) 207,119
Income tax expense (benefit) (2,266,000) 171,000
------------- -----------
Income (loss) before income taxes (6,070,871) 378,119
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 321,180 330,522
Spin-off stock option adjustment 5,770,000 --
Increase in working capital items (1,430,028) (2,102,614)
Other noncash transactions 110,011 28,200
------------- -----------
(1,299,708) (1,365,773)
Income taxes (net paid) (520,926) (14,115)
Increase in other assets (32,977) (13,599)
Payments on other long-term liabilities (29,837) (86,620)
------------- -----------
Net cash flows used in operating activities (1,883,448) (1,480,107)
------------- -----------
Cash flows from investing activities:
Investment in discontinued operations including spin-off costs (11,879) (713,521)
Acquisition of property and equipment (153,644) (502,658)
------------- -----------
Net cash flows used in investing activities (165,523) (1,216,179)
------------- -----------
Cash flows from financing activities:
Exercise of stock options 59,628 116,148
------------- -----------
Net cash flows provided by
financing activities 59,628 116,148
------------- -----------
Net decrease in cash and cash equivalents (1,989,343) (2,580,138)
Cash and cash equivalents, beginning of period 12,226,821 12,561,703
------------- -----------
Cash and cash equivalents, end of period $ 10,237,478 $ 9,981,565
============= ===========
6
7
AMERICAN HEALTHCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL REPORTING
The accompanying consolidated financial statements of American
Healthcorp, Inc. and its subsidiaries (the "Company") for the three month
periods ended November 30, 1997 and 1996 are unaudited. However, in the opinion
of the Company, all adjustments consisting of normal, recurring accruals
necessary for a fair presentation, have been reflected therein.
The continuing operations of the Company consist primarily of Diabetes
Treatment Centers of America, Inc., a wholly owned subsidiary. The Company's
discontinued operations represent AmSurg Corp ("AmSurg"), a majority owned (58%
at November 30, 1997) subsidiary. The net assets and operations of AmSurg are
shown as discontinued operations due to the distribution of all the AmSurg
common stock held by the Company to the Company's shareholders on December 3,
1997.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1997.
2. AMSURG - DISCONTINUED OPERATIONS
On March 7, 1997, the Company's Board of Directors approved a plan to
distribute on a substantially tax-free basis all of the shares of AmSurg common
stock by the Company to the holders of Company common stock ("the
Distribution"). The Distribution to shareholders of record at November 25, 1997
based on an amended plan of distribution was completed on December 3, 1997. The
terms of the Distribution provide that the Company and AmSurg bear their own
expenses in connection with the Distribution. Distribution costs incurred during
the quarter ended November 30, 1997 of $344,500 for the Company and $351,748 for
AmSurg were expensed.
Summary operating results of AmSurg are as follows:
- ------------------------------------------------------------------------------------------
Three Months Ended November 30, 1997 1996
- ------------------------------------------------------------------------------------------
Revenues $15,916,989 $10,202,568
Net income $ 768,439 $ 417,039
7
8
A reconciliation of AmSurg net income to the Company's income from
discontinued operations is as follows:
- ------------------------------------------------------------------------------------------
Three Months Ended November 30, 1997 1996
- ------------------------------------------------------------------------------------------
Net income $ 768,439 $ 417,039
AmSurg minority stockholders' interest (367,456) (161,050)
Distribution costs incurred by American Healthcorp (344,500) -
- ------------------------------------------------------------------------------------------
Net income from discontinued operations $ 56,483 $ 255,989
- ------------------------------------------------------------------------------------------
Net assets of AmSurg are as follows:
- ------------------------------------------------------------------------------------------
At November 30, 1997
- ------------------------------------------------------------------------------------------
Current assets $ 14,304,329
Property and equipment, net 18,151,026
Other assets 1,541,841
Excess of cost over net assets of purchased companies, net 41,272,089
Current liabilities (8,198,919)
Deferred taxes (765,000)
Long-term debt (22,535,085)
Minority interests (27,294,120)
- ------------------------------------------------------------------------------------------
Net assets of discontinued operations $ 16,476,161
- ------------------------------------------------------------------------------------------
As a result of the Company's distribution of its AmSurg common stock
and pursuant to the terms of the Company's stock option plans, the number of
shares issuable pursuant to the Company's outstanding stock options and the
exercise price per share were adjusted to maintain the value of the options
subsequent to the Distribution at the pre-Distribution level. This adjustment
had the effect of reducing the average exercise price of outstanding options to
$3.27 per share from $8.62 per share and resulted in an additional 254,000
shares being subject to options. Additionally, all outstanding options became
fully vested. As a result of this adjustment of the stock options, generally
accepted accounting principles required that the Company record non-cash
compensation expense and an equal increase in stockholders' equity (additional
paid-in capital) in an amount equal to the difference between the aggregate
exercise price of outstanding options to purchase shares of the Company's common
stock having an exercise price below the market price of the Company's common
stock and the aggregate market price for such shares immediately prior to the
Distribution. The compensation expense and associated increase in additional
paid-in capital were recognized because generally accepted accounting principles
require such recognition when an adjustment results in a change in the ratio of
the exercise price to the market price per share even though no change in the
aggregate value of the options has taken place.
8
9
The impact of this adjustment on the Company's financial statements is
summarized below:
Net Income
Increase
(Decrease)
-----------
Compensation expense $(5,770,000)
Estimated deferred income tax benefit 2,190,000
-----------
Net decrease in net income $(3,580,000)
===========
Stockholders'
Equity
Increase
(Decrease)
-----------
Increase in paid-in capital $ 5,770,000
Net decrease in net income (3,580,000)
-----------
Net increase in stockholders' equity $ 2,190,000
===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The continuing operations of American Healthcorp, Inc. (the "Company")
consist primarily of Diabetes Treatment Centers of America, Inc. ("DTCA"), a
wholly-owned subsidiary that is a national provider of diabetes patient services
to hospitals and managed care payors designed to enhance the quality and lower
the cost of treatment of individuals with diabetes. The Company's discontinued
operations represent AmSurg Corp. ("AmSurg"), a majority-owned (58% at November
30, 1997) subsidiary that develops, acquires and operates physician
practice-based ambulatory surgery centers and specialty physician networks in
partnerships with surgical and other group practices.
In March of 1997 the Company's Board of Directors approved a plan to
distribute, on a substantially (approximately 98.5%) tax-free basis, all of the
shares of AmSurg common stock owned by the Company to the holders of Company
common stock (the "Distribution"). The plan of Distribution was amended based on
discussions with the Internal Revenue Service ("IRS") in its response to the
Company's requests for an IRS ruling that the Distribution could be completed on
a substantially tax-free basis. The Distribution, which is described in more
detail in an Information Statement provided to all holders of the Company's
common stock during November 1997, was completed on December 3, 1997.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements which are based upon current
expectations and involve a number of risks and uncertainties. In order for the
Company to utilize the "safe harbor" provisions of the Private Litigation
9
10
Reform Act of 1995, investors are hereby cautioned that these statements may be
affected by the important factors, among others, set forth below, and
consequently, actual operations and results may differ materially from those
expressed in these forward-looking statements. The important factors include:
DTCA's ability to renew contracts for hospital-based treatment centers on terms
that are acceptable to DTCA; DTCA's ability to execute contracts for new
hospital-based treatment centers; DTCA's ability to replace discontinued
contracts in a market; DTCA's ability to effect estimated cost savings under
certain managed care agreements or to effect such savings within the time frames
contemplated by DTCA; unusual and unforeseen patterns of healthcare utilization
by individuals with diabetes in the HMOs with which DTCA has executed an
agreement; the ability of the HMOs to maintain the number of covered lives
enrolled in the plans during the terms of the agreements between the HMOs and
DTCA; and DTCA's ability to attract and/or retain and effectively manage the
employees required to implement the managed care agreements.
DTCA
The principal sources of revenues for DTCA were its operating contracts
for hospital-based diabetes treatment centers. Fee structures under the hospital
contracts consist of either incentive-based fees, fixed management fees or a
combination thereof. Incentive arrangements generally provide for fee payments
to DTCA based on changes in the client hospital's market share of diabetes
inpatients and the costs of providing care to these patients. The form of these
contracts includes various structures ranging from arrangements where all costs
of the DTCA program for center professional personnel, medical director fees and
community relations are the responsibility of DTCA to structures where all DTCA
program costs are the responsibility of the client hospital.
The following table presents the number of DTCA contracts in effect and
the number of hospital sites where DTCA provided services or was in the process
of initiating operations as of November 30, 1997 and 1996. The number of
contracts and hospital sites for these periods includes two Arthritis and
Osteoporosis Care Center ("AOCC") contracts with hospitals to provide
comprehensive arthritis and osteoporosis services that are operated by DTCA.
As of November 30,
=====================================================
1997 1996
=====================================================
Hospital Hospital
Contracts Sites Contracts Sites
-----------------------------------------------------
Hospital contracts/sites 54 58 59 62
Network contracts/sites 4 16 2 11
-----------------------------------------------------
Total contracts/sites 58 74 61 73
=====================================================
10
11
The components of changes to the total number of DTCA hospital contracts and
hospital sites during the quarters ended November 30, 1997 and 1996 are
presented below.
Three Months Ended November 30,
=====================================================
1997 1996
=====================================================
Hospital Hospital
Contracts Sites Contracts Sites
-----------------------------------------------------
Total contracts/sites at
beginning of period 58 74 61 72
New contracts/sites
signed 2 3 - 1
Contracts/sites
discontinued (2) (3) - -
-----------------------------------------------------
Total contracts/sites 58 74 61 73
=====================================================
During the quarter ended November 30, 1997, three contracts were
renewed for DTCA hospital-based diabetes treatment centers. During the remainder
of fiscal 1998, there are 22 contracts which will reach the end of their terms
unless renewed. The Company periodically renegotiates existing DTCA hospital
contracts and, in that connection, has historically agreed to reduce its fee
structure in certain of these contracts in order to maintain favorable long-term
client relationships with these hospitals. The Company anticipates that it will
continue to make such fee reductions or center contract restructurings which
will have a negative impact on the Company's revenues and profitability.
Five of the contracts that will expire during the remainder of fiscal
1998 are with hospitals owned by Columbia/HCA Healthcare Corporation
("Columbia"). During the past twelve months, the majority of contracts that were
up for renewal with Columbia hospitals have been discontinued. The Company
anticipates that some of the contracts with Columbia which expire during the
remainder of fiscal 1998 will also be discontinued.
While DTCA's revenues have historically been generated primarily by its
operating contracts with hospitals, the Company believes that the substantial
portion of its future revenue growth will result from healthcare management
contracts with managed care payors for their enrollees with diabetes. During the
quarter ended November 30, 1997, DTCA's managed care payor operations reduced
the Company's pretax profitability by approximately $1.2 million. This negative
impact resulted primarily from the overhead costs related to these contracts and
from the costs associated with marketing efforts to enter into additional
disease management contracts. During the quarter the results of operations from
the managed care contracts themselves were approximately breakeven. The Company
anticipates continuing to experience a negative impact on its operations during
the remainder of fiscal 1998 as a result of its managed care disease management
efforts.
Also as a result of its managed care payor efforts, in June 1996 DTCA
reached agreement with two HMOs, Principal Healthcare, Inc. ("Principal") and
Health Options, Inc. ("Health Options"), an HMO subsidiary of Blue Cross and
Blue Shield of Florida, to provide comprehensive healthcare management services
for their at-risk enrollees with diabetes in selected markets. The Principal
agreement originally
11
12
encompassed six market sites with an additional HMO contract site being added
during the first quarter of fiscal 1997. The original Health Options agreement
was for one market site but an additional HMO contract location was added during
the second quarter of fiscal 1997. The Principal agreements now cover seven of
the largest HMO subsidiaries of Principal totaling approximately 360,000 at-risk
members, including an estimated 7,500 members with diabetes. The Health Options
agreements cover approximately 135,000 at-risk members, including an estimated
3,000 members with diabetes. Both the Principal and the Health Options
agreements have an initial term of five years. DTCA is at risk for the costs of
operating its comprehensive healthcare management system at each of the HMO
sites and Principal and Health Options continue to be at risk for all of their
members' healthcare costs. Cost savings anticipated to be produced by the
management system are shared according to formulae set forth in the agreements.
DTCA anticipates that revenues and profits from the Principal and
Health Options agreements will be more heavily weighted toward the later years
of the agreements' initial terms and that, during the first full year of
operations at each site, revenues will be less than operating costs.
Implementation of these contracts began on a market-by-market basis during July
1996, with all markets having begun implementation by April 1, 1997. Because of
expected ramp-up periods at each of the agreement sites and the timing delay in
calculating healthcare cost savings, if any, upon which DTCA's revenues are
calculated, it is anticipated that DTCA's profitability will be negatively
affected by these agreements during the first 12 to 18 months of operation at
each of these sites. Losses at several of these sites are expected to continue
into fiscal 1998. During the first quarter of fiscal 1998, these contracts
continued to show improving aggregate healthcare cost savings.
During September 1997 DTCA also signed an agreement with CIGNA
HealthCare ("CIGNA") to provide diabetes disease management services for members
at six CIGNA HMO markets that encompass approximately 1.3 million covered lives.
Under the three year agreement, DTCA will provide, through a fee-based
arrangement, a tailored version of its NetLink(TM) telephone-based diabetes
management program. These services, which will be provided from a telephone
center located in Nashville, Tennessee, will be designed primarily to improve
blood glucose management for diabetes patients and to monitor and promote
compliance with certain standards of care for diabetes patients. The services do
not encompass comprehensive management of all healthcare services such as that
provided under the Principal and Health Options agreements. Because CIGNA will
pay a monthly fee to DTCA based on the number of their members enrolled in the
program and because this is not a cost savings sharing arrangement as provided
in the Principal and the Health Options agreements, the Company does not
anticipate any significant start-up losses from these contracts. In addition,
the CIGNA contract provides for a fee payment prior to the effective start date
of services of March 1, 1998 which is designed to approximate DTCA's start-up
expenses prior to the initiation of the monthly per enrolled member service fee
payment from CIGNA. Of the fees to be received by DTCA for these services,
slightly less than 20% will be at risk of repayment unless certain standards of
care and cost reduction targets are achieved as measured as of each contract
site year-end. It is anticipated that the program will be in operation in six
CIGNA HMO markets by the end of fiscal 1998.
During September 1997, the Company also announced the execution of a
new one year contract with United Healthcare of Georgia ("United") to make
available DTCA's outpatient diabetes services to the approximately 240,000
United members in the greater Atlanta area and also announced the signing of an
expanded three year contract with Aetna U.S. Healthcare ("Aetna") to make
available DTCA's outpatient diabetes education services to Aetna's members
diagnosed with diabetes in markets where both DTCA and Aetna provide services.
Both the United and the Aetna contracts are fee-for-service arrangements that
will be provided primarily from DTCA's hospital contract sites and will require
the enrollment of the patient by the patient's primary care physician and will
also require the consent of the
12
13
patient. Physicians and patients of both United and Aetna may have other choices
of providers for similar services to those provided by DTCA in their markets.
The services encompassed in these contracts are primarily educational,
behavioral and motivational support and, in some cases, also include patient
assessment and outcomes reporting. The United contract began implementation
during the first quarter of fiscal 1998. The Aetna contract also began
implementation in the Atlanta market during the first quarter of fiscal 1998 and
current plans provide for the expansion of this contract to additional markets
during fiscal 1998. These contracts generated minimal revenues during the
quarter ended November 30, 1997 and at this time the Company cannot predict the
rate at which revenues will be generated under these contracts.
The Company's growth strategy is primarily to develop new relationships
directly with managed care payors and others who are ultimately responsible for
the healthcare costs of individuals with diabetes and to further develop its
hospital-based diabetes treatment business. Pursuant to its strategy with
managed care payors, DTCA is expected to provide management services designed to
improve the quality of care for individuals with diabetes while lowering the
overall cost of care. DTCA fees under these arrangements with payors may take
the form of shared savings of overall diabetes enrollee healthcare costs,
capitated payments to DTCA to cover DTCA's services to enrollees but not the
responsibility for enrollee healthcare claims or some combination of these
arrangements. However, the Company believes that the majority of future managed
care disease management contracts that will be signed by DTCA will not entail
the type of initial operating losses as the Company has incurred with respect to
the Principal and the Health Options agreements.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of DTCA under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal government had declined
to take over and pursue a civil "whistle blower" action brought under seal in
June 1994 on behalf of the government by a former employee dismissed by the
Company in February 1994. The Company believes that this lawsuit triggered the
OIG investigation. The civil suit was filed in June 1994 against the Company,
DTCA, and certain named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine whether to take over
the lawsuit. Following its review, the government made the determination not to
take over the litigation, and the complaint was unsealed on February 10, 1995.
Various preliminary motions have been filed regarding jurisdictional and
pleading matters, resulting in the filing of a number of amended complaints and
the dismissal of the Company as a defendant. DTCA continues to be a defendant.
All of these preliminary motions have now been resolved and the lawsuit has
entered the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
AMSURG
Through investments made since fiscal 1993, the Company owned as of
November 30, 1997 approximately 58% of the outstanding common stock of AmSurg, a
company that develops, acquires and
13
14
operates physician practice-based ambulatory surgery centers with physician
practice groups through partnership or limited liability companies.
Only limited information has been provided for AmSurg operations
because AmSurg is being reported by the Company as a discontinued operation as a
result of the decision by the Company's Board of Directors to distribute all of
the common stock of AmSurg held by the Company to the shareholders of the
Company. This distribution was completed on December 3, 1997. AmSurg itself is a
separate reporting company under the Securities Exchange Act of 1934 and has
been subject to its own filing and reporting requirements since May 1997.
RESULTS OF CONTINUING OPERATIONS
DTCA represents the continuing operations of the Company and includes
the results of operations of two Arthritis and Osteoporosis Care centers and
corporate costs attributable to DTCA.
The DTCA revenues decrease to $7.7 million for the three month period
ended November 30, 1997 from $8.0 million for the comparable period last year
resulted primarily from the impact of DTCA hospital contract rate renegotiations
and restructurings and hospital contract terminations, offset somewhat by
revenues from new DTCA hospital contracts, which did not provide the same
average revenue per contract as the more mature contracts that were terminated,
and by additional revenues generated under the managed care payor contracts with
Principal and Health Options. Hospital contract rate renegotiations and
restructurings were the primary reasons for a 16% decrease in same contract
revenues for contracts in operation as of September 1, 1996. The Company
believes that the impact of hospital contract restructurings will negatively
impact same-contract revenue comparisons during the remainder of fiscal 1998. In
addition, costs associated with DTCA's managed care payor operations are
expected to exceed anticipated revenues during the remainder of fiscal 1998.
The increase in overall DTCA salaries and benefits to $5.5 million for
the three month period ended November 30, 1997 from $5.3 million for the
comparable period last year resulted primarily from higher staffing costs
associated with DTCA's managed care contracts with Principal and Health Options
and from normal salary and benefit increases. Salaries and benefits as a
percentage of revenues for the three month period ended November 30, 1997 were
71% as compared with 66% for the comparable fiscal 1997 period. This increase
resulted primarily from the impact of additional salary costs associated with
the Company's managed care contract operations and decreased revenues. The
Company anticipates that salaries and benefits will increase during the
remainder of fiscal 1998 primarily as a result of the implementation of the
CIGNA contract.
The increase in DTCA's other operating expenses to $2.2 million for the
three month period ended November 30, 1997 from $2.0 million for the comparable
period last year resulted primarily from increased costs associated with the
implementation of the Principal and Health Options contracts. These
implementation costs combined with reduced revenues caused other operating
expenses as a percentage of revenues for the three month period ended November
30, 1997 to increase to 28% compared with 25% for the comparable fiscal 1997
period. The Company anticipates that other operating expenses will increase
during the remainder of fiscal 1998 primarily as a result of the implementation
of the CIGNA contract during 1998.
The decrease in income tax expense (resulting in an income tax benefit
of $76,000 for the three month period ended November 30, 1997 compared with
income tax expense of $171,000 for the comparable fiscal 1997 period) resulted
from decreased operating results for the first quarter of fiscal 1998. The
differences between the federal statutory income tax rate of 34% and the
Company's effective income
14
15
tax rates during the periods are due primarily to the impact of state income
taxes and the amortization of certain excess costs over net assets of purchased
companies which are not deductible for income tax purposes.
As a result of the Distribution and pursuant to the terms of the
Company's stock option plans, the exercise price per share of outstanding
options to purchase shares of the Company's common stock was reduced and the
number of shares underlying such options was, in certain cases, increased to
maintain the value of these stock options following the Distribution at
pre-Distribution levels. Holders of these stock options on the Distribution
record date were not entitled to receive shares of AmSurg common stock with
respect to such options. The amount by which the options were adjusted resulted
from a comparison of the market price per share of American Healthcorp common
stock before and after the Distribution. In addition, the vesting of options was
accelerated for options that have not yet vested. This adjustment had the effect
of reducing the average exercise price of outstanding options to $3.27 per share
from $8.62 per share. As a result of this adjustment of the stock options,
generally accepted accounting principles required that the Company record
non-cash compensation expense and an equal increase in stockholders' equity
(additional paid-in capital) in an amount equal to the difference between the
aggregate exercise price of outstanding options to purchase shares of the
Company's common stock having an exercise price below the market price of the
Company's common stock and the aggregate market price for such shares
immediately prior to the Distribution. The compensation expense and associated
increase in additional paid-in capital were recognized because generally
accepted accounting principles require such recognition when an adjustment
results in a change in the ratio of the exercise price to the market price per
share even though no change in the aggregate value of the options has taken
place. Although it would have been possible to adjust the options without
changing this ratio, it could only have been accomplished by issuing a large
number of new options which would have resulted in substantial dilution to the
Company's stockholders. While the adjustment did result in an additional 254,000
shares being subject to options, the number of additional shares being subject
to options is significantly less than the number which would have been required
to avoid recognition of compensation expense. The option adjustment, on a
one-time basis, resulted in the recognition of compensation expense of $5.8
million and also resulted in an income tax benefit associated with the
compensation expense of $2.2 million.
In addition, the option adjustment described above will also have the
effect, during periods when the Company is reporting net income, of decreasing
future earnings per share primarily because of the impact of the additional
number of shares being subject to options that were issued as part of this
adjustment on the calculation of common stock equivalents used in the
calculation of earnings per share.
The Distribution also resulted in certain nonrecurring expenses being
recognized by the Company as part of its discontinued operations. For the
Company, the non-recurring expenses of the Distribution are expected to be
approximately $960,000 of which $615,000 was incurred and expensed during the
year ended August 31, 1997 and $345,000 was incurred and expensed during the
three month period ended November 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities from continuing operations for the first quarter
of fiscal 1998 utilized $1.9 million in cash flow. The first quarter of each
fiscal year normally utilizes a much larger amount of cash for operating
activities than other quarters of the year primarily as a result of certain
insurance, income tax and employee incentive compensation payments which are
made during the first quarter of each fiscal year. Investing activities during
the first quarter of fiscal 1998 used $165,523 in cash flow which consisted
15
16
primarily of property and equipment purchases for DTCA. Financing activities
associated with continuing operations for the three month period ended November
30, 1997 provided $59,628 in cash flow in proceeds from the exercise of options
to purchase the Company's common stock.
The Company believes that cash flow from DTCA operating activities and
the Company's available cash balances of $10.2 million at November 30, 1997 will
continue to enable the Company to fund DTCA's current working capital needs and
capital expenditure needs, including its diabetes disease management efforts and
to pay the Company's remaining costs associated with the Distribution.
The Company has evaluated its computer software and databases to ensure
that any modifications required to be year 2000 compliant are made in a timely
manner. Management does not expect the financial impact of such modifications to
be material to the Company's financial position or results of operations in any
given year.
PART II
ITEM 1. Legal Proceedings.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General
("OIG") of the Department of Health and Human Services in connection
with an investigation of DTCA under certain federal Medicare and
Medicaid statutes. On February 10, 1995, the Company learned that the
federal government had declined to take over and pursue a civil
"whistle blower" action brought under seal in June 1994 on behalf of
the government by a former employee dismissed by the Company in
February 1994. The Company believes that this lawsuit triggered the OIG
investigation. The civil suit was filed in June 1994 against the
Company, DTCA, and certain named and unnamed medical directors and
client hospitals and was kept under seal to permit the government to
determine whether to take over the lawsuit. Following its review, the
government made the determination not to take over the litigation, and
the complaint was unsealed on February 10, 1995. Various preliminary
motions have been filed regarding jurisdictional and pleading matters,
resulting in the filing of a number of amended complaints and the
dismissal of the Company as a defendant. DTCA continues to be a
defendant. All of these preliminary motions have now been resolved and
the lawsuit has entered the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance
with applicable statutory requirements. Although there can be no
assurance that the existence of, or the results of, the investigation
would not have a material adverse effect on the Company, the Company
believes that the resolution of issues, if any, which may be raised by
the government and the resolution of the civil litigation would not
have a material adverse effect on the Company's financial position or
results of operations except to the extent that the Company incurs
material legal expenses associated with its defense of this matter and
the civil suit.
ITEM 2. Changes in Securities.
Not Applicable.
16
17
ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
ITEM 5. Other Information.
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the quarter for
which this report is filed.
17
18
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 hereunto duly authorized.
AMERICAN HEALTHCORP, INC.
(Registrant)
Date January 13, 1998 By /s/ Henry D. Herr
------------------------ ---------------------------------
HENRY D. HERR
Executive Vice President
Finance and Administration,
(Principal Financial Officer)
Date January 13, 1998 By /s/ David A. Sidlowe
------------------------ ---------------------------------
DAVID A. SIDLOWE
Vice President and Controller
(Principal Accounting Officer)
18