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 FEBRUARY 28, 1998
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 April 13, 1998 there were outstanding 8,089,315 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
February 28, August 31,
1998 1997
------------ ------------
Current assets:
Cash and cash equivalents $ 10,192,599 $ 12,226,821
Accounts receivable, net 2,868,218 3,469,839
Other current assets 1,107,987 1,307,075
Deferred tax asset 1,306,000 1,306,000
------------ ------------
Total current assets 15,474,804 18,309,735
------------ ------------
Net assets of discontinued operations -- 16,407,271
------------ ------------
Property and equipment:
Leasehold improvements 105,136 77,434
Equipment 4,180,978 3,581,093
------------ ------------
4,286,114 3,658,527
Less accumulated depreciation (2,204,401) (1,851,087)
------------ ------------
Net property and equipment 2,081,713 1,807,440
------------ ------------
Long-term deferred tax asset 2,881,000 691,000
------------ ------------
Other assets, net 264,197 309,998
------------ ------------
Excess of cost over net assets
of purchased companies, net 11,656,249 11,847,358
------------ ------------
$ 32,357,963 $ 49,372,802
============ ============
2
3
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, August 31,
1998 1997
----------- -----------
Current liabilities:
Accounts payable $ 772,166 $ 785,674
Accrued salaries and benefits 1,142,615 1,457,139
Accrued liabilities 901,287 1,240,660
Unearned contract fees 1,217,212 2,251,176
Income taxes payable 400,688 885,950
Current portion of other long-term liabilities 436,307 125,000
----------- -----------
Total current liabilities 4,870,275 6,745,599
----------- -----------
Other long-term liabilities 2,191,595 2,186,481
----------- -----------
Stockholders' equity
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,085,806 and 8,051,559
shares outstanding 8,086 8,052
Additional paid-in capital 24,009,000 18,142,278
Retained earnings 1,279,007 22,290,392
----------- -----------
Total stockholders' equity 25,296,093 40,440,722
----------- -----------
$32,357,963 $49,372,802
=========== ===========
3
4
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
February 28, February 28,
--------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
Revenues $ 8,454,077 $ 7,352,800 $ 16,199,729 $ 15,332,220
----------- ----------- ------------ ------------
Expenses
Salaries and benefits 6,089,759 5,493,934 11,620,275 10,754,958
Other operating expenses 2,187,726 2,114,057 4,382,553 4,122,776
Depreciation and amortization 303,796 344,957 624,976 675,479
Interest 113 1,022 113 2,058
Spin-off stock option adjustment -- -- 5,770,000 --
----------- ----------- ------------ ------------
Total expenses 8,581,394 7,953,970 22,397,917 15,555,271
----------- ----------- ------------ ------------
Income (loss) before income taxes
and discontinued operations (127,317) (601,170) (6,198,188) (223,051)
Income tax expense (benefit) (12,000) (171,000) (2,278,000) --
----------- ----------- ------------ ------------
Income (loss) from continuing operations (115,317) (430,170) (3,920,188) (223,051)
Income from discontinued operations,
net of income taxes -- 235,875 56,483 491,864
----------- ----------- ------------ ------------
Net income (loss) $ (115,317) $ (194,295) $ (3,863,705) $ 268,813
=========== =========== ============ ============
Basic and diluted income (loss) per share:
From continuing operations $ (0.01) $ (0.05) $ (0.49) $ (0.03)
From discontinued operations -- 0.03 0.01 0.06
----------- ----------- ------------ ------------
$ (0.01) $ (0.02) $ (0.48) $ 0.03
=========== =========== ============ ============
Weighted average common shares
and equivalents:
Basic 8,072,065 8,014,006 8,064,625 8,008,675
Diluted 8,072,065 8,258,886 8,064,625 8,228,862
4
5
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998
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 46 197,654 -- 197,700
Repurchase of stock (12) (100,932) -- (100,944)
Spin-off stock
option adjustment -- 5,770,000 -- 5,770,000
Distribution of
AmSurg stock -- -- (17,147,680) (17,147,680)
Net loss -- -- (3,863,705) (3,863,705)
------- ------------ ------------ ------------
Balance, February 28, 1998 $ 8,086 $ 24,009,000 $ 1,279,007 $ 25,296,093
======= ============ ============ ============
5
6
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
February 28,
-----------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (3,863,705) $ 268,813
Income from discontinued operations 56,483 491,864
------------ ------------
Net income (loss) from continuing operations (3,920,188) (223,051)
Income tax expense (benefit) (2,278,000) --
------------ ------------
Income (loss) before income taxes (6,198,188) (223,051)
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 624,976 675,479
Spin-off stock option adjustment 5,770,000 --
Increase in working capital items (900,660) (1,344,425)
Other noncash transactions 346,047 179,692
------------ ------------
(357,825) (712,305)
Income taxes (net paid) (543,543) (24,688)
Increase in other assets (63,121) (65,886)
Payments on other long-term liabilities (34,091) (86,620)
------------ ------------
Net cash flows used in operating activities (998,580) (889,499)
------------ ------------
Cash flows from investing activities:
Investment in discontinued operations including spin-off costs (479,231) (793,521)
Acquisition of property and equipment (584,424) (971,360)
------------ ------------
Net cash flows used in investing activities (1,063,655) (1,764,881)
------------ ------------
Cash flows from financing activities:
Repurchase of stock (100,944) --
Exercise of stock options 128,957 202,535
------------ ------------
Net cash flows provided by
financing activities 28,013 202,535
------------ ------------
Net decrease in cash and cash equivalents (2,034,222) (2,451,845)
Cash and cash equivalents, beginning of period 12,226,821 12,561,703
------------ ------------
Cash and cash equivalents, end of period $ 10,192,599 $ 10,109,858
============ ============
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 and six
month periods ended February 28, 1998 and 1997 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"), formerly a majority
owned 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 owned 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. The effect of the Distribution was
a one time charge to retained earnings of $17,147,680 which represents the
Company's investment in AmSurg.
3. EARNINGS PER SHARE
For the three and six month periods ended February 28, 1998 and 1997,
the Company has reported earnings per share under Financial Accounting Standard
No. 128 ("FAS 128") "Earnings per Share". The presentation of basic earnings per
share is based upon average common shares outstanding during the period. Diluted
earnings per share is based on average common shares outstanding during the
period plus the dilutive effect of stock options outstanding. Calculation of
diluted earnings per share for the three and six month periods ended February
28, 1998 does not include 527,668 in common stock equivalents relative to
outstanding stock options as their effect would be antidilutive.
7
8
4. STOCK REPURCHASE
In January 1998, the Company's Board of Directors authorized the
repurchase and cancellation of up to 400,000 shares of the Company's common
stock. The authorization enables the Company to make repurchases from time to
time prior to January 1, 2000. As of February 28, 1998 the Company has
repurchased 11,956 shares at a cost of $100,944.
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 represented AmSurg Corp.
("AmSurg"), formerly a majority-owned 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 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 Securities
Litigation 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 and for diabetes healthcare management
agreements; 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. The Company undertakes no obligation to update or
revise any such forward-looking statements.
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
8
9
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 February 28, 1998 and 1997. 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 February 28,
-------------------------------------------------------
1998 1997
-------------------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
------------------------ ------------------------
Hospital contracts/sites 52 56 58 61
Network contracts/sites 4 16 2 11
------------------------ ------------------------
Total contracts/sites 56 72 60 72
======================== ========================
The components of changes to the total number of DTCA hospital contracts during
the quarters and the six months ended February 28, 1998 and 1997 are presented
below.
For the Three Months Ended February 28,
------------------------------------------------------
1998 1997
------------------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
------------------------ -------------------------
Total contracts/sites at
beginning of period 58 74 61 73
New contracts/sites
signed 1 1 2 2
Contracts/sites discontinued (3) (3) (3) (3)
------------------------ -------------------------
Total contracts/sites 56 72 60 72
======================== =========================
9
10
For the Six Months Ended February 28,
--------------------------------------------------------
1998 1997
--------------------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
----------------------- -----------------------
Total contracts/sites at
beginning of period 58 74 61 72
New contracts/sites signed 3 4 2 3
Contracts/sites discontinued (5) (6) (3) (3)
----------------------- -----------------------
Total contracts/sites 56 72 60 72
======================= =======================
During the quarter ended February 28, 1998, seven contracts were
renewed for DTCA hospital-based diabetes treatment centers. During the remainder
of fiscal 1998, there are 13 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.
Three 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 eighteen months, the majority of contracts that
were up for renewal with Columbia hospitals have been discontinued and during
the six months ended February 28, 1998, two contracts with Columbia hospitals
have been discontinued. The Company does not anticipate that all of the
contracts with Columbia which expire during the remainder of fiscal 1998 will be
renewed.
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 February 28, 1998, DTCA's managed care payor operations reduced
the Company's pretax profitability by approximately $1.0 million. This negative
impact resulted primarily from the overhead costs related to DTCA's managed care
operations 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 generated approximately
$200,000 in pretax profit. The Company anticipates continuing to experience a
negative impact on its operating results during the remainder of fiscal 1998 as
a result of its managed care disease management operations.
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
through DTCA's NetCare(TM) product. The Principal agreement originally
encompassed six market sites with an additional HMO contract site being added
during the first quarter of fiscal 1997. The original
10
11
Health Options agreement was for one market site; an additional HMO contract
location was added during the second quarter of fiscal 1997 and a third HMO
contract location has been added effective March 1, 1998. The Principal
agreements now cover seven of the largest HMO subsidiaries of Principal totaling
approximately 360,000 at-risk members, including an estimated 7,000 members with
diabetes. The first two Health Options agreements cover approximately 135,000
at-risk members, including an estimated 3,000 members with diabetes. The
Principal and the first two Health Options agreements have an initial term of
five years and provide that DTCA is at risk for the costs of operating its
comprehensive healthcare management system at each of the HMO sites while
Principal and Health Options continue to be at risk for all of their members'
healthcare costs. Cost savings anticipated to be produced by DTCA's management
system at these nine sites are shared according to formulae set forth in the
agreements.
DTCA anticipates that revenues and profits from the Principal and the
first two 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 nine 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
normal time lag 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. During the second quarter of fiscal 1998,
these contracts continued to show improving aggregate healthcare cost savings
and were beginning to contribute toward covering the overhead associated with
the managed care operations. Discussions have recently been initiated with
Principal regarding the conversion of the Principal arrangements from a sharing
of healthcare cost savings with DTCA to fees based on members enrolled in the
program subject to adjustment for financial and clinical performance. These
discussions have only recently begun and the outcome of these discussions cannot
be predicted at this time.
The most recent contract with Health Options has a three year term and
is for DTCA's NetCare(TM) product covering approximately 300,000 commercial and
Medicare members and includes approximately 10,000 members with diabetes. In
contrast to DTCA's two other contracts with Health Options and with the
contracts with Principal, DTCA will be compensated under the new Health Options
contract through a per member per month payment, with an initial minimum
guarantee, for all members who elect to participate, as well as through payments
based upon the achievement of specified outcomes measures. As a result, it is
anticipated that this contract will begin generating revenues for DTCA beginning
March 1, 1998 without the initial operating losses incurred with the other
Health Options and Principal contracts.
During September 1997, DTCA 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
11
12
effective start date of April 1, 1998 which is designed to offset the majority
of 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 early fiscal 1999.
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 the Company has incurred with respect to
the Principal and 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 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 will 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 will 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.
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.
12
13
Revenues for the quarter and six months ended February 28, 1998
increased 15% and 6%, respectively, over the same periods in 1997. The principal
sources of the increase in revenues were managed care payor contracts and new
hospital contracts offset by reductions in revenues from discontinued hospital
contracts and reduced same hospital contract revenues. Same hospital contract
revenues for the quarter and six months ended February 28, 1998 were 6% and 12%,
respectively, less than the 1997 periods. The same hospital revenue decreases
were principally a result of contract rate renegotiations and restructurings.
The Company believes that the impact of hospital contract restructurings will
negatively impact same hospital revenue comparisons during the remainder of
fiscal 1998.
Salaries and benefits for the quarter and six months ended February 28,
1998 increased 11% and 8%, respectively, as a result of increased staffing
levels associated primarily with managed care payor operations and normal salary
increases partially offset by reduced salaries and benefits associated with
fewer hospital contracts in operation. Salaries and benefits as a percentage of
revenues for the quarter and six months ended February 28, 1998 were 72% for
both periods, compared with 75% and 70% for the quarter and six months ended
February 28, 1997, respectively. Salaries and benefits as a percentage of
revenues for the six months ended February 28, 1998 increased compared to the
same period in 1997 principally because of increased salaries and benefits
related to managed care payor operations, while the improvement in these
percentages in the quarter ended February 28, 1998 compared to the same period
in 1997 was primarily due to increasing managed care payor contract revenues.
Other operating expenses for the quarter and six months ended February
28, 1998 increased 4% and 6%, respectively, principally as a result of
additional managed care payor contracts in operation. Other operating expenses
as a percentage of revenue decreased to 26% for the quarter ended February 28,
1998 from 29% for the same quarter in 1997, while remaining at 27% for the six
months ended February 28, 1998 and 1997. Operating expenses as a percentage of
revenues decreased during the quarter ended February 28, 1998 primarily as a
result of additional revenues from managed care payor contracts.
The income tax benefit for the quarter ended February 28, 1998 was
$12,000 compared to a benefit of $171,000 for the same quarter in 1997. The
decreased tax benefit resulted from reduced operating losses. The income tax
benefit for the six months ended February 28, 1998 of $2,278,000 was principally
the result of recording the tax benefit associated with compensation expense
related to the adjustment of stock options in the quarter ended November 30,
1997. The differences between the statutory federal income tax rate of 34% and
the Company's effective tax income rates during the periods are due primarily to
the impact of state income taxes and the amortization of 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
13
14
(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 during the quarter ended November 30, 1997.
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 were 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 six months
ended February 1998 utilized $1.0 million in cash flow. The first two quarters
of each fiscal year normally utilize 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 six months ended February 28, 1998 used $1.1 million in cash flow which
consisted primarily of property and equipment purchases for DTCA of $584,424 and
payment of costs associated with the spinoff of AmSurg of $479,231. Financing
activities associated with continuing operations for the six months ended
February 28, 1998 provided $28,013 in cash flow in proceeds from the exercise of
options to purchase the Company's common stock of $128,957 offset by the
Company's repurchase of its stock of $100,944.
The Company believes that cash flow from DTCA operating activities and
the Company's available cash balances of $10.2 million at February 28, 1998 will
continue to enable the Company to fund DTCA's current working capital needs and
capital expenditure needs, including its diabetes disease management efforts.
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.
14
15
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 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 will 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 will 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.
ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of Stockholders of American Healthcorp, Inc.
was held on January 21, 1998.
15
16
(c) Nominations to elect Frank A. Ehmann and William C. O'Neil, Jr.
as Directors of the Company were voted upon at the Annual
Meeting of Stockholders. The results of the election of the
above mentioned nominees were as follows:
For Against Withheld
--------- ------- --------
Frank A. Ehmann 6,840,050 - 7,954
William C. O'Neil, Jr. 6,840,509 - 7,495
A proposal to approve and adopt an amendment to the Company's
1996 Stock Incentive Plan was also voted upon at the Annual
Meeting of Stockholders. The results of the vote to approve and
adopt an amendment to the 1996 Stock Incentive Plan were as
follows:
For Against Withheld
--------- --------- --------
5,262,192 1,547,164 38,648
ITEM 5. Other Information.
Not Applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule (for 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.
16
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 hereunto duly authorized.
AMERICAN HEALTHCORP, INC.
-------------------------
(Registrant)
Date April 14, 1998 By /s/ Henry D. Herr
------------------------- -------------------------------------
HENRY D. HERR
Executive Vice President
Finance and Administration,
(Principal Financial Officer)
Date April 14, 1998 By /s/ David A. Sidlowe
-------------------------- ------------------------------------
DAVID A. SIDLOWE
Vice President and Controller
(Principal Accounting Officer)
17