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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, 1998
Commission File Number 000-19364
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AMERICAN HEALTHCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1117144
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Burton Hills Boulevard, Nashville, TN 37215
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(Address of Principal Executive Offices) (Zip Code)
(615) 665-1122
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(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
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As of January 12, 1999 there were outstanding 8,294,972 shares of the
Registrant's Common Stock, par value $.001 per share.
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PART I.
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
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November 30, August 31,
1998 1998
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Current assets:
Cash and cash equivalents $ 8,282,016 $ 13,243,571
Accounts receivable, net 7,490,053 3,623,461
Other current assets 1,338,380 798,714
Deferred tax asset 998,000 998,000
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Total current assets 18,108,449 18,663,746
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Property and equipment:
Leasehold improvements 292,419 191,950
Equipment 6,299,570 5,828,698
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6,591,989 6,020,648
Less accumulated depreciation (2,556,246) (2,336,242)
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Net property and equipment 4,035,743 3,684,406
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Long-term deferred tax asset 2,753,000 2,753,000
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Other assets, net 306,951 290,513
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Excess of cost over net assets
of purchased companies, net 11,369,584 11,465,139
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$ 36,573,727 $ 36,856,804
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AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
====================================
November 30, August 31,
1998 1998
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Current liabilities:
Accounts payable $ 1,159,305 $ 1,015,918
Accrued salaries and benefits 2,004,717 2,985,589
Accrued liabilities 1,763,782 2,163,963
Income taxes payable 733,096 1,054,407
Current portion of other long-term liabilities 439,548 584,805
------------------------------------
Total current liabilities 6,100,448 7,804,682
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Other long-term liabilities 2,454,078 2,446,089
------------------------------------
Stockholders' equity:
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,281,866 and 8,125,507
shares outstanding 8,282 8,125
Additional paid-in capital 24,527,150 23,719,833
Retained earnings 3,483,769 2,878,075
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Total stockholders' equity 28,019,201 26,606,033
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$ 36,573,727 $ 36,856,804
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AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended
November 30,
1998 1997
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Revenues $ 11,834,889 $ 7,745,652
------------------------------------
Expenses:
Salaries and benefits 7,487,162 5,530,516
Other operating expenses 2,888,791 2,194,827
Depreciation and amortization 404,986 321,180
Interest 256 -
Spin-off stock option adjustment - 5,770,000
------------------------------------
Total expenses 10,781,195 13,816,523
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Income (loss) before income taxes and
discontinued operations 1,053,694 (6,070,871)
Income tax expense (benefit) 448,000 (2,266,000)
------------------------------------
Income (loss) from continuing operations 605,694 (3,804,871)
Income from discontinued operations,
net of income taxes - 56,483
------------------------------------
Net income (loss) 605,694 (3,748,388)
Other comprehensive income, net of income taxes - -
------------------------------------
Comprehensive income (loss) $ 605,694 $ (3,748,388)
====================================
Basic income (loss) per share:
From continuing operations $ 0.07 $ (0.47)
From discontinued operations - 0.01
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$ 0.07 $ (0.46)
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Fully diluted income (loss) per share:
From continuing operations $ 0.07 $ (0.47)
From discontinued operations - 0.01
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$ 0.07 $ (0.46)
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Weighted average common shares and equivalents
Basic 8,148,195 8,057,184
Fully diluted 8,684,467 8,057,184
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AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998
Additional
Common Paid-in Retained
Stock Capital Earnings Total
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Balance, August 31, 1998 $ 8,125 $ 23,719,833 $ 2,878,075 $ 26,606,033
Exercise of stock
options 157 807,317 - 807,474
Comprehensive income - - 605,694 605,694
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Balance, November 30, 1998 $ 8,282 $ 24,527,150 $ 3,483,769 $ 28,019,201
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AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three Months Ended
November 30,
1998 1997
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Cash flows from operating activities:
Net income (loss) $ 605,694 $ (3,748,388)
Income from discontinued operations -- 56,483
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Net income (loss) from continuing operations 605,694 (3,804,871)
Income tax expense (benefit) 448,000 (2,266,000)
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Income (loss) before income taxes 1,053,694 (6,070,871)
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 404,986 321,180
Spin-off stock option adjustment -- 5,770,000
Increase in working capital items (5,643,924) (1,430,028)
Other noncash transactions 241,270 110,011
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(3,943,974) (1,299,708)
Income taxes (net paid) (553,484) (520,926)
Increase in other assets (63,972) (32,977)
Payments on other long-term liabilities (308,452) (29,837)
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Net cash flows used in operating activities (4,869,882) (1,883,448)
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Cash flows from investing activities:
Acquisition of property and equipment (683,320) (153,644)
Investment in discontinued operations including spin-off costs -- (11,879)
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Net cash flows used in investing activities (683,320) (165,523)
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Cash flows from financing activities:
Exercise of stock options 591,647 59,628
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Net cash flows provided by
financing activities 591,647 59,628
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Net decrease in cash and cash equivalents (4,961,555) (1,989,343)
Cash and cash equivalents, beginning of period 13,243,571 12,226,821
--------------------------------------
Cash and cash equivalents, end of period $ 8,282,016 $ 10,237,478
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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, 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"), 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, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The continuing operations of American Healthcorp, Inc. (the "Company")
primarily consist 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"), 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 was completed on December 3, 1997. The
Company has received a letter ruling from the Internal Revenue Service
confirming the substantially tax-free nature of the Distribution.
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 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
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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 managed care
diabetes population management services; DTCA's ability to effect estimated cost
savings and clinical outcome improvements under managed care contracts or to
effect such savings and improvements within the time frames contemplated by
DTCA; the ability of DTCA to negotiate favorable fee structures, including per
member per month payment terms, with managed care payors; unusual and unforeseen
patterns of healthcare utilization by individuals with diabetes in the HMOs with
which DTCA has executed a diabetes population management contract; 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; DTCA's ability to
implement its backlog of contracted lives within anticipated time frames
contemplated by DTCA; DTCA's ability to attract and/or retain and effectively
manage the employees required to implement its agreements with hospitals and
managed care organizations; the impact of existing and any future litigation or
judicial or administrative proceedings; the Company's ability to acquire or
successfully develop capability in chronic disease management other than
diabetes; and DTCA's ability and the ability of its customers and vendors to
prepare their mission-critical information technology resources to handle Year
2000 processing requirements. The Company undertakes no obligation to update or
revise any such forward-looking statements.
The following table sets forth the sources of the Company's revenues by
customer type as a percentage of total revenues from continuing operations for
the three month periods ended November 30, 1998 and 1997.
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Three Months Ended November 30, 1998 1997
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DTCA Hospital Contracts 50% 77%
DTCA Managed Care Payor Contracts 49 21
Other 1 2
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100% 100%
===================
DTCA hospital-based diabetes treatment centers are located in and
operated under contracts with general acute care hospitals. The primary goal of
each center is to create a center of excellence for the treatment of diabetes in
the community in which it is located and thereby increase the hospital's market
share of diabetes patients and lower the hospital's cost of providing services
to this population. Fee structures under the hospital contracts consist of
either fixed management fees, incentive-based 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.
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The following table presents the number of DTCA hospital contracts in
effect and the number of hospital sites where DTCA services were provided under
the terms of these contracts or was in the process of initiating operations as
of November 30, 1998 and 1997. The number of hospital 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,
====================
1998 1997
====================
Hospital contracts 57 58
Hospital sites where services are provided 74 74
The components of changes to the total number of DTCA hospital
contracts and hospital sites under these contracts for the three months ended
November 30, 1998 and 1997 are presented below.
Three months ended November 30,
=============================================
1998 1997
=============================================
Hospital Hospital
Contracts Sites Contracts Sites
------------------- ----------------------
Total contracts/sites at
beginning of period 57 72 58 74
New contracts/sites
signed 1 3 2 3
Contracts/sites
discontinued (1) (1) (2) (3)
------------------ ---------------------
Total contracts/sites at
end of period 57 74 58 74
============================================
During the three month period ended November 30, 1998, three contracts
were renewed for DTCA hospital-based diabetes treatment centers. During the
remainder of fiscal 1999, there will be 18 hospital contracts which will reach
the end of their terms unless renewed. Five of these hospital contracts that are
expiring are contracts with hospitals owned by Columbia/HCA Healthcare
Corporation. It is anticipated that three of these contracts, all of which
expire during the quarter ending February 28, 1999, will not be 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.
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While DTCA's revenues historically have been generated primarily by its
operating contracts with hospitals, DTCA's revenue growth for the three month
period ended November 30, 1998 compared to the three month period ended November
30, 1997 resulted primarily from the growth in DTCA's managed care diabetes
population management operations. DTCA has developed and implemented diabetes
disease management contract services which are designed to assist managed care
payors in reducing the total costs and improving the quality of care for
individuals with diabetes enrolled in their plans, and believes that a
substantial portion of its future revenue growth will result from healthcare
management contracts with managed care payors. Implementation of DTCA's first
management contracts with managed care payors occurred in fiscal 1996.
Pursuant to DTCA's diabetes population management contracts, DTCA
provides a core group of diabetes clinical and support staff that are
responsible for coordinating and supporting the management of the treatment of
individuals with diabetes in accordance with treatment standards and protocols
that have been developed by DTCA and have been approved by the medical
leadership at each managed care plan The actual treatment of the individuals is
provided by physicians and hospitals who are part of the payor's network of
providers. Services provided under contracts for DTCA's Diabetes NetCare(SM)
product comprise its most comprehensive product offering and includes DTCA
professional staff on-site at the HMO location to assist in the delivery of this
service. Services provided under DTCA's Diabetes NetLink(SM)product are provided
telephonically and via mail by a team of diabetes treatment and support staff
from a telephone center located in Nashville, Tennessee, and are designed
primarily to improve blood glucose management for diabetes patients and to
monitor and promote compliance with certain standards of care for diabetes
patients and to support the case management activities of the HMO. Diabetes
NetCare(SM)and Diabetes NetLink(SM)contracts with managed care payors are based
on per member per month payments to DTCA for the HMO's enrollees who have
diabetes and participate in DTCA's programs. These contracts are generally for
terms of three years with provisions for subsequent renewal and typically
provide that between 15% and 30% of the per member per month fee is at risk
subject to DTCA's performance against clinical and financial cost savings
criteria.
As of November 30, 1998, DTCA had contracts with eight managed care
payors to provide diabetes population disease management services to 22 HMO
markets. The number of covered lives under management pursuant to these
contracts for its Diabetes NetCare(SM)and its Diabetes NetLink(SM)products which
have been implemented as of November 30, 1998 and 1997 is presented on the
following table.
===================================================================
At November 30, 1998 1997
===================================================================
Covered lives under management:
Diabetes NetCare(SM) contracts 53,734 10,889
Diabetes NetLink(SM) contracts 25,280 -
-------------------------
Total covered lives under management 79,014 10,889
=========================
In addition, covered lives at November 30, 1998 exclude approximately
1,000 Diabetes NetCare(SM)contract lives and 27,000 Diabetes NetLink(SM)contract
lives under existing contracts that are scheduled for implementation subsequent
to November 30, 1998.
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The Company's growth strategy is primarily to develop additional
relationships with managed care payors responsible for the healthcare costs of
individuals with diabetes and to further develop and expand its hospital-based
diabetes treatment center business. In addition, the Company has begun
evaluating opportunities to develop or acquire capabilities in chronic disease
management areas other than diabetes. The Company believes that the healthcare
payor market is recognizing the potential cost-savings and improved outcome
benefits of chronic disease management programs, including diabetes population
management services.
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 is now
in 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.
YEAR 2000 COMPLIANCE PLAN
Historically, many computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
program failing to properly recognize a year that begins with "20" instead of
"19". Potential system failures or miscalculations are generally referred to as
Year 2000 issues. While the Company's business does not involve the sale of
computer services or medical equipment that might be affected by Year 2000
compliance, the Company does make extensive use of information technologies to
support its operations.
In particular, the Company's managed care operations are structured
around its electronic medical record capability and various data interchange
capabilities with its managed care customers. The underlying electronic medical
record system upon which the Company's propriety standards of care are built is
licensed from an outside software company.
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The Company has initiated an extensive effort to address Year 2000
compliance and has engaged a major national healthcare consulting company to
assist in the development and implementation of this plan. This Year 2000
Project addresses software applications, information technology hardware, other
infrastructure and customer and other third party relationships and data
exchanges. The structured approach of this Project includes (1) compiling an
inventory of affected technology, systems and processes; (2) assessing Year 2000
compliance for critical components of the Company's operations and selection of
appropriate remediation efforts where required; (3) remediating, converting or
replacing each critical non-compliant component; (4) testing each critical
component for compliance; and (5) implementing remediated and tested components.
Because the Company is highly dependent, particularly in its managed care
operations, on the ability of its customers to provide DTCA with enrollment,
claims and other data which is utilized by the Company to provide services under
its contracted service agreements, the Year 2000 Project also includes
activities related to coordinating and, in some cases, testing compliance of key
data exchange systems with the Company's customers.
As of December 31, 1998, the Company has substantially completed the
inventory phase of its Year 2000 Project and is in the process of assessing Year
2000 compliance for its critical components of operations. In addition, the
Company has identified the electronic medical record utilized in its managed
care operations as its primary mission-critical component and has initiated a
planned upgrade of this software capability to a version of the base electronic
medical record that the third party provider of this platform represents as Year
2000 compliant. This conversion is expected to position the Company to realize
significant operating enhancements for the system in addition to Year 2000
compliance.
Pursuant to its Year 2000 Project plan, the Company expects to have all
of its mission-critical systems and processes Year 2000 compliant by August 31,
1999. Some non-critical systems may not be addressed until after that date or
until after January 2000; however, the Company believes that the potential
failure of some or all of these non-critical systems does not pose a material
threat to its operations. The Company believes that it will incur up to $500,000
in operating expenditures, which represents approximately 15% to 20% of the
Company's information technology operating budget for the fiscal year ending
August 31, 1999, to support the Year 2000 Project through completion. This
estimate is based on presently available information and will be updated as the
Company continues its assessment and proceeds with implementation of the Year
2000 Project. Most of these expenditures will be made during the year ended
August 31, 1999. Approximately $145,000 in Year 2000 Project operating
expenditures were incurred during the three month period ended November 30,
1998. No expenditures were incurred for the Year 2000 Project during the three
month period ended November 30, 1997. In addition, the Company expects that
there may be limited amounts of equipment and infrastructure capital
expenditures that will be accelerated because of Year 2000 compliance issues.
However, because the majority of its information technology and infrastructure
capital expenditures for its managed care operations have been made within the
last two years and primarily have included equipment which the Company believes
will prove to be Year 2000 compliant, the Company currently anticipates that
accelerated capital expenditures because of Year 2000 issues will be less than
$500,000.
The Company also anticipates that a primary focus of its managed care
information technology system development resources throughout fiscal 1999 will
be directed toward Year 2000 compliance efforts. The Company also believes that
it has the resources and capabilities to support current customer information
technology needs and also believes that its ability to add new managed care
business and hospital center business will not be negatively impacted by its
Year 2000 efforts.
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While the Company believes that it has the resources and the
capabilities to adequately address Year 2000 compliance, if the Company's unique
proprietary medical record application cannot be made Year 2000 compliant, or if
the data exchanges between the Company and its managed care customers cannot be
made Year 2000 compliant because of failure of the Company's or a customer's
system or a supplier's system on which the Company relies, there can be no
assurances that these failures would not have a material adverse effect on the
business operations or financial performance of the Company. The Company has not
yet established a contingency plan to address any such failures but intends to
formulate plans to address unavoided or unavoidable risks and expects to have
the contingency plans formulated by August 1999.
RESULTS OF OPERATIONS
The continuing operations of the Company represents the results of
operations of DTCA and the corporate costs of American Healthcorp, Inc. Included
in the results from discontinued operations are charges to AmSurg for general
management, administrative and accounting services provided by the Company.
Charges to AmSurg for such services approximated the Company's cost.
The increase in revenues to $11.8 million for the three months ended
November 30, 1998 from $7.7 million for the comparable period last year resulted
primarily from an increase in the average number of lives enrolled in DTCA's
managed care diabetes population management contracts to approximately 76,000
for the three months ended November 30, 1998 compared to approximately 10,900
lives under management during the comparable period last year. This increase in
lives under management was primarily the result of new managed care contracts
signed during fiscal 1998. Revenues from DTCA's hospital contract operations for
the three months ended November 30, 1998 approximated hospital contract revenues
for the comparable period last year on approximately the same average number of
contracts in operation during both periods. The Company anticipates that DTCA
revenues for the remainder of fiscal 1999 will increase over fiscal 1998
revenues primarily as a result of additional lives enrolled under its existing
diabetes population management contracts with managed care payors as well as
from additional lives from new managed care payor contracts anticipated to be
signed during the remainder of fiscal 1999.
The increase in salaries and benefits to $7.5 million for the three
months ended November 30, 1998 from $5.5 million for the comparable period last
year resulted primarily from higher staffing levels associated with increases in
the number of lives enrolled in DTCA's managed care payor contracts and from
increased employee incentive compensation associated with improved operating
performance during the current quarter. Salaries and benefits as a percentage of
revenues decreased to 63% for the three month period ended November 30, 1998
from 71% for the comparable period last year primarily as a result of improved
revenue performance at its managed care contract operations. The Company
anticipates salaries and benefits expense to increase during the remainder of
fiscal 1999 compared with fiscal 1998 primarily as a result of increased staff
required for expected increases in the number of lives enrolled under DTCA's
managed care contracts.
The increase in other operating expenses to $2.9 million for the three
months ended November 30, 1998 from $2.2 million for the comparable period last
year resulted primarily from higher costs associated with increases in the
average number of lives enrolled in DTCA's managed care payor contracts. Other
operating expenses as a percentage of revenues decreased to 24% for the three
month period ended November 30, 1998 from 28% for the comparable period last
year primarily as a result of improved revenue performance at DTCA's managed
care payor contracts. The Company anticipates other operating
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expenses will increase during the remainder of 1999 compared with fiscal 1998
primarily as a result of increased costs associated with anticipated increases
in the number of lives enrolled under DTCA's managed care payor contracts as
well as from increased expenses associated with planned improvements in the
Company's information technology capabilities including the costs associated
with its Year 2000 compliance efforts.
The increase in depreciation and amortization expense to $404,986 for
the three month period ended November 30, 1998 from $321,180 for the comparable
period last year principally resulted from increased depreciation expense
associated with equipment and computer-related capital expenditures for its
diabetes population management operations for managed care payors. The Company
anticipates depreciation and amortization expense to increase during the
remainder of fiscal 1999 compared with fiscal 1998 primarily as a result of
increased information technology and other capital expenditures associated with
expected increases in the number of covered lives enrolled under DTCA's managed
care payor contracts as well as from improvement in the Company's information
technology capabilities.
During the three month period ended November 30, 1997, the Company
recorded a non-recurring stock option expense adjustment of $5.8 million
associated with adjustment of these options as a result of the Company's
Distribution of AmSurg common stock to the Company's stockholders. 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.
The Company's income tax expense for the three months ended November
30, 1998 was $448,000 compared to an income tax benefit of $2.3 million for the
comparable period last year. The increase in the income tax expense between
these periods resulted primarily from an income tax benefit of $2.2 million
associated with the stock option expense adjustment recording during the quarter
ended November 30, 1997 as well as from additional income tax expense resulting
from improved profitability before consideration of the stock option expense
adjustment during the three month period ended November 30, 1998. The
differences between the statutory federal income tax rate of 34% and the
Company's effective tax benefit rates during both 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.
The results of operations from discontinued operations for the three
month period ended November 30, 1997 include the Company's share of AmSurg's net
income based on the Company's percentage ownership of AmSurg as well as the
Company's expenses associated with the Distribution which totaled $345,000
during that period.
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LIQUIDITY AND CAPITAL RESOURCES
Operating activities from continuing operations for the first quarter
of fiscal 1999 utilized $4.9 million in cash flow. The first quarter of each
fiscal year normally utilizes a significant level of cash for operating
activities when compared with other fiscal quarters primarily as a result of
employee incentive compensation and certain insurance payments that are made
during this quarter. In addition, approximately $2.6 million in payments from a
managed care payor customer that should be have been paid by the end of the
quarter was delayed and was not received until early December. The Company
believes that the cause of the delay has been resolved and does not anticipate
that it will be a recurring problem. Investing activities during this period
used $683,320 which consisted of the acquisition of property and equipment
purchases for DTCA primarily associated with its expanding managed care payor
operations. Financing activities associated with continuing operations for the
first quarter of fiscal 1999 generated $591,647 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 $8.3 million at November 30, 1998 will
continue to enable the Company to fund DTCA's current working capital needs,
including the working capital and capital expenditures associated with its
managed care payor operations and the costs associated with the Company's Year
2000 compliance efforts. In addition, the Company may also utilize its cash
resources to fund repurchases of the Company's common stock; as of November 30,
1998 the Company had repurchased 78,820 shares of stock pursuant to an
authorization to purchase up to 400,000 shares as approved by the Company's
Board of Directors in January 1998.
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 is now in 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
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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.
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
(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.
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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.
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(Registrant)
Date January 14, 1999 By /s/ Henry D. Herr
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HENRY D. HERR
Executive Vice President
Finance and Administration,
(Principal Financial Officer)
Date January 14, 1999 By /s/ David A. Sidlowe
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DAVID A. SIDLOWE
Vice President and Controller
(Principal Accounting Officer)
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