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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Fiscal Year Ended August 31, 1996
Commission File No. 000-19364
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
One Burton Hills Boulevard, Nashville Tennessee 37215
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (615) 665-1122
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.001 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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As of November 13, 1996, 8,008,140 shares of Common Stock were outstanding.
The aggregate market value of the shares held by non-affiliates of the
Registrant was approximately $60,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held January 21, 1997 are incorporated by reference into
Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
American Healthcorp, Inc. and its subsidiaries (the "Company") currently
operate two business segments, Diabetes Treatment Centers of America, Inc.
("DTCA") and AmSurg Corp. ("AmSurg"). DTCA, a wholly-owned subsidiary, is the
nation's leading provider of diabetes services to physicians, hospitals and
healthcare payors. AmSurg, a majority-owned (61% at August 31, 1996)
subsidiary, develops, acquires and manages physician practice-based ambulatory
surgery centers and specialty physician networks in partnership with surgical
and other group practices.
This Form 10-K 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 new "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 materially
from those expressed in these forward-looking statements. The important
factors for DTCA 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
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
agreements. The important factors for AmSurg include: AmSurg's ability to
enter into partnership agreements for new practice-based ambulatory surgery
centers and new specialty physician networks; AmSurg's ability to contract with
managed care payors for its existing centers and its centers that are currently
under development; AmSurg's ability to obtain and retain appropriate licensing
approvals for its existing centers and centers currently under development; and
AmSurg's ability to maintain favorable relations with its physician partners.
SOURCES OF REVENUES
The following table sets forth the sources of the Company's revenues as a
percentage of total revenues for the three years ended August 31, 1996:
<TABLE>
<CAPTION>
1996 1995 1994
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<S> <C> <C> <C>
DTCA/Other 52% 65% 79%
AmSurg 48% 35% 21%
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100% 100% 100%
---- ---- ----
</TABLE>
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DTCA - DIABETES SERVICES
The principal sources of revenues for DTCA have been its operating
contracts for hospital-based diabetes treatment centers. These 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.
DTCA's hospital-based centers have a professional staff for patient
management and education services in conjunction with the hospital's nursing
and other ancillary staff. The basic professional staffing level consists of
health professionals who have special expertise and training in diabetes.
Depending upon the needs of the individual client hospital, the professional
staff may include a diabetes clinical nurse specialist, a registered dietitian,
an exercise specialist and a counselor. In addition, DTCA generally provides a
program manager who is responsible for on-site program management, community
relations and hospital and physician relations and a program assistant who is
responsible for record-keeping, general administrative functions and
providing assistance to the program manager and the professional staff.
Generally, all of the program staff is recruited and directed by DTCA. Other
personnel (nursing, ancillary and support staff) are employed and directed by
the client hospital.
Specific clinical diabetes services provided by DTCA in a hospital setting
include, but are not limited to: (1) detailed assessment of patient status in
the areas of diet and caloric intake, exercise, psychosocial adjustment,
knowledge of the disease and self-treatment skill level; (2) formulation of
recommendations on patient treatment and education; (3) coordination of
hospital and center patient care to ensure that physician goals for patients
are achieved; (4) provision, in conjunction with the hospital nursing staff,
for monitoring of patient blood sugar levels; (5) training of hospital nurses
and other professional staff in diabetes management; (6) training of patients
in blood glucose monitoring and insulin administration and assistance for
physicians in initiating insulin pump therapy; (7) assistance in establishing
standardized treatment protocols for hospital staff use; (8) assistance to
hospitals to better manage inpatient diabetes patient care costs; and (9)
coordination of patient discharge planning.
DTCA has also developed additional products which are designed to assist
healthcare payors in reducing the total costs and improving the quality of care
for individuals with diabetes enrolled in their plans. These products,
designed principally for healthcare payors, enable DTCA to manage the total
healthcare needs of a population of individuals with diabetes. DTCA believes
that its intensive diabetes education, patient support and treatment regimens,
delivered by a multi-disciplinary team, will assist in assuring that the most
effective care is delivered at the lowest cost and that ultimately such
intensive diabetes education, support and treatment efforts will reduce or
prevent the devastating and costly complications of diabetes.
During January 1996, DTCA executed a contract to provide comprehensive
healthcare management services for employees with diabetes of Bristol-Myers
Squibb ("Bristol-Myers") located in central and western New Jersey and eastern
Pennsylvania. During June 1996, DTCA
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executed contracts to provide these services for enrollees of Principal Health
Care, Inc. ("Principal") at six of their HMO locations and enrollees of Health
Options, Inc. ("Health Options"), a subsidiary of Blue Cross and Blue Shield of
Florida, at one of its HMO locations. These contracts, which the Company
believes are the first comprehensive diabetes disease management contracts
signed in the industry, include almost 450,000 covered lives, of which
approximately 13,000 to 14,000 have diabetes. The Bristol-Myers contract became
operational in March 1996 and it is anticipated that the Principal and Health
Options contracts will be operational at all seven site locations by January
1997. See "DTCA's Contractual Relationship with Clients."
At each of the Bristol-Myers, Principal and Health Options locations, DTCA
will provide an office with a staff of six to eight individuals consisting of
case managers, nurse educators, dieticians, counselors, administrative support
and program management as needed for the number of enrollees and their
geographic location in the market. The primary services provided by DTCA under
these contracts include (1) identification and clinical stratification of
enrollees with diabetes; (2) education of the primary care physician network on
the services available to them and their patients under the program; (3)
development of individual treatment plan recommendations; (4) provision of
patient diabetes disease education and support; (5) provision of case
management recommendation for hospitalized diabetes patients; (6) monitoring
and support of the treatment plan with the primary care physician and with the
patient; and (7) monitoring and reporting of clinical progress and outcomes and
provision of assistance to the network providers in improving outcomes.
Diabetes population management contracts require a sophisticated
management information system to enable DTCA to manage the care of large
diabetes patient populations and to assist in reporting outcomes and costs.
The Company has developed a clinical management system which it believes will
meet DTCA's initial information management needs for its diabetes population
management services and has installed and is utilizing the system at the
Bristol-Myers location.
For fiscal 1996, 1995 and 1994, the Company has incurred approximately
$3.4 million, $4.3 million and $1.5 million, respectively, in new product
development and marketing expenditures primarily related to its disease
management efforts. The Company anticipates that it will continue marketing
and development expenditures associated with these products during fiscal 1997
and to incur significant additional corporate operational support costs
associated with the implementation and operation of the Principal and Health
Options contracts. While the Company believes that the new products will, over
time, be accepted as addressing the evolving needs of managed care payors to
meet the challenges of reducing cost and improving outcomes for individuals
with diabetes, no assurances can be given that its diabetes disease management
efforts will be successful and will generate revenues equal to or greater than
the costs incurred in their development, marketing and operation.
DTCA operates through Arthritis and Osteoporosis Care Center, Inc.
("AOCC"), a wholly-owned subsidiary of the Company, two arthritis and
osteoporosis treatment centers in Nashville, Tennessee and Toledo, Ohio. These
centers are designed as comprehensive treatment
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centers providing the resources to meet all of the needs of individuals with
arthritis and osteoporosis in one location.
In August 1995, the Company sold its mail order diabetes supply business.
The net revenues of this business were $1,898,000 and $2,373,000 for fiscal
years 1995 and 1994, respectively. This business produced no material profit
or loss to the Company from its operation or from its sale.
The following table sets forth the number and location by state of the
hospitals in which the DTCA's diabetes treatment centers in effect as of August
31, 1996 are located and the aggregate number of licensed beds in these
hospitals:
<TABLE>
<CAPTION>
========================================================
Number of Client Hospitals'
State Client Hospitals Licensed Beds (1)
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<S> <C> <C>
Florida 8 2,260
Georgia 7 1,812
Utah 7 743
California 6 1,472
New Jersey 4 1,575
North Carolina 4 751
Oregon 4 795
Alabama 3 946
South Carolina 3 870
Tennessee 3 1,365
Texas 3 964
Virginia 3 905
New York 2 587
Wisconsin 2 451
Colorado 1 285
Kentucky 1 157
Indiana 1 330
Iowa 1 603
Louisiana 1 166
Massachusetts 1 344
Minnesota 1 366
Missouri 1 238
Nebraska 1 316
Nevada 1 225
Oklahoma 1 247
Ohio 1 605
Pennsylvania 1 274
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Total 72 19,652
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</TABLE>
(1) Numbers based upon the American Hospital Association's 1995/96 Guide to
the Healthcare Field.
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DTCA'S BUSINESS STRATEGY
DTCA's hospital-based diabetes treatment center business has grown from
two diabetes treatment contracts in effect in 1984 to 61 contracts in effect in
27 states at August 31, 1996. The following table presents the number of
contracts in effect during the past five fiscal years:
<TABLE>
<CAPTION>
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Fiscal Year Ended August 31, 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Contracts in effect at beginning
of period 69 69 70 65 57
Contracts signed 5 9 11 9 9
Contracts discontinued (13) (9) (12) (4) (1)
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Contracts in effect at end of
period 61 69 69 70 65
===========================
Hospital sites where services
are delivered 72 74 71 70 65
===========================
</TABLE>
During fiscal 1996, DTCA also signed contracts with three healthcare
payors for its new diabetes disease management products. These contracts cover
implementation of the Company's program in eight markets covering approximately
13,000 to 14,000 individuals with diabetes in these locations.
The Company's growth strategy is primarily to further develop and expand
its hospital-based diabetes treatment center business, to develop new
relationships directly with payors and others who are ultimately responsible
for the healthcare costs of individuals with diabetes and if the Company
determines that it will enhance and/or accelerate the development of its
diabetes disease management product for the managed care marketplace, the
Company may develop strategic alliances or joint ventures with other entities
that have interests in diabetes care. The Company believes that the healthcare
payor market is recognizing the potential cost-savings and improved outcome
benefits of chronic disease programs, including diabetes population management
services. The Company also believes that its position as the leading provider
of diabetes treatment services to hospitals and physicians will be an advantage
in comparison with other potential competitors or with the payors themselves
who have no such actual diabetes treatment experience.
DTCA's ability to generate revenues and profits from its diabetes disease
management contracts with payors is dependent primarily on its ability to
reduce overall healthcare costs for individuals with diabetes while improving
clinical outcomes for these individuals. While DTCA has considerable
supporting evidence and there exists considerable independent research
regarding the ability to reduce the healthcare costs and to improve the
clinical outcomes for
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individuals with diabetes through effective management of the disease, DTCA's
ability to operate these contracts in a manner that will produce profitability
for the Company has not yet been established because the Company's initial
disease management contracts are believed to be the first of this type in the
industry and have only recently been implemented or are in the process of being
implemented.
DTCA'S OPERATIONAL RELATIONSHIP WITH CLIENTS
In DTCA's typical hospital relationship, the Company is retained to be the
service-line manager for the client hospital's diabetes treatment services.
Although DTCA interacts with and provides services to patients located
throughout the entire hospital, a dedicated area or a medical/surgical unit of
the hospital is often reserved for the diabetes treatment center. Each
diabetes treatment center typically consists of dedicated patient beds, an
exercise facility, a classroom and staff offices.
In its effort to increase the client hospital's market share of diabetes
patients, DTCA has developed expertise in community relations to make patients,
physicians and payors aware of the services offered by the diabetes treatment
centers. Generally, DTCA provides materials and programs associated with
community relations activities for each diabetes treatment center. These
efforts increase the visibility of the client hospital within its community and
additional diabetes patients that otherwise would have utilized other hospitals
and providers in the area are attracted to the client hospital and its medical
staff.
The hospital provides all equipment and furnishings needed for the
diabetes treatment center and is responsible for routine patient services
including admissions, nursing care, housekeeping, laboratory and other
ancillary services, and billing and collections for all patients. The DTCA
staff is responsible for coordinating and supporting the management of the
treatment of both inpatients and outpatients with diabetes in accordance with
the treatment objectives of the patient's physicians. DTCA provides corporate
support to each client hospital and to the on-site DTCA staff in the areas of
community relations, staff training and education, financial analysis, clinical
programming and management, quality assurance, utilization review and ongoing
program development and refinement.
DTCA typically sends one monthly bill to each client hospital, and is paid
directly by the hospital. Patients receiving services from the diabetes
treatment centers are charged by the hospital for typical hospital services.
Health insurance, including Medicare and Medicaid, cover charges incurred on an
inpatient basis on the same basis as non-diabetes related inpatient episodes.
Many insurance plans, including Medicare, also provide coverage for outpatient
education services for people with diabetes.
Pursuant to DTCA's disease management contracts with payors, DTCA
provides a core group of diabetes treatment and support staff that will be
responsible for coordinating and supporting the management of the treatment of
individuals with diabetes in accordance with
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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.
DTCA'S CONTRACTUAL RELATIONSHIP WITH CLIENTS
DTCA has a variety of contractual relationships with its client hospitals.
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 Company in previous years had
designated DTCA contracts as either "A" contracts or "B" contracts depending
primarily on whether the assumption of risk for the center program costs was
assumed by DTCA or the client hospital. Because the terms of numerous new
contracts and renewed contracts in recent periods have tended to create
numerous hybrid arrangements regarding risk that do not provide for clear
designation of a contract into these two categories, the Company has decided to
discontinue the designation of contracts as either "A" or "B" status.
DTCA currently has 18 operating contracts covering services at 24
hospitals that are owned by Columbia/HCA Healthcare Corporation
("Columbia/HCA"). The revenues from the Columbia/HCA contracts were
approximately 15%, 15% and 22% of the Company's total revenues for fiscal years
ended August 31, 1996, 1995 and 1994, respectively. Eight of those contracts
covering services at eight hospitals will expire during fiscal 1997 unless
renewed. A loss of the revenue derived from these contracts could materially
adversely affect the Company.
During the fourth quarter of fiscal 1996, DTCA executed an agreement with
U.S. Healthcare ("USHC") to provide outpatient services to USHC enrollees with
diabetes, including patient assessment and patient stratification based on the
scope and intensity of needed services, as well as educational, behavioral and
motivational support and outcomes tracking and reporting. Services will be
provided on a packaged fee-for-service basis through DTCA centers currently
operating in USHC markets. As of August 31, 1996, implementation has begun at
DTCA hospital contract sites in markets which contain the greatest
concentration of USHC enrollees.
The Company's agreement with Bristol-Myers for disease management services
has a two year term, provides that Bristol-Myers will continue to be at risk
for all healthcare costs for their employees and dependents with diabetes and
will pay DTCA a fee of $1,000,000 plus reimbursement of DTCA's costs associated
with implementing its comprehensive diabetes disease management program for
these individuals. In addition, the agreement also provides Bristol-Myers an
exclusive, one-year right, which expires on December 31, 1996, to negotiate a
further agreement with the Company regarding future joint business
opportunities in diabetes disease management.
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The Company's agreements with Principal and Health Options are "shared
savings" contracts with initial terms of five years. Principal and Health
Options will continue to be at risk for 100% of their members' healthcare
costs. DTCA will be at risk for the costs of operating its comprehensive
healthcare program system at each of the seven locations included in these
contracts. Cost savings produced by the system will be shared according to
ratios set forth in the respective contracts. DTCA anticipates that revenues
and profits from these contracts will be more heavily weighted toward the later
years of the contracts' initial terms and that, during the first year of
operations at each site, revenues will be slightly less than operating costs.
Because of anticipated ramp-up periods at each of the contract sites and
significant start-up costs and the timing delay in calculating DTCA's share of
cost savings, if any, produced by the program, DTCA's profitability is expected
to be negatively affected by these contracts through fiscal 1997.
The Company anticipates that additional disease management contracts that
the Company may sign could take a variety of forms including shared savings
contracts such as the Principal and the Health Options contracts, contracts
which provide fees to DTCA based on the number of diabetes lives under
management or a combination of shared savings and fixed management fee
arrangements.
DTCA'S OPERATING CONTRACT RENEWALS
As a service provider, DTCA's revenues have been dependent upon the
contractual relationships it establishes and maintains with client hospitals to
develop and operate diabetes treatment centers. The terms of these contracts
generally range from two to five years and are subject to periodic
renegotiation and renewal of the financial terms as well as the length of the
contract. Contracts have been discontinued or not renewed by the Company and
by client hospitals for a number of reasons including financial problems of the
hospital, the consolidation of hospitals in a market, a hospital's need to
reduce the hospital's operating costs including the short-term reduction of
costs associated with elimination of DTCA's program or the contract's
performance.
During fiscal 1996, 14 contracts were renewed. Some of these renewals
included contract rate reductions which DTCA has traditionally undertaken to
maintain favorable long-term contractual relationships. The Company
anticipates that downward pressures on hospital costs will result in a
continuation of contract rate reductions. During fiscal 1997, 25 contracts
will reach the end of their terms unless renewed.
Also during fiscal 1996, 13 contracts were discontinued or not renewed.
The Company believes that the general uncertainties associated with the changes
taking place in the healthcare industry and the reactions of the Company's
client hospitals to date to this changing healthcare environment have adversely
affected the Company's revenues and the contract retention during fiscal 1996,
1995 and 1994 and may continue to have an adverse effect in future periods.
While the Company believes that its programs reduce the costs of care for
hospitalized diabetes
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patients, certain hospitals faced with pressures to make immediate cost
reductions have decided that the short-term benefit of eliminating the costs
associated with programs such as the Company's diabetes program is justified.
However, the Company also believes that the growth in healthcare payor demand
for effective chronic disease management programs from healthcare providers such
as hospitals will eventually stabilize DTCA's hospital contract business and
will provide an opportunity for future growth in this business. During fiscal
1996 there were no material continuing obligations or costs for the Company
associated with the termination of any client hospital contracts.
DTCA'S PHYSICIAN RELATIONSHIPS
DTCA generally contracts with leading physicians in that community who
specialize in the treatment of diabetes to serve as medical directors or
associate medical directors of the diabetes treatment center. These
physicians, who are independent contractors with DTCA or, in certain
circumstances, with the client hospital, remain in private practice and are
responsible for billing and collecting for their personal professional
services. In addition, these physicians receive a fixed annual stipend under
their contracts for providing specific services to the diabetes treatment
center in the areas of medical supervision, liaison with the hospital's medical
staff, quality control and staff and patient education. These contracts
generally have terms of one to two years with renewal options and generally
cannot be extended beyond the terms of the related hospital contract.
DTCA also targets local physicians in its awareness efforts. Each member
of the center staff is assigned to work with physicians who have diabetes
patients in the hospital and to serve as case manager for those patients, thus
helping to assure that the physicians' treatment objectives are met.
DTCA'S COMPETITION
The healthcare industry is highly competitive and subject to continual
change in the manner in which services are provided. DTCA's principal
competition for its treatment center business is from hospitals that have basic
programs for treating patients with diabetes. Generally, hospitals have not
committed the time, personnel or financial resources necessary to establish and
maintain comprehensive diabetes treatment services comparable to the services
offered by DTCA's diabetes treatment centers. The Company is also aware that
other companies such as major pharmaceutical companies and managed care
organizations, which may have greater financial, research, staff, and marketing
resources than the Company, are interested in diabetes disease management and
may develop the necessary expertise alone or in partnership with other
providers to compete with DTCA in its diabetes disease management efforts.
There is no assurance that the Company could compete effectively with these
companies.
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DTCA'S GOVERNMENTAL REGULATION
While DTCA itself is not directly subject to many of the governmental and
regulatory requirements affecting healthcare delivery, its client hospitals
must comply with a variety of regulations including the licensing requirements
of federal, state and local health agencies, state mandated rate control
initiatives and the requirements of municipal buildings codes, health codes and
local fire departments.
DTCA is indirectly affected by changes in the laws governing hospital
reimbursement under governmental programs such as Medicare. There may be
continuing legislative and regulatory initiatives to reduce the funding of the
Medicare and Medicaid programs in an effort to curtail or reduce the overall
federal budget deficit. Recently introduced federal legislation, if enacted,
would significantly limit the rate of increase in Medicare spending over the
next several years and establish block grants to the states for Medicaid
spending. These funding limitations, if enacted, could negatively impact
hospital revenues and operations. There can also be no assurance that current
or future legislative initiatives or government regulation will not adversely
affect DTCA's operations or reduce the demand for its services.
Various federal and state laws regulate the relationship among providers
of healthcare services, other healthcare businesses and physicians. The "fraud
and abuse" provisions of the Social Security Act provide civil and criminal
penalties and potential exclusion from the Medicare and Medicaid programs for
persons or businesses who offer, pay, solicit or receive remuneration in order
to induce referrals of Medicare or Medicaid patients. While the Company
believes that its business arrangements with its client hospitals and medical
directors are in compliance with these statutes, these fraud and abuse
provisions are broadly written and the full extent of their application is not
yet known. The Company is therefore unable to predict the effect, if any, of
broad enforcement interpretation of these fraud and abuse provisions.
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.
Certain of these motions are still pending.
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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. During the fiscal year ended August 31, 1996, the
legal expense costs associated with these matters totaled approximately
$250,000.
AMSURG - PRACTICE-BASED AMBULATORY SURGERY CENTERS
Practice-based ambulatory surgery centers are licensed outpatient surgery
centers equipped and staffed for a single medical specialty and are generally
located in or adjacent to a physician group practice. AmSurg has targeted
ownership in centers that perform gastrointestinal endoscopy, eye surgery,
urology, orthopaedics or otolaryngology procedures. These specialties perform
many high-volume, lower risk procedures that are appropriate for the
practice-based setting. The focus at each center on only the procedures in a
single specialty results in these centers generally having significantly lower
capital and operating costs than the costs of hospital and freestanding
ambulatory surgery center alternatives that are designed to provide more
intensive services in a broader array of surgical specialties. In addition,
the practice-based surgery center, which is located in or adjacent to the group
practice, also provides a much more convenient setting for the patient and for
the physician performing the procedure. Improvements in technology are also
enabling additional types of procedures to be performed in the practice-based
setting.
AmSurg believes that a primary competitive advantage is the translation of
lower surgery center costs into lower prices for high quality service in a very
convenient location. AmSurg believes that the fees charged by its surgery
centers are generally less than the fees charged by hospitals or by
freestanding surgery centers.
The AmSurg development staff selects potential acquisition and new center
startup candidates based on identification of specific group practices in the
medical specialties which AmSurg has targeted for development. These
candidates are then screened against AmSurg's project criteria which include
several factors such as number of procedures currently being performed by the
practice, competition from and the fees being charged by other surgical
providers, relative strength of the physician practice under consideration,
certificate of need requirements for development of a new center and other
factors. The Company believes that continuing pressures to reduce healthcare
costs provides AmSurg with a significant opportunity to develop new centers in
partnership with physician practices.
AmSurg intends to expand primarily through the development and acquisition
of additional surgery centers in targeted surgical specialties. In addition,
AmSurg's surgery
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centers, combined with its relationships with specialty physician surgical
practices in their markets, will provide other opportunities for AmSurg growth
from surgical specialty network acquisition and development that may include the
acquisition of specialty physician practices. By using AmSurg surgery centers
as a base to develop specialty physician networks that are designed to serve
large numbers of covered lives, the Company believes that AmSurg will strengthen
its market position in contracting with managed care organizations. In
furtherance of this strategy, on February 1, 1996, AmSurg acquired an undivided
70% interest in the assets of a gastroenterology and primary care physician
practice located in Miami, Florida and associated with a surgery center in which
AmSurg already held an ownership interest.
AMSURG CENTER STRUCTURE
AmSurg, through its corporate subsidiaries, owns between a 51% and a 70%
interest as a general partner in each partnership or as a member in each
limited liability company ("LLC") that owns the individual practice-based
surgery centers. The remaining partnership or LLC interest in each center is
generally held by the physician practice group that has made partnership or LLC
capital contributions proportionate to its interest in the center. AmSurg
manages the business operations at each center. At the majority of centers,
AmSurg receives a management fee paid by the partnership or LLC. In addition,
for start-up centers that are being developed, a fee is generally paid by the
partnership or LLC to AmSurg for management of the planning, construction and
opening of the center.
At August 31, 1996, AmSurg had 22 centers and one specialty physician
practice in operation, 16 centers under development or subject to certificate
of need review and 11 centers under letters of intent. While AmSurg generally
owns 51% to 70% of the entities operating each of these center/practice
entities, the Company's consolidated statements of operations include 100% of
the results of operations of these entities reduced by the minority partners'
share of the net income of the entities. In addition, because the Company owns
only approximately 61% of the common stock of AmSurg, the calculation of
consolidated net income of the Company includes a minority interest adjustment
to reflect the AmSurg minority stockholders' share of the net income or loss of
AmSurg.
AMSURG FINANCING
The Company anticipates that AmSurg operating activities will continue to
provide positive cash flow and that this cash flow will be utilized in
combination with borrowings under AmSurg's existing bank revolving credit
agreement and other financing agreements that may be entered into by AmSurg to
finance additional AmSurg acquisition and development projects. AmSurg may
also fund acquisition and development projects with the private sale of AmSurg
debt or equity securities to parties other than the Company and as part of the
consideration paid in connection with the acquisition of center and specialty
physician practice interests.
13
<PAGE> 14
On November 20, 1996, AmSurg issued to unaffiliated institutional investors
a combination of redeemable and convertible preferred stock for consideration
totaling $5,500,000, the convertible portion of which is convertible into 6%
(ratably increasing to 8% by November 2000) of the outstanding common stock of
AmSurg if certain events of liquidity do not take place. The Company and AmSurg
also are considering certain strategic alternatives in order to provide AmSurg
with better access to the public and private capital necessary to fund its
continuing growth. Among the alternatives available to the Company and AmSurg
is the alternative of creating a public market for AmSurg common stock either
through a public offering of authorized but unissued shares of AmSurg common
stock or the spinoff of AmSurg common stock owned by the Company. No assurance
can be made that the Company and AmSurg will effect any such strategic
alternative.
In September 1993, AmSurg entered into a revolving credit agreement with a
lending institution. This agreement was amended and restated in June 1996.
The agreement provided for repayment of a term loan totaling $5.6 million by
installment payments through June 2000 and also provided an additional $12
million of borrowing capacity to finance additional development and acquisition
projects. Borrowings under the $12 million portion of this agreement must be
completed by June 10, 1998 and are repayable through June 10, 2002. As of
August 31, 1996, AmSurg had borrowed $3,744,000 under this $12 million
facility.
AMSURG THIRD PARTY PAYMENT
Practice-based ambulatory surgery centers such as those owned by AmSurg
depend upon third-party programs, including governmental and private insurance
programs, to pay for facility services rendered to patients in the centers.
Physicians who perform procedures in these centers bill and are paid separately
by these third party programs for their professional fees. Physicians'
professional fees are not included in the revenues of AmSurg. AmSurg also is a
partner in a physician group practice which also derives a significant amount
of its revenue from third party payors.
AmSurg's surgery centers derive a significant portion of their net
revenues from healthcare programs including Medicare and Medicaid. The
Medicare program presently pays ambulatory surgery centers in accordance with a
fee schedule which is prospectively determined. As part of the Omnibus Budget
Reconciliation Act of 1993 ("OBRA 93"), Congress froze the Medicare fee
schedule for ambulatory surgery centers for the fiscal years ended September
30, 1994 and 1995. Effective October 1, 1995 the Medicare ambulatory surgery
center fee schedules were increased by 3.2% and on October 1, 1996 Medicare
increased the fee schedules by 2.6%. There may be continuing legislative and
regulatory initiatives to limit the rate of increase in expenditures of the
Medicare and Medicaid programs in an effort to curtail or reduce the federal
budget deficit. These limitations, if enacted, could negatively impact AmSurg
center revenues and operations.
14
<PAGE> 15
In addition to payment from governmental programs, ambulatory surgery
centers derive a significant portion of their net revenues from private
healthcare reimbursement plans. These plans include both standard indemnity
insurance programs as well as managed care structures such as preferred
provider organizations, health maintenance organizations and other similar
structures. The strengthening of managed care systems nationally has resulted
in substantial competition among providers of services, including providers of
surgery center services with greater financial resources and market penetration
than AmSurg, to contract with these systems. The Company believes that all
payors, both governmental and private, will continue their efforts over the
next several years to reduce healthcare costs and that their efforts will
generally result in a less stable market for healthcare services. While no
assurances can be given concerning the ultimate success of AmSurg's efforts to
contract with healthcare payors, the Company believes that AmSurg's position as
a low-cost alternative for certain surgical procedures should enable AmSurg
centers to compete effectively in the evolving healthcare marketplace.
AMSURG'S GOVERNMENTAL REGULATION
AmSurg's surgery centers and its physician partners are subject to
numerous regulatory, accreditation and certification requirements, including
requirements related to licensure, certificate of need, reimbursement from
insurance companies and other private third-party payors, Medicare and Medicaid
participation and reimbursement, and utilization and quality review
organizations. The grant and renewal of these licenses, certifications and
accreditations are based upon governmental and private regulatory agency
inspections, surveys, audits, investigations or other reviews, including
self-reporting requirements. An adverse review or determination by any
regulatory authority could result in denial of a center's plan of development
or proposed expansion of facilities or services, the loss or restriction of
licensure by a center or one or more of the physician partners, or loss of
center certification or accreditation. A regulatory authority could also
reduce, delay or terminate reimbursement to a center or require repayment of
reimbursement received. The loss, denial or restriction of any such licensure,
accreditation, certification (including certificates of need or exemption
therefrom) or reimbursement through changes in the regulatory requirements, an
enforcement action, or otherwise, could have a material adverse effect on
AmSurg.
As generators of infectious waste, the AmSurg surgery centers are required
to satisfy all federal, state and local waste disposal requirements. If any
regulatory agency finds a center to be in violation of waste laws, penalties
and fines may be imposed for each day of violation, and the center in question
could be forced to cease operations. The Company believes that the AmSurg
centers dispose of such waste properly.
PHYSICIAN SELF-REFERRAL AND ILLEGAL REMUNERATION PROVISIONS
Recent federal legislation, including OBRA 93, prohibit referrals of
Medicare and Medicaid patients for "designated health services" in which a
physician has an ownership or investment interest. In addition, other federal
and state legislation makes certain investment and
15
<PAGE> 16
financial arrangements between healthcare service providers and referring
physicians illegal if such arrangements are determined to encourage referrals by
the physician (the "anti-kickback provisions"). Violation of the federal
anti-kickback provisions is a felony, punishable by a five year jail sentence
and/or exclusion from participation in the Medicare and Medicaid programs. The
Department of Health and Human Services has from time to time published
regulations identifying certain "safe harbors", including investment interests,
which offer exemption from the anti-kickback provisions.
The Company believes that the structure and the activities of the AmSurg
centers are not outlawed by OBRA 93 because, among other reasons, ambulatory
surgery services are not a "designated health service" subject to the
prohibition. In addition, various state legislation aimed at banning physician
ownership of certain health services has generally exempted ownership of
ambulatory surgery centers by the physicians who perform procedures in these
centers from such prohibitions. Further, the Company believes that the
structure and activities of the AmSurg centers are not in violation of the
anti-kickback provisions although to date they have not been afforded safe
harbor protection.
There can, however, be no assurance that physician ownership of surgery
center interests could not be prohibited in the future. In the event of such
prohibition, AmSurg would be required to purchase the limited partnership or
LLC interests currently owned by physicians under the terms of its limited
partnership or operating agreements generally at a preset multiple of actual
pretax earnings for the center. These purchase arrangements provide for
payment of the consideration generally in the form of cash, notes and common
stock of AmSurg. The Company believes that, should physicians no longer have
an ownership interest, the physicians would continue to utilize the center
because of its location inside of or adjacent to their practice. Utilizing
alternative surgery sites for these procedures would be much less convenient
and less efficient for the physicians and for their patients. However, there
can be no assurance that the physicians would continue to utilize the center's
services.
INSURANCE
The Company maintains professional malpractice liability and general
liability insurance for all of its locations and operations. The cost of
liability insurance coverage and the availability of such coverage has varied
widely in recent years. While the Company believes its insurance policies to
be adequate in amount and coverage for its current operations, there can be no
assurance that coverage is sufficient to cover all future claims or will
continue to be available in adequate amounts or at a reasonable cost. The
Company's liability insurance coverage provides for certain deductible levels
to be paid by the Company. Estimated reserves to cover potential payments
under these deductibles have been provided in the Company's financial
statements.
16
<PAGE> 17
EMPLOYEES
As of August 31, 1996, the Company had 298 full-time employees and 126
part-time employees distributed by position as follows: 111 center management
and administrative personnel; 101 clinical nurse specialists; 99 other
healthcare professionals, including counselors, dietitians and exercise
therapists; and 113 center support and Company management personnel.
Employees of AmSurg centers are generally employees of the physicians' practice
who are leased by the partnership or LLC that owns and operates the center.
The physicians who are the medical directors of the diabetes, arthritis and
osteoporosis treatment and AmSurg centers are independent contractors, and not
employees of the Company. The Company's employees are not subject to any
collective bargaining agreement. Management considers the relationship between
the Company and its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Nashville, Tennessee
and contains an aggregate of approximately 39,400 square feet of office space,
which the Company leases pursuant to an agreement that expires in December
1999. The Company subleases to AmSurg approximately 15,000 square feet of its
corporate headquarters pursuant to a sublease which also expires December 1999.
All of the Company's diabetes and arthritis and osteoporosis treatment centers
are located in hospital-based units for which the Company pays no rent. At
each of DTCA's disease management contract sites, DTCA will rent office space
ranging from 1,000 to 3,000 square feet for terms of two to three years.
AmSurg partnerships and LLCs generally lease space for their surgery centers.
Nineteen of the centers and the physician practice in operation at August 31,
1996 lease space ranging from 1,200 to 7,800 square feet with remaining lease
terms ranging from two to eighteen years. Three centers in operation at August
31, 1996 are located in buildings owned by AmSurg or the related partnership.
ITEM 3. LEGAL PROCEEDINGS
The Internal Revenue Service has completed examinations of the Company's
federal income tax returns through the fiscal year ended August 31, 1992. In
connection with these examinations, the Company received assessments totaling
approximately $2.6 million primarily related to the disallowance of deductions
taken for certain costs associated with the leveraged buy-out of the Company in
August 1988 and for certain costs associated with the sale of the Company's
alcohol and drug treatment business in August 1989. The Company filed a
petition with the Tax Court to contest the assessments. In September 1996 a
settlement was reached with the Internal Revenue Service which substantially
confirmed the Company's position on these issues and accordingly, the Company
reversed $760,000 of income tax liabilities it had previously provided for
these matters.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the OIG of the Department of Health and
Human Services in connection with an investigation of DTCA under certain
federal Medicare and Medicaid statutes.
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<PAGE> 18
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. Certain of these motions are still pending.
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. During the fiscal year ended August 31, 1996, the
legal expense costs associated with these matters totaled approximately
$250,000.
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<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company as of August 31, 1996. Executive officers of the
Company serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Employee Age Position
- ------------------ --- -----------------------------------------------------
<S> <C> <C>
Thomas G. Cigarran 54 Chairman of the Board and Chief Executive Officer
since 1988, President and Director since 1981.
Chairman, President and Chief Executive Officer of
AmSurg since 1992.
James A. Deal 46 Executive Vice President since 1991, Vice President
from 1982-1990, President of DTCA since 1985.
Director of AmSurg since 1992.
Henry D. Herr 50 Executive Vice President-Finance and Administration
since 1986, Chief Financial Officer since 1981,
Secretary and Director since 1988. Vice President,
Secretary and Director of AmSurg since 1992.
Robert E. Stone 50 Vice President since 1981, Executive Vice President of
DTCA since 1989.
David A. Sidlowe 46 Vice President since 1984, Controller since 1982.
</TABLE>
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<PAGE> 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's common stock is traded over the counter on The Nasdaq Stock
Market under the symbol AMHC.
The following table sets forth the high and low sales prices per share of
common stock as reported by Nasdaq for the relevant periods.
<TABLE>
<CAPTION>
Common Stock
Prices
--------------
High Low
------ ------
<S> <C> <C>
Year Ended August 31, 1996
First Quarter $10.13 $ 5.75
Second Quarter 10.75 8.75
Third Quarter 12.38 8.25
Fourth Quarter 14.38 10.00
Year Ended August 31, 1995
First Quarter 9.00 5.13
Second Quarter 8.25 4.88
Third Quarter 8.38 6.38
Fourth Quarter 7.63 5.38
</TABLE>
(b) Holders
At November 13, 1996 there were approximately 2,550 holders of the
Company's Common Stock, including 150 stockholders of record.
(c) Dividends
The Company has never declared or paid a cash dividend on its Common
Stock. The Company intends to retain its earnings to finance the growth and
development of its business and does not expect to declare or pay any cash
dividends in the foreseeable future. The declaration of dividends is within
the discretion of the Company's Board of Directors, which will review this
dividend policy from time to time. However, the declaration of dividends is
currently limited in amount under the Company's senior revolving credit
facility.
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<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
For the Twelve Months Ended and At August 31,
(In thousands except per share data)
<TABLE>
<CAPTION>
-----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
DTCA and other $31,403 $36,583 $41,144 $39,682 $37,112
AmSurg 29,206 20,026 10,900 4,331 -
------- ------- ------- ------- -------
Total revenues 60,609 56,609 52,044 44,013 37,112
Expenses:
Salaries and benefits 29,088 24,411 22,075 18,533 16,488
Other operating expenses 16,879 17,708 16,685 13,646 11,860
Depreciation and amortization 3,927 3,459 2,301 1,787 1,336
Interest 828 600 89 22 12
------- ------- ------- ------- -------
Total expenses 50,722 46,178 41,150 33,988 29,696
------- ------- ------- ------- -------
Income before income taxes and minority interests 9,887 10,431 10,894 10,025 7,416
Income tax expense # 1,358 2,659 3,586 3,884 3,040
------- ------- ------- ------- -------
Income before minority interests 8,529 7,772 7,308 6,141 4,376
AmSurg minority partners' interest 4,783 3,446 1,975 731 -
AmSurg minority stockholders' interest 486 410 6 (127) -
------- ------- ------- ------- -------
Net income $ 3,260 $ 3,916 $ 5,327 $ 5,537 $ 4,376
======= ======= ======= ======= =======
Net income per share $ 0.40 $ 0.48 $ 0.63 $ 0.66 $ 0.52
======= ======= ======= ======= =======
Weighted average common shares and equivalents 8,161 8,211 8,461 8,404 8,370
Components of net income:
DTCA and other $ 2,461 $ 3,242 $ 5,289 $ 5,707 $ 4,376
AmSurg 799 674 38 (170) -
------- ------- ------- ------- -------
Total net income $ 3,260 $ 3,916 $ 5,327 $ 5,537 $ 4,376
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Cash and cash equivalents $13,990 $13,722 $11,820 $ 9,445 $10,323
Working capital 15,067 13,353 14,295 13,454 11,961
Total assets 78,205 65,532 53,853 40,784 32,203
Long-term debt and other long-term liabilities 13,345 7,384 4,377 2,067 1,665
Minority interest 13,797 10,582 7,002 3,416 -
Stockholders' equity 41,611 38,299 36,460 30,850 25,158
</TABLE>
# Includes nonrecurring income tax benefit in the fourth quarter of fiscal 1996
of $760,000, or $.09 per share.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
American Healthcorp, Inc. and its subsidiaries (the "Company") currently
operate two business segments, Diabetes Treatment Centers of America, Inc.
("DTCA") and AmSurg Corp. ("AmSurg"). DTCA, a wholly-owned subsidiary, is the
nations's leading provider of diabetes services to physicians, hospitals and
healthcare payors designed to enhance the quality and lower the cost of
treatment of patients with diabetes. AmSurg, a majority-owned (61% at August
31, 1996) subsidiary, develops, acquires and manages physician practice-based
ambulatory surgery centers and specialty physician networks in partnership with
surgical and other group practices.
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 new "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 materially from those
expressed in these forward-looking statements. The important factors for DTCA
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 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 agreements. The important
factors for AmSurg include: AmSurg's ability to enter into partnership
agreements for new practice-based ambulatory surgery centers and new specialty
physician networks; AmSurg's ability to contract with managed care payors for
its existing centers and its centers that are currently under development;
AmSurg's ability to obtain and retain appropriate licensing approvals for its
existing centers and centers currently under development; and AmSurg's ability
to maintain favorable relations with its physician partners.
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
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<PAGE> 23
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 the end of fiscal years 1996, 1995 and 1994.
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.
<TABLE>
<CAPTION>
As of August 31,
==============================================================
1996 1995 1994
==============================================================
Hospital Hospital Hospital
Contracts Sites Contracts Sites Contracts Sites
------------------- ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Hospital contracts/sites 59 61 68 70 69 71
Network contracts/sites 2 11 1 4 - -
--------- -------- --------- -------- --------- --------
Total contracts/sites 61 72 69 74 69 71
--------- -------- --------- -------- --------- --------
</TABLE>
The components of changes to the total number of DTCA hospital contracts for
fiscal years 1996, 1995 and 1994 are presented below.
<TABLE>
<CAPTION>
Fiscal year ended August 31,
=================================================================
1996 1995 1994
=================================================================
Hospital Hospital Hospital
Contracts Sites Contracts Sites Contracts Sites
------------------- ------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Total contracts/sites
at beginning of
period 69 74 69 71 70 71
New contracts/sites
signed 6 11 9 9 11 12
Contracts/sites
discontinued (13) (13) (9) (9) (12) (12)
Conversion of stand
alone hospital contract
to hospital network
contract (1) - - 3 - -
-------- ------- -------- ------- -------- -------
Total contracts/sites 61 72 69 74 69 71
-------- ------- -------- ------- -------- -------
</TABLE>
23
<PAGE> 24
During fiscal 1996 and 1995, 14 and 25 contracts, respectively, were
renewed for DTCA hospital-based diabetes treatment centers. During fiscal
1997, there will be 25 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.
The Company believes that general uncertainties associated with the
changes taking place in the healthcare industry and hospital pressures to
reduce operating costs as a result of increasing managed care payor influences
have adversely affected the Company's revenues and contract retention during
fiscal 1996 and 1995 and may continue to have an adverse effect on hospital
contract profitability in future periods. While the Company believes that its
programs reduce the costs of care for hospitalized diabetes patients, certain
hospitals faced with pressures to make immediate cost reductions have decided
that the short-term benefit of eliminating the costs associated with programs
such as the Company's diabetes program is justified. However, the Company also
believes that the growth in healthcare payor demand for effective chronic
disease management programs from healthcare providers such as hospitals will
eventually stabilize DTCA's hospital contract business and will provide an
opportunity for future growth in this business.
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.
Certain of these motions are still pending.
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
24
<PAGE> 25
associated with its defense of this matter and the civil suit. During the
fiscal year ended August 31, 1996, the legal expense costs associated with these
matters totaled approximately $250,000.
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 comprehensive healthcare
management contracts with managed care payors for their enrollees with
diabetes. During fiscal 1996 and 1995 the Company incurred approximately $3.4
million and $4.3 million, respectively, in expenditures for the development and
marketing of new products associated primarily with these comprehensive
diabetes disease management efforts. These expenditures have been incurred
primarily to identify and develop diabetes population management products to
address varying managed care payor needs and delivery system requirements, to
develop the staff and materials and implement a managed care payor marketing
program for these products and to develop the Company's information technology
capabilities. Information technology efforts have focused primarily on
supporting claims/cost analyses for individuals with diabetes for potential
payor customers as part of the marketing process, developing clinical patient
management and data collection capabilities and developing information
technology support systems required to manage and measure performance under
operating contracts with managed care payors. The Company anticipates that it
will need to continue these disease management product development and
marketing efforts during fiscal 1997 at expenditure levels it expects to
approximate fiscal 1996 expenditure levels and additional expenditures during
fiscal 1997 will be required to support the comprehensive healthcare management
contracts for individuals with diabetes which will be implemented during fiscal
1997.
The Company's growth strategy is primarily to develop new relationships
directly with payors and others who are ultimately responsible for the
healthcare costs of individuals with diabetes and to further develop its
hospital-based diabetes treatment center business. If the Company determines
that it will enhance and/or accelerate the development of its comprehensive
diabetes disease management product for the managed care marketplace, the
Company may develop strategic alliances or joint ventures with other entities
that have interests in diabetes care. Pursuant to the strategy with 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 agreements with payors may take the form of shared
savings of overall diabetes enrollee healthcare costs, capitated payments to
DTCA that cover DTCA's services to enrollees but do not include responsibility
for enrollee healthcare claims or some combination of these arrangements. The
Company believes that its current position as the leading provider of diabetes
treatment services to hospitals and physicians will be an advantage in
comparison with other potential competitors or with the payors considering
initiating such services themselves, most of whom have no such actual diabetes
treatment or comprehensive diabetes population management experience.
In this regard, during January 1996, DTCA entered into an agreement with
Bristol-Myers Squibb Co., U.S. Pharmaceuticals ("Bristol Myers") whereby DTCA
will provide its comprehensive diabetes disease management services to
Bristol-Myers' employees, dependents and retirees located in central and
western New Jersey and eastern Pennsylvania. During the
25
<PAGE> 26
initial two-year term of this agreement, Bristol-Myers will continue to be at
risk for all healthcare costs for this population, will reimburse DTCA for
DTCA's costs associated with implementing its comprehensive diabetes disease
management program for this group of individuals and will pay DTCA $1,000,000.
Implementation of this agreement began during the Company's third quarter of
fiscal 1996. In addition, the agreement provides an exclusive, one-year right
to negotiate a further agreement with the Company regarding future joint
business opportunities.
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 enrollees with diabetes. The Principal agreement covers six of the
largest HMO subsidiaries of Principal totaling approximately 370,000 members,
including an estimated 11,000 members who have diabetes. The Health Options
agreement covers enrollees in their central Florida region in Orlando and seven
surrounding counties encompassing approximately 65,000 members, including an
estimated 1,800 to 2,000 members with diabetes. Both the Principal and the
Health Options contracts have an initial term of five years. DTCA will be at
risk for the costs of operating its comprehensive healthcare management system
and Principal and Health Options will continue to be at risk for all of their
members' healthcare costs. Cost savings produced by the system will be 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 slightly 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 the end of October 1996. Because of
expected ramp-up periods at each of the agreement sites, the significant
start-up costs for the implementation program and the timing delay in
calculating DTCA's share of savings, if any, which may be produced by the
program, it is anticipated that DTCA's profitability will be negatively
affected by these agreements during fiscal 1997.
In June 1996, DTCA also reached agreement with U.S. Healthcare ("USHC") to
provide outpatient services to USHC enrollees with diabetes, including patient
assessment and patient stratification based on the scope and intensity of
needed services, as well as educational, behavioral and motivational support
and outcomes tracking and reporting. Services will be provided on a packaged
fee-for-services basis and will be delivered through DTCA centers currently
operating in USHC markets. Implementation has begun at DTCA hospital contract
sites in markets which contain the greatest concentration of USHC enrollees.
While the Company believes that the Principal, Health Options and the USHC
agreements will provide substantial revenue and profit opportunities for DTCA
over the term of these agreements, it cannot accurately predict the amount or
timing of these revenues and profits. The Company also believes the agreements
with Principal, Health Options and USHC, as well as the agreement announced in
January 1996 with Bristol-Myers, will provide momentum in its
26
<PAGE> 27
discussions with other potential customers for its diabetes healthcare
management products; however, no assurances can be given that DTCA will be
successful in developing these additional relationships.
AMSURG
Through investments made since fiscal 1993, the Company owns approximately
61% of the outstanding common stock of AmSurg, a company that develops,
acquires and manages physician practice-based ambulatory surgery centers and
specialty physician networks through partnership or limited liability company
("LLC") interests in these centers and networks.
The following table presents the components of changes in the number of
AmSurg surgery centers in operation at the end of fiscal 1996, 1995 and 1994.
<TABLE>
<CAPTION>
Fiscal year ended August 31,
============================
1996 1995 1994
============================
<S> <C> <C> <C>
Centers in operation at beginning of period 18 10 4
New center acquisitions placed in operation 2 3 4
New development centers placed in operation 2 5 2
----------------------------
Centers in operation at end of period 22 18 10
----------------------------
</TABLE>
Beginning in fiscal 1995, AmSurg focused its center development efforts
primarily on start-up centers as opposed to center acquisitions. Because of
the additional time required in the development and construction of these
start-up centers, the number of centers placed in operation during fiscal 1996
was lower than in previous fiscal years. However, because most of these
start-up centers will begin operation during fiscal 1997 and because AmSurg has
recently resumed its acquisition efforts, it is anticipated that the number of
AmSurg centers placed in operation during fiscal 1997 will be significantly
higher than that experienced during fiscal 1996.
Eighteen of the AmSurg surgery centers in operation as of August 31, 1996
perform gastrointestinal endoscopy procedures, three centers perform eye surgery
procedures and one center performs ear, nose and throat procedures. As of
August 31, 1996, AmSurg also owned a majority interest in sixteen partnerships
or LLCs, including four projects requiring certificate of need approval, each of
which will develop, own and operate a surgery center. As of August 31, 1995,
AmSurg owned a majority interest in five partnerships that were developing
centers. In addition, on February 1, 1996, AmSurg acquired an undivided 70%
interest in the assets of a gastroenterology and primary care physician practice
located in Miami, Florida and associated with a surgery center in which AmSurg
already held an ownership interest. While AmSurg generally owns 51% to 70% of
these center/practice entities, the Company's consolidated statements of
operations include 100% of the results of operations of the entities, reduced by
the minority partners' share of the net income or loss of the surgery
center/practice entities. Also,
27
<PAGE> 28
because the Company owns approximately 61% of the common stock of AmSurg, the
calculation of consolidated net income of the Company includes a minority
interest provision to reflect the AmSurg minority stockholders' share of the net
income or loss of AmSurg.
AmSurg intends to expand primarily through the development and acquisition
of additional surgery centers in targeted surgical specialties. In addition,
AmSurg's surgery centers, combined with its relationships with specialty
physician surgical practices in their markets, will provide other opportunities
for AmSurg growth from surgical specialty network acquisition and development
that may include the acquisition of specialty physician practices. By using
AmSurg surgery centers as a base to develop specialty physician networks that
are designed to serve large numbers of covered lives, the Company believes that
AmSurg will strengthen its market position in contracting with managed care
organizations. In order to fund its future growth, AmSurg expects to obtain
additional equity or debt financing from sources other than the Company. In
that respect, on November 20, 1996, AmSurg issued to an unaffiliated
institutional investor a combination of redeemable and convertible preferred
stock totaling $5,500,000, the convertible portion of which is convertible into
6% (ratably increasing to 8% by November 2000) of the outstanding common stock
of AmSurg if certain events of liquidity do not take place. The Company and
AmSurg also are considering certain strategic alternatives in order to provide
AmSurg with better access to the public and private capital necessary to fund
its continuing growth. Among the alternatives available to the Company and
AmSurg is the alternative of creating a public market for AmSurg common stock
either through a public offering of authorized but unissued shares of AmSurg
common stock or the spinoff of AmSurg common stock owned by the Company. No
assurance can be made that the Company and AmSurg will effect any such
strategic alternative.
RESULTS OF OPERATIONS
The Company operates two business segments, DTCA and AmSurg. Included in
DTCA results of operations are the operations of two Arthritis and Osteoporosis
Care centers and corporate costs attributable to DTCA. Included in AmSurg
expenses are charges for general management, administrative and accounting
services provided by the Company. Charges to AmSurg for such services
approximate the Company's cost.
28
<PAGE> 29
DTCA
The following table presents the operations of DTCA for fiscal 1996, 1995
and 1994 and associated percentage changes for fiscal 1996 from 1995 and the
percentage changes for fiscal 1995 from 1994.
<TABLE>
<CAPTION>
Fiscal Year Ended August 31, 1996 % Change 1995 % Change 1994
===========================================================================================
<S> <C> <C> <C> <C> <C>
Revenues $31,403,644 (14.2)% $36,583,573 (11.1)% $41,144,098
----------- ------ ----------- ------ -----------
Expenses:
Salaries and benefits 19,866,459 5.2 % 18,877,972 1.0 % 18,699,330
Other operating expenses 7,254,703 (33.2)% 10,865,505 (11.5)% 12,270,569
Depreciation and amortization 1,272,756 (5.0)% 1,339,357 3.6 % 1,292,638
Interest 5,248 (25.9)% 7,081 8.9 % 6,501
----------- ------ ----------- ------ -----------
Total expenses 28,399,166 (8.7)% 31,089,915 (3.7)% 32,269,038
----------- ------ ----------- ------ -----------
Income before income taxes 3,004,478 (45.3)% 5,493,658 (38.1)% 8,875,060
Income taxes 544,000 (75.8)% 2,252,000 (37.2)% 3,586,000
=========== ====== =========== ====== ===========
Net income $ 2,460,478 (24.1)% $ 3,241,658 (38.7)% $ 5,289,060
=========== ====== =========== ====== ===========
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
The DTCA revenue decrease for 1996 from 1995 resulted primarily from the
impact of contract terminations, from a 9% decrease in same contract revenues
for centers in operation as of September 1, 1994 and from the absence of
revenues from the Company's mail order diabetes supply business which was sold
at the end of 1995. The decrease in same contract revenues resulted primarily
from the impact of contract fee renegotiations and restructurings. The Company
believes that hospital pressures to immediately reduce their operating costs
may continue to negatively impact same-contract revenue comparisons and
contract renewals during fiscal 1997. While the comprehensive healthcare
management contract with Bristol-Myers for enrollees with diabetes at select
locations did generate a small amount of revenue for DTCA during 1996, the new
managed care agreements signed by DTCA with Principal, Health Options and USHC
are anticipated to begin generating revenues during fiscal 1997, though costs
associated with such contracts are expected to initially exceed anticipated
revenues.
The increase in overall DTCA salaries and benefits for 1996 over 1995
resulted primarily from normal salary and benefit increases, higher staffing
costs associated with DTCA's managed care contract with Bristol-Myers which was
signed during the second quarter of fiscal 1996 and its contracts with
Principal and Health Options signed during the fourth quarter of fiscal 1996
offset somewhat by the impact of fewer hospital contracts in operation during
1996 than during 1995 and decreased incentive compensation during 1996 compared
with 1995. Salaries and benefits as a percentage of revenues for 1996 was
63.3% as compared with 51.6% for 1995.
29
<PAGE> 30
This increase resulted primarily from the impact of reduced same-contract
revenues during 1996, the absence of diabetes supply revenues during 1996 and
the impact of additional salary costs associated with the Company's managed care
efforts which produced minimal revenues during 1996. DTCA anticipates that
salaries and benefits will increase during fiscal 1997 as a result of the
implementation and operation of the managed care contracts with Principal and
Health Options.
The decrease in DTCA's other operating expenses for 1996 from 1995
resulted primarily from the sale of the Company's mail order diabetes supply
business, reduced outside consulting fees associated with DTCA's new product
development efforts, lower medical director costs at DTCA hospital centers and
lower legal costs associated with a civil suit filed by a former employee and
the resulting OIG investigation. Therefore, other operating expenses as a
percentage of revenues for 1996 were 23.1% compared with 29.7% for 1995. DTCA
anticipates that other operating costs will increase during fiscal 1997 as a
result of the implementation and operation of the managed care contracts with
Principal and Health Options.
The decrease in DTCA's depreciation and amortization expense for 1996 from
1995 resulted from reduced amortization expense at DTCA centers where the costs
of center contract development have been fully amortized, partially offset by
additional amortization expense associated with the costs of center development
at centers recently placed in operation.
The decrease in income tax expense attributable to DTCA's operations for
1996 from 1995 resulted from decreased operating results for 1996 and from the
reversal of $760,000 of income tax liability reserves during 1996 as a result
of the favorable resolution of prior year income tax issues with the Internal
Revenue Service. DTCA's effective income tax rate for 1996, excluding the
nonrecurring favorable income tax expense adjustment of $760,000, increased
from 41.0% for 1995 to 43.4% and resulted primarily from the impact of the
fixed amount of DTCA's non-deductible amortization of excess costs over net
assets of purchased companies relative to decreased levels of income. The
differences between the federal statutory income tax rate and the Company's
effective income tax rate during 1996 and 1995, excluding the impact of the
non-recurring favorable $760,000 adjustment to income tax expense during 1996
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.
FISCAL 1995 COMPARED TO FISCAL 1994
The DTCA revenue decrease for 1995 from 1994 resulted primarily from an 8%
decrease in same-contract revenues for centers in operation as of September 1,
1993, and from an increase in the percentage mix of lower revenue, less mature
contracts during 1995 compared with 1994. The decrease in same center revenues
resulted primarily from the impact of contract fee restructurings. The change
in the mix of contracts resulted from the impact of the discontinuance of
several mature contracts during 1994 and 1995 the revenues of which were
considerably higher than new contracts that were being signed and placed in
operation during this period. The Company believes that the negative impact of
selected contract rate
30
<PAGE> 31
renegotiations and restructurings, the transition of client hospitals to their
evolving healthcare markets, the impact of changing revenue patterns resulting
from new DTCA products and the timing of implementation of these new products
have negatively impacted same center revenue changes, contract terminations and
new center revenues.
The increase in overall DTCA salaries and benefits for 1995 over 1994
resulted primarily from increased corporate staff overhead costs associated
with DTCA's new product efforts during 1995 and from increased performance-based
compensation during 1995 offset by lower corporate overhead costs associated
with DTCA's traditional hospital inpatient treatment center business during 1995
and by lower staffing levels during 1995 required at new centers placed in
operation during 1995 and 1994 compared with contracts terminated during this
period. Salaries and benefits expense as a percentage of revenues for 1995 was
51.6% compared with 45.4% for 1994. This increase was primarily a result of the
revenue decrease for 1995 from 1994 and from an increase in the corporate staff
overhead costs associated with DTCA's new product efforts which did not produce
significant revenue during 1995.
The decrease in DTCA's other operating expenses for 1995 from 1994 resulted
primarily from reduced center expenses such as media, community relations and
contracted medical director costs offset somewhat by increased expenditures
related to the Company's new product efforts and legal costs associated with the
civil suit filed by a former employee and the OIG investigation. Therefore,
other operating expenses as a percentage of revenues for 1995 were 29.7%
compared with 29.8% for 1994.
The increase in DTCA depreciation and amortization expense for 1995 over
1994 resulted primarily from additional amortization expense associated with
the costs of center development at centers recently placed in operation
partially offset by reduced amortization expense at DTCA centers where the
costs of center contract development have been fully amortized. The decrease
in income tax expense attributable to DTCA's operations for 1995 resulted
primarily from decreased operating results compared with 1994. DTCA's
effective income tax rate for 1995 increased to 41.0% from 40.4% for 1994. The
increase in the effective rate resulted primarily from the impact of the fixed
amount of DTCA's non-deductible amortization of excess costs over net assets of
purchased companies relative to decreased levels of income. The differences
between the federal statutory income tax rate and the Company's effective tax
rates during 1995 and 1994 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.
31
<PAGE> 32
AMSURG
The following table presents the operations of AmSurg for fiscal 1996,
1995 and 1994 and associated percentage changes for fiscal 1996 from 1994 and
the percentage changes for fiscal 1995 from 1994.
<TABLE>
%
Fiscal Year Ended August 31, 1996 % Change 1995 Change 1994
===================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues $29,205,697 45.8% $20,025,821 83.7% $10,899,771
----------- ------- ----------- ------ -----------
Expenses:
Salaries and benefits 9,222,023 66.7% 5,532,991 63.9% 3,376,093
Other operating expenses 9,624,549 40.7% 6,842,648 55.0% 4,414,489
Depreciation and amortization 2,654,102 25.2% 2,119,290 110.2% 1,008,159
Interest 822,573 38.6% 593,363 623.3% 82,034
----------- ------- ----------- ------ -----------
Total expenses 22,323,247 48.0% 15,088,292 69.9% 8,880,775
----------- ------- ----------- ------ -----------
Income before income taxes and
minority interests 6,882,450 39.4% 4,937,529 144.6% 2,018,996
Income taxes 814,000 100.0% 407,000 - -
----------- ------- ----------- ------ -----------
Income before minority interests 6,068,450 33.9% 4,530,529 124.4% 2,018,996
AmSurg minority partners' interest 4,783,195 38.8% 3,445,651 74.5% 1,974,926
AmSurg minority stockholders' interest 486,112 18.5% 410,213 6752.9% 5,986
----------- ------- ----------- ------ -----------
Net income $ 799,143 18.5% $ 674,665 1671.5% $ 38,084
=========== ======= =========== ====== ===========
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
The increase in AmSurg revenues for 1996 over 1995 resulted primarily from
more surgery centers in operation, the acquisition of the Florida physician
practice as of February 1, 1996 and from an increase of 15.0% in same-center
revenues at the ten centers in operation since September 1, 1994. The Company
anticipates further revenue growth in 1997 resulting from additional start-up
and acquisition centers placed in operation in 1996 and 1997 and from
same-center revenue growth.
The increase in salaries and benefits expense and in other operating
expenses for 1996 from 1995 resulted primarily from the acquisition of the
Florida physician practice and from an increase in AmSurg corporate staff
primarily to support anticipated growth in centers in operation that will occur
primarily during fiscal 1997.
32
<PAGE> 33
AmSurg's depreciation and amortization expense increases for 1996 over
1995 resulted primarily from AmSurg's acquisition of majority interests in
additional surgery centers, the acquisition of the Florida physician practice
and from new start-up surgery centers placed in operation. The increase in
interest expense for 1996 over 1995 is primarily attributable to debt assumed
or incurred by AmSurg in connection with additional acquisitions of interests
in surgery centers and the Florida physician practice plus the interest expense
associated with newly opened start-up surgery centers financed partially with
bank debt.
The effective income tax rate for 1996 for AmSurg, after reduction of
taxable income for AmSurg center minority partner's interest, was 38.8%
compared with 27.3% for 1995. The increase in the effective income tax rate
resulted from the utilization of prior period net operating loss carryforwards
during 1995. The difference between the federal statutory income tax rate and
AmSurg's effective income tax rates is due primarily to the utilization of
prior-period net operating loss carryforwards for 1995 and the impact of state
income taxes for both 1996 and 1995.
The AmSurg minority partners' interest in earnings for 1996 increased to
$4.8 million from $3.4 million for 1995, primarily as a result of minority
partners' interest in earnings at AmSurg surgery centers recently added to
operations and from increased profitability at same-centers. AmSurg minority
stockholders' interest in earnings increased to $486,112 for 1996 from $410,213
for 1995 primarily as a result of improved AmSurg 1996 profitability.
FISCAL 1995 COMPARED TO FISCAL 1994
The increase in AmSurg revenues for 1995 over 1994 resulted primarily from
more centers in operation which were added through acquisition and through
start-up development and from increases in revenues at existing centers. The
increases in salaries and benefits expense and in other operating expenses for
1995 over 1994 resulted primarily from an increased number of centers in
operation and from an increase in AmSurg corporate staff to support centers in
operation and the anticipated growth in the number of centers.
AmSurg depreciation and amortization expense increases for 1995 over 1994
are associated primarily with AmSurg's acquisition of majority interests in
additional practice-based ambulatory surgery centers and from new start-up
centers placed in operation. Increases in interest expense are primarily
attributable to debt assumed or incurred by AmSurg in connection with
additional acquisitions of interests in centers plus the interest expense
associated with newly opened start-up centers financed with bank debt.
The effective income tax rate for 1995 for AmSurg, after reduction of
taxable income for AmSurg center minority partners' interest, was 27.3%
compared with no provision for income tax made during 1994 because of the
utilization of prior period net operating loss carryforwards during that year.
The difference between the federal statutory tax rate and AmSurg's effective
income tax rates for both periods is due primarily to the utilization of prior
33
<PAGE> 34
period net operating loss carryforwards during 1995 and 1994 and the impact of
state income taxes.
The AmSurg minority partners' interest in earnings for 1995 increased to
$3.4 million from $2.0 million in 1994 primarily as a result of additional
practice-based surgery centers placed in operation and from increased
profitability at existing centers. AmSurg minority stockholders' interest in
earnings increased to $410,000 for 1995 from $6,000 for 1994 as a result of
improved AmSurg 1995 profitability.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities for fiscal 1996 generated $11.2 million in cash flow.
Investing activities during this period used $11.8 million which consisted
primarily of $8.5 million used by AmSurg to acquire partnership interests in
additional practice-based ambulatory surgery centers and to acquire the
partnership interest in the Florida physician practice and $3.4 million used
for the acquisition of property and equipment for new AmSurg start-up surgery
centers and for other equipment and leasehold improvement purchases for AmSurg
and DTCA. Financing activities for fiscal 1996 provided $809,017 in cash flow
primarily as a result of net additions to AmSurg long-term debt of $4.5
million, $866,347 in AmSurg minority partner capital contributions to AmSurg
partnerships and LLCs and cash proceeds from the private sale of AmSurg common
stock to parties other than the Company and $160,429 in proceeds from the
exercise of options to purchase the Company's common stock; these financing
proceeds were partially offset by $4.6 million in net distributions to AmSurg
surgery center minority partners and $127,503 utilized to repurchase Company
common stock. At August 31, 1996, the Company had no outstanding borrowings
under its $10 million bank revolving credit agreement, which expires January
29, 1998, and AmSurg had $5.6 million outstanding under its amended and
restated bank credit agreement which is repayable through June 2000. At August
31, 1996, AmSurg also had outstanding borrowings of $3.7 million under a credit
facility which provides up to $12 million through June 1998 for acquisition and
development projects with repayment of these borrowings being made through June
2002. AmSurg borrowings under this bank credit agreement bear interest at a
rate equal to the prime rate or 1.75% above LIBOR or a combination thereof at
AmSurg's option.
The Company believes that cash flow from DTCA operating activities and the
Company's available cash balances will continue to enable the Company to fund
DTCA's current working capital needs, including the implementation and
operation of the new agreements with Principal and Health Options. The Company
anticipates that AmSurg operating activities will continue to provide positive
cash flow and that this cash flow will be utilized in combination with
borrowings under AmSurg's amended and restated bank revolving credit agreement
and through additional financing sources that AmSurg is expected to require to
fund acquisition and development projects. On November 20, 1996, AmSurg issued
to an unaffiliated institutional investor a combination of redeemable and
convertible preferred stock totaling $5,500,000, the convertible portion of
which is convertible into 6% (ratably increasing to 8% by November 2000) of the
outstanding common stock of AmSurg if certain events of liquidity do not take
34
<PAGE> 35
place. The Company and AmSurg also are considering certain strategic
alternatives in order to provide AmSurg with better access to the public and
private capital necessary to fund its continuing growth. Among the alternatives
available to the Company and AmSurg is the alternative of creating a public
market for AmSurg common stock either through a public offering of authorized
but unissued shares of AmSurg common stock or the spinoff of AmSurg common stock
owned by the Company. No assurance can be made that the Company and AmSurg will
effect any such strategic alternative.
35
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31,
---------------------------
1996 1995
------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1) $13,989,848 $13,721,650
Accounts receivable, net of allowance for uncollectible
accounts of $845,859 and $405,992 7,922,084 6,162,026
Other current assets (Note 1) 1,471,797 1,586,051
Deferred tax asset (Notes 1 and 3) 679,000 934,000
----------- -----------
Total current assets 24,062,729 22,403,727
----------- -----------
Long-term receivables and deposits 1,008,604 120,534
----------- -----------
Property and equipment (Note 1):
Land and improvements 97,280 -
Buildings and improvements 6,247,661 4,586,031
Equipment 10,043,288 7,278,162
Construction in progress 591,266 42,624
----------- -----------
16,979,495 11,906,817
Less accumulated depreciation (4,711,066) (2,916,377)
----------- -----------
Net property and equipment 12,268,429 8,990,440
----------- -----------
Long-term deferred tax asset (Notes 1 and 3) 740,000 453,000
----------- -----------
Other assets, net (Note 1) 929,545 1,277,121
----------- -----------
Excess of cost over net assets of purchased
companies, net (Notes 1 and 2) 39,195,303 32,286,755
----------- -----------
$78,204,610 $65,531,577
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
36
<PAGE> 37
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31,
------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 936,775 $ 886,628
Accrued salaries and benefits 2,348,406 2,385,784
Accrued liabilities 2,617,082 1,982,882
Income taxes payable (Notes 1 and 3) 255,111 1,320,609
Current portion of other long-term debt/liabilities
(Notes 4 and 5) 2,838,381 2,475,101
---------- ----------
Total current liabilities 8,995,755 9,051,004
---------- ----------
Deferred income taxes (Notes 1 and 3) 456,000 215,000
---------- ----------
Long-term debt (Note 4) 10,736,825 5,237,286
---------- ----------
Other long-term liabilities (Note 5) 2,608,041 2,146,322
---------- ----------
Minority interest (Note 1) 13,796,900 10,582,469
---------- ----------
Commitments and contingencies (Notes 6 and 11)
Stockholders' equity (Notes 7 and 8)
Preferred stock
$.001 par value, 5,000,000 shares authorized,
none outstanding - -
Common stock
$.001 par value, 15,000,000 shares authorized,
7,985,884 and 7,979,005 shares outstanding 7,986 7,979
Additional paid-in capital 17,629,678 17,577,713
Retained earnings 23,973,425 20,713,804
---------- ----------
Total stockholders' equity 41,611,089 38,299,496
---------- ----------
$78,204,610 $65,531,577
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
37
<PAGE> 38
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Revenues (Note 1) $60,609,341 $56,609,394 $52,043,869
Expenses:
Salaries and benefits 29,088,482 24,410,963 22,075,423
Other operating expenses 16,879,252 17,708,153 16,685,058
Depreciation and amortization (Note 1) 3,926,858 3,458,647 2,300,797
Interest 827,821 600,444 88,535
----------- ---------- -----------
Total expenses 50,722,413 46,178,207 41,149,813
----------- ---------- -----------
Income before income taxes and minority interests 9,886,928 10,431,187 10,894,056
Income tax expense (Notes 1 and 3) 1,358,000 2,659,000 3,586,000
----------- ---------- -----------
Income before minority interests 8,528,928 7,772,187 7,308,056
AmSurg minority partners' interest (Note 1) 4,783,195 3,445,651 1,974,926
AmSurg minority stockholders' interest (Note 1) 486,112 410,213 5,986
----------- ---------- -----------
Net income $ 3,259,621 $ 3,916,323 $ 5,327,144
========== ========== ===========
Net income per share (Note 1) $ 0.40 $ 0.48 $ 0.63
=========== ========== ===========
Weighted average common shares and equivalents
(Note 1) 8,160,764 8,211,097 8,461,042
</TABLE>
See accompanying notes to the consolidated financial statements.
38
<PAGE> 39
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings Total
----------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1993 $ - $ 8,236 $19,371,492 $11,470,337 $ 30,850,065
Exercise of stock options (Note 8) - 45 282,357 - 282,402
Net income - - - 5,327,144 5,327,144
--------- -------- ----------- ----------- -----------
Balance, August 31, 1994 - 8,281 19,653,849 16,797,481 36,459,611
Exercise of stock options (Note 8) - 35 138,075 - 138,110
Stock repurchase (Note 7) - (337) (2,214,211) - (2,214,548)
Net income - - - 3,916,323 3,916,323
--------- -------- ----------- ----------- -----------
Balance, August 31, 1995 - 7,979 17,577,713 20,713,804 38,299,496
Exercise of stock options (Note 8) - 22 179,453 - 179,475
Stock repurchase (Note 7) - (15) (127,488) - (127,503)
Net income - - - 3,259,621 3,259,621
--------- -------- ----------- ----------- -----------
Balance, August 31, 1996 $ - $ 7,986 $17,629,678 $23,973,425 $ 41,611,089
========= ======== =========== =========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
39
<PAGE> 40
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,259,621 $ 3,916,323 $ 5,327,144
Income tax expense (Notes 1 and 3) 1,358,000 2,659,000 3,586,000
AmSurg minority partners' interest (Note 1) 4,783,195 3,445,651 1,974,926
AmSurg minority stockholders' interest (Note 1) 486,112 410,213 5,986
------------ ----------- ------------
Income before income taxes and minority interests 9,886,928 10,431,187 10,894,056
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization (Note 1) 3,926,858 3,458,647 2,300,797
Decrease (increase) in working capital items (359,151) 1,274,767 1,551,177
Other noncash transactions 91,246 915,957 544,912
------------ ----------- ------------
13,545,881 16,080,558 15,290,942
Income taxes (net paid) (2,095,452) (2,485,748) (3,682,770)
Additions to other long-term liabilities 583,333 - -
Increase in other assets (393,006) (1,140,282) (804,868)
Payments on other long-term liabilities (Note 5) (394,610) (228,245) (216,646)
------------ ----------- ------------
Net cash flows provided by operating activities 11,246,146 12,226,283 10,586,658
------------ ----------- ------------
Cash flows from investing activities:
Business acquisitions (Note 2) (8,547,533) (5,260,203) (5,081,218)
Acquisition of property and equipment (3,373,823) (3,885,064) (3,668,311)
Decrease (increase) in long-term receivables and deposits 134,391 (37,920) (105,818)
------------ ----------- ------------
Net cash flows used in investing activities (11,786,965) (9,183,187) (8,855,347)
------------ ----------- ------------
Cash flows from financing activities:
Additions to long-term debt (Note 4) 6,785,333 3,527,365 1,961,181
Payments on long-term debt (Note 4) (2,264,474) (613,315) (507,376)
AmSurg distributions to center minority partners (Note 1) (4,611,115) (3,300,098) (1,821,743)
AmSurg center minority partners capital contributions 725,080 735,778 381,051
Stock repurchase (Note 7) (127,503) (2,214,548) -
Sale of AmSurg stock (net of issuance costs) 141,267 639,422 540,814
Exercise of stock options (Note 8) 160,429 84,166 89,179
------------ ----------- ------------
Net cash flows provided by (used in) financing activities 809,017 (1,141,230) 643,106
------------ ----------- ------------
Net increase in cash and cash equivalents 268,198 1,901,866 2,374,417
Cash and cash equivalents, beginning of period 13,721,650 11,819,784 9,445,367
------------ ----------- ------------
Cash and cash equivalents, end of period $ 13,989,848 $13,721,650 $ 11,819,784
============ =========== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
40
<PAGE> 41
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------
1996 1995 1994
------------ ---------- -----------
<S> <C> <C> <C>
Decrease (increase) in other working capital items
excluding income taxes:
Accounts receivable, net $(906,259) $ 640,319 $ 726,782
Other current assets 146,505 (351,734) (210,310)
Accounts payable 50,147 (244,224) 101,476
Accrued expenses 350,456 1,230,406 933,229
--------- ----------- -----------
$(359,151) $ 1,274,767 $1,551,177
========= =========== ===========
SUPPLEMENTAL NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
1. Interest payments of $711,538, $441,410 and $66,613 were
made during the years ended August 31, 1996, 1995 and 1994,
respectively.
2. Other noncash transactions consist of the following:
Deferred compensation agreements $ 551,775 $ 571,013 $ 500,843
Deferred income (458,333) - -
Liability insurance reserves (50,000) (86,192) (179,934)
Accrued expenses for center closings - - 97,172
--------- --------- ---------
Miscellaneous other 47,804 431,136 126,831
$ 91,246 $ 915,957 $ 544,912
========= ========= =========
</TABLE>
3. Shares of AmSurg stock valued at $1,351,174, $1,001,223 and $1,787,038 were
issued in conjunction with the acquisition of a majority interest in
various practice-based centers during the years ended August 31, 1996,
1995 and 1994, respectively.
(See Note 2.)
See accompanying notes to the consolidated financial statements.
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Healthcorp, Inc. and its subsidiaries (the "Company") currently
operate two business segments, Diabetes Treatment Centers of America ("DTCA")
and AmSurg Corp. ("AmSurg"). DTCA, a wholly-owned subsidiary, is a national
provider of diabetes services to physicians, hospitals and healthcare payors.
AmSurg Corp., a majority-owned (61% at August 31, 1996) subsidiary, develops,
acquires and manages physician practice-based ambulatory surgery centers and
specialty physician networks in partnership with surgical and other group
practices. AmSurg's partnership with physician group practices may take the
form of limited partnerships, general partnerships or limited liability
companies which, in any case, the minority owners thereof are herein referred
to as partners.
a. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned or majority-owned. All material intercompany profits,
transactions and balances have been eliminated.
b. Cash and Cash Equivalents - Cash and cash equivalents are comprised
principally of tax-exempt debt instruments, repurchase agreements, commercial
paper and other short-term investments with maturities of less than three
months and accrued interest thereon. Included in cash at August 31, 1996 and
1995, is the cash of AmSurg totaling $1,427,145 and $2,645,605, respectively.
The cash of AmSurg is intended to be used only for the business purposes of
AmSurg.
c. Other Current Assets - Other current assets at August 31, 1996 and 1995
are comprised of prepaid expenses, inventories and other receivables.
d. Property and Equipment - Property and equipment costs include
expenditures which increase value or extend useful lives. Depreciation is
recognized under the straight line method over useful lives ranging principally
from 5 to 20 years for buildings and improvements and 5 to 10 years for
equipment.
e. Other Assets - Other assets principally include costs incurred in
obtaining management contracts which are being amortized over the lives of the
related contracts (generally 2 to 5 years), and the opening activities of DTCA
contract centers and AmSurg centers which are being amortized over 12 months.
Total accumulated amortization of other assets at August 31, 1996 and 1995 was
$1,174,488 and $1,306,979, respectively.
f. Excess of Cost Over Net Assets of Purchased Companies - The excess
costs at August 31, 1996 and 1995 include net costs of $12,229,578 and
$12,611,797 which arose from a management buy-out of the Company in August
1988. This excess cost is being amortized over 40 years and has no income tax
basis. The excess costs at August 31, 1996 and 1995 also include excess costs
which have income tax basis associated with AmSurg business acquisitions made
during fiscal 1993 through fiscal 1996 which are being amortized over 25 years.
(See Note 2). Accumulated amortization at August 31, 1996 and 1995 was
$5,425,600 and $4,121,214, respectively. The Company assesses the impairment
of the value of excess of cost over net assets of purchased companies from time
to time utilizing valuation methodologies that reflect the current fair market
value of the businesses that have been acquired. Effective September 1, 1996,
the Company will adopt the provisions of Financial Accounting Standard No. 121
("FAS 121")
42
<PAGE> 43
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". The Company does not expect the adoption of FAS 121 to result
in an adjustment to the financial statements at the date of adoption.
g. Minority Interest - Minority interest at August 31, 1996 and 1995
represents the equity attributable to the minority stockholders of AmSurg plus
the equity attributable to the partners of AmSurg centers as of August 31, 1996
and 1995. (See Note 2). As of August 31, 1996, the Company owned 61% of the
outstanding common shares of AmSurg and AmSurg generally owns between 51% and
60% of each of its centers.
h. Income Taxes - The Company files a consolidated federal income tax
return and, effective September 1, 1993, computes its income tax provision
under Financial Accounting Standard No. 109, "Accounting for Income Taxes".
AmSurg files a separate consolidated federal income tax return with a tax year
ending December 31.
i. Revenue Recognition - Revenues under the Company's contracts with
hospitals are calculated based on various performance-based and fixed-fee
methodologies and are recognized when the related service has been provided.
Hospital contract revenues include estimates which are subject to adjustment in
subsequent periods. During the years ended August 31, 1996, 1995 and 1994,
approximately 15%, 15% and 22%, respectively, of the Company's revenues were
derived from DTCA contracts with hospitals which had a common parent company.
AmSurg revenue is recognized on the date of service, net of estimated
contractual allowances from third party medical service payors including
Medicare and Medicaid. During the years ended August 31, 1996, 1995 and 1994
approximately 17%, 14% and 9%, respectively, of the Company's revenues were
derived from AmSurg's provision of services to patients covered under Medicare
and Medicaid.
j. Net Income Per Share - Net income per share is computed by dividing net
income by the weighted average number of common shares and equivalents
outstanding.
k. Fair Value of Financial Instruments - Financial Accounting Standard No.
107, "Disclosures About Fair Value of Financial Instruments", requires
disclosure of the fair value of certain financial instruments. Cash and cash
equivalents, receivables and payables are reflected in the financial statements
at cost which approximates fair value. Management believes that the carrying
amount of long-term debt approximates market value, because it believes the
terms of its borrowings approximate terms which it would incur currently.
l. Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. BUSINESS ACQUISITIONS
In four separate transactions during the year ended August 31, 1996,
AmSurg acquired a majority interest in three physician practice-based surgery
centers and a physician practice and related entities. The purchase price paid
for the interests acquired was $10,990,183 which consisted of cash of
$8,119,028, AmSurg common stock valued at $1,343,374 and assumed debt of
$1,527,781. Approximately $8,950,000 of the total purchase price for these
acquisitions was allocated to excess of cost over net assets of purchased
companies.
43
<PAGE> 44
In three separate transactions during the year ended August 31, 1995,
AmSurg acquired a majority interest in three physician practice-based surgery
centers and another center nearing completion of construction. The purchase
price paid for the center interests acquired was $7,899,178 which consisted of
cash of $5,163,197, AmSurg common stock valued at $1,001,223, notes payable of
$1,012,380 and assumed debt of $722,378. Approximately $6,500,000 of the total
purchase price for these acquisitions was allocated to excess of cost over net
assets of purchased companies.
In four separate transactions during the year ended August 31, 1994,
AmSurg acquired a majority interest in four physician practice-based surgery
centers. The purchase price paid for the center interests acquired was
$7,596,843 which consisted of cash of $4,794,333, AmSurg common stock valued at
$1,787,038 and assumed debt of $1,015,472. Approximately $6,610,000 of the
total purchase price for these acquisitions was allocated to excess of cost
over net assets of purchased companies.
Had these transactions occurred September 1, 1993, unaudited pro forma
revenues for the years ended August 31, 1996, 1995, and 1994 would have been
approximately $65,756,000, $64,776,000 and $62,003,000, respectively. Pro
forma net income and earnings per share would not have been materially
different from those reported for the period.
3. INCOME TAXES
Income tax expense is comprised of the following:
<TABLE>
<CAPTION>
=========================================================
Year Ended August 31, 1996 1995 1994
=========================================================
<S> <C> <C> <C>
Current taxes
Federal $926,000 $2,206,000 $2,969,000
State 189,000 481,000 659,000
Deferred taxes 243,000 (28,000) (42,000)
---------------------------------------------------------
Total $1,358,000 $2,659,000 $3,586,000
=========================================================
</TABLE>
44
<PAGE> 45
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred asset for the fiscal years ended August 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
---------------------
1996 1995
---------------------
<S> <C> <C>
Deferred tax asset:
Allowance for doubtful accounts $ 228,000 $ 188,000
Financial accruals without economic performance 532,000 719,000
Deferred compensation 906,000 858,000
Other 15,000 42,000
--------- ----------
1,681,000 1,807,000
--------- ----------
Deferred tax liability:
Tax over book depreciation 97,000 13,000
Tax over book amortization 621,000 622,000
--------- ----------
718,000 635,000
--------- ----------
Net deferred tax asset $ 963,000 $1,172,000
========= ==========
Net current deferred tax asset $ 679,000 $ 934,000
Net long-term deferred tax asset 284,000 238,000
--------- ----------
$ 963,000 $1,172,000
========= ==========
</TABLE>
The Company has not provided any significant valuation allowance on its
deferred tax asset as it believes such allowance is unnecessary because it has
been paying current taxes substantially in excess of the net deferred tax asset
and anticipates continuing to do so.
The difference between income tax expense computed using the effective tax
rate and the statutory federal income tax rate follows:
<TABLE>
<CAPTION>
==========================================================================================
Year Ended August 31, 1996 1995 1994
==========================================================================================
<S> <C> <C> <C>
Statutory federal income tax $3,362,000 $3,547,000 $3,704,0000
AmSurg center minority partners' pretax interest (1,626,000) (1,172,000) (671,000)
State income taxes, less Federal income tax benefit 249,000 314,000 420,000
Amortization of excess of cost over net assets of
purchased companies 134,000 136,000 130,000
Internal Revenue Service settlement (760,000) - -
AmSurg separate return (income) losses - - (15,000)
Other (1,000) (166,000) 18,000
- ------------------------------------------------------------------------------------------
Income tax expense $1,358,000 $2,659,000 $3,586,000
==========================================================================================
</TABLE>
45
<PAGE> 46
The Company recognized a $760,000 reduction in its income tax expense in
its fiscal year ended August 31, 1996 resulting from the resolution of all
issues between the Company and the Internal Revenue Service relating principally
to the deductibility of costs associated with the leveraged buyout of the
Company in 1988 and the sale of the Company's alcohol and drug treatment
business in 1989. In fiscal 1994, the Company had filed a petition with the
United States Tax Court to contest the proposed disallowance by the IRS of
deductions associated with these issues. In September 1996 a settlement was
reached with the IRS which substantially confirmed the Company's position on
these issues and, accordingly, the Company reversed $760,000 of income tax
liabilities it had previously provided for these matters.
4. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
=======================================================================================================
Year Ended August 31, 1996 1995
=======================================================================================================
<S> <C> <C>
$10,000,000 revolving credit agreement at prime or .75% above
LIBOR............................................................... $ - $ -
AmSurg term loan at prime or 1.75% above LIBOR (7.3% at August 31,
1996) due through June 10, 2000..................................... 5,629,470 3,607,296
$12,000,000 AmSurg credit agreement at prime or 1.75% above LIBOR
(average rate of 7.2% at August 31, 1996) due through June 10,
2002................................................................ 3,744,000 -
Various AmSurg debt at an average rate of 9.0% due through
September 23, 2003.................................................. 4,064,913 3,738,714
----------- ----------
13,438,383 7,346,010
7,346,010
Less current portion.................................................. 2,701,558 2,108,724
----------- ----------
$10,736,825 $5,237,286
=========== ==========
</TABLE>
The Company has a revolving credit agreement with a lending institution
which permits the Company to borrow up to $10,000,000. Borrowings under this
agreement, at the Company's option, bear interest at the prime rate or at .75%
above the LIBOR or a combination thereof. This agreement provides for a fee of
.375% on unused commitments and expires January 29, 1998 but may be extended
annually at the lender's option. This agreement contains covenants relating to
working capital, operating performance, the ratio of liabilities to net worth,
maintenance of a minimum net worth and the payment of cash dividends. Under
the most restrictive of these covenants, approximately 41% of retained earnings
was available for the payment of dividends at August 31, 1996. Unused
commitments under the agreement totaled $10,000,000 as of August 31, 1996.
46
<PAGE> 47
On September 29, 1993, AmSurg entered into a credit agreement with a
lending institution. The credit agreement was amended and restated June 25,
1996. Under the terms of the new agreement, all borrowings outstanding under
the previous credit agreement were converted to a term loan that bears interest
at the prime rate or 1.75% above LIBOR or a combination thereof and is being
repaid on an installment basis through June 10, 2000. The borrowings under the
term loan are secured by $9,623,156 of assets financed by these borrowings.
Borrowings under the term loan totaled $5,629,470 of which payment of $559,415
was guaranteed by certain partners of AmSurg centers. In addition, the credit
agreement permits AmSurg to borrow up to an additional $12,000,000 to finance
AmSurg acquisition and development projects. New borrowings under this
agreement bear interest at prime or 1.75% above LIBOR or a combination thereof.
AmSurg may borrow under this credit agreement through June 10, 1998. The
agreement provides for a fee of .35% on unused commitments and all additional
borrowings are to be repaid on an installment basis through June 10, 2002. The
agreement contains covenants relating to the ratio of debt to net worth,
operating performance and minimum net worth and prohibits the payment of
dividends. Borrowings under the $12,000,000 credit agreement totaled
$3,744,000 at August 31, 1996 of which payment of $208,250 was guaranteed by
certain partners of AmSurg centers. The borrowings under the credit agreement
are secured by $492,606 of assets financed by a portion of these borrowings.
Various of the AmSurg centers included in the Company's consolidated
financial statements have loans with local lending institutions or have
capitalized lease arrangements. All the loans and capitalized leases are
secured by assets of the centers totaling $5,596,874 and both AmSurg and the
partners have guaranteed payment of the loans and leases. In addition, AmSurg
issued unsecured notes payable in connection with the acquisition of two
physician practice-based surgery centers during the year ended August 31, 1995
(see Note 2).
Principal payments required on long-term debt in the five years subsequent
to August 31, 1996 are $2,701,558, $2,612,172, $3,230,801, $2,719,413 and
$1,187,437.
5. OTHER LONG-TERM LIABILITIES
The Company has a non-qualified deferred compensation plan under which
officers of the Company and certain subsidiaries may defer a portion of their
salaries and receive a Company matching contribution plus a contribution based
on the performance of the Company. Prior to September 1, 1990, other key
managers of the Company were also eligible to participate in a similar plan.
Company contributions vest at 25% per year. The plan is unfunded and remains
an unsecured obligation of the Company. Participants in these plans elect
payout dates for their account balances which can be no earlier than four years
from the period of the deferral. Included in other long-term liabilities are
vested amounts under these plans of $2,127,372 and $1,737,672 as of August 31,
1996 and 1995, respectively, net of the current portion of $136,823 and
$366,377, respectively. Plan payments required in the five years subsequent to
August 31, 1996 for the Company are $136,823, $324,573, $208,615, $169,389 and
$127,846.
Other long-term liabilities at August 31, 1996 and 1995 also include
$355,669 and $408,650, respectively, of reserves related to self-insured
deductibles under the Company's liability insurance program. The Company's
professional and general liability risks above certain levels of per claim and
annual aggregate deductibles are insured with major insurance carriers. The
Company's policies provide coverage on a claims-made basis. The Company
accrues the estimated liability for the retained
47
<PAGE> 48
deductibles on claims and incurred but not reported claims under these policies
based on historical loss patterns and management projections.
6. LEASES
The Company has operating lease agreements for AmSurg's ambulatory surgery
centers, physician practice and the Company's and AmSurg's corporate office
space. Rent expense under lease agreements for the years ended August 31,
1996, 1995 and 1994 was approximately $1,843,000, $1,427,000 and $875,500,
respectively.
The future minimum lease commitments for each of the next five years
following August 31, 1996 for the Company for all non-cancelable operating
leases are as follows:
<TABLE>
<CAPTION>
========================================
Year Ended August 31,
========================================
<S> <C>
1997........................ $2,310,082
1998........................ 2,286,488
1999........................ 2,181,860
2000........................ 1,573,313
2001........................ 1,124,602
----------------------------------------
Total $9,476,345
========================================
</TABLE>
7. STOCKHOLDERS' EQUITY
In December 1994, 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 the repurchases from time
to time in the open market prior to December 26, 1996. At August 31, 1996, the
Company had repurchased 351,900 shares at a cost of $2,342,051.
8. STOCK OPTIONS
The Company has a number of stock plans under which options to purchase
American Healthcorp, Inc. common stock or restricted stock may be granted. All
options under these plans have been granted at fair market value as of the date
of the grant. The Company has reserved 50,000 shares of common stock to be
granted as restricted stock as part of the Company's Board of Director
compensation program of which 4,324 shares have been granted.
48
<PAGE> 49
Stock option activity, as adjusted for the three-for-two split effective
November, 1993, for the three years ended August 31, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
========================================
Number of shares Option price per share
========================================
<S> <C> <C>
Outstanding at August 31, 1993 912,362 $ .001-$14.730
Options granted 123,011 $5.930-$21.930
Options exercised (45,218) $ .001-$12.687
Options terminated (33,310) $2.780-$12.687
---------
Outstanding at August 31, 1994 956,845 $ .001-$21.930
Options granted 279,665 $ 5.100-$7.880
Options exercised (35,136) $ .001-$2.780
Options terminated (274,098) $2.780-$21.930
---------
Outstanding at August 31, 1995 927,276 $ .001-$21.43
Options granted 319,325 $ 6.44-$12.60
Options exercised (17,555) $ 2.78-$11.42
Options terminated (55,743) $ 5.93-$11.42
---------
Outstanding at August 31, 1996 1,173,303 $ .001-$21.43
=========
</TABLE>
As of August 31, 1996, options for 681,359 shares were exercisable at an
average price of $7.77 per share and 272,708 shares were reserved for future
options. As of August 31, 1995, options for 573,771 shares were exercisable at
an average price of $7.29 per share and 221,290 shares were reserved for future
options.
Pursuant to a stock option plan, AmSurg has granted to certain founding
and management employees of AmSurg incentive and non-qualified options to
purchase shares of AmSurg common stock which, if exercised, would be equal to
approximately 9.8% of its common stock outstanding as of August 31, 1996 at a
price equal to the fair value of the AmSurg stock at the date of grant. All of
these AmSurg options were outstanding at August 31, 1996.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation". FAS 123 provides for an alternate method of
recording the issuance of stock options and other stock based compensation from
that promulgated by Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees". Pursuant to the provisions of FAS
123, the Company has elected to continue to record the issuance of employee
stock options in accordance with APB 25, effective September 1, 1996.
49
<PAGE> 50
9. EMPLOYEE BENEFITS
The Company has a Section 401(k) Retirement Savings Plan ("Plan")
available to substantially all employees of the Company and its wholly owned
subsidiaries. Employee contributions are limited to a percentage of their
basic compensation as defined in the Plan and are supplemented by Company
contributions which are subject to vesting requirements. Company contributions
under the Plan totaled $265,528, $195,716 and $210,114 for the years ended
August 31, 1996, 1995 and 1994, respectively.
10. INDUSTRY SEGMENTS
A summary of segment information for the fiscal years ended August 31,
1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
=======================================================================
Year ended August 31, 1996 1995 1994
=======================================================================
<S> <C> <C> <C>
Revenues:
DTCA/American Healthcorp $31,403,644 $36,583,573 $41,144,098
AmSurg Corp. 29,205,697 20,025,821 10,899,771
-------------------------------------
$60,609,341 $56,609,394 $52,043,869
=====================================
Operating profits:
DTCA/American Healthcorp $ 3,009,726 $ 5,500,739 $ 8,881,561
AmSurg Corp. 7,705,023 5,530,892 2,101,030
-------------------------------------
10,714,749 11,031,631 10,982,591
Interest expense (827,821) (600,444) (88,535)
------------------------------------
$ 9,886,928 $10,431,187 $10,894,056
=====================================
Identifiable assets:
DTCA/American Healthcorp $31,968,374 $31,062,102 $31,516,249
AmSurg Corp. 46,236,236 34,469,475 22,336,410
-------------------------------------
$78,204,610 $65,531,577 $53,852,659
=====================================
Capital expenditures:
DTCA/American Healthcorp $ 651,676 $ 435,653 $ 332,313
AmSurg Corp. 2,722,147 3,449,411 3,335,998
-------------------------------------
$ 3,373,823 $ 3,885,064 $ 3,668,311
=====================================
Depreciation and amortization:
DTCA/American Healthcorp $ 1,272,756 $ 1,339,357 $ 1,292,638
AmSurg Corp. 2,654,102 2,119,290 1,008,159
-------------------------------------
$ 3,926,858 $ 3,458,647 $ 2,300,797
=====================================
</TABLE>
50
<PAGE> 51
11. CONTINGENCIES
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.
Certain of these motions are still pending.
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. During the fiscal years ended August 31, 1996 and
1995, the legal expense costs associated with these matters totaled
approximately $250,000 and $750,000, respectively.
The Company is not a party to any other pending legal proceedings which it
believes will have a material adverse effect on its financial position or
results of operations.
12. SUBSEQUENT EVENT
On November 20, 1996, AmSurg issued to an unaffiliated institutional
investor a combination of redeemable and convertible preferred stock totaling
$5,500,000, the convertible portion of which is convertible into 6% (ratably
increasing to 8% by November 2000) of the outstanding common stock of AmSurg if
certain events of liquidity do not take place.
51
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
American Healthcorp, Inc.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of American
Healthcorp, Inc. and subsidiaries as of August 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended August 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Healthcorp, Inc. and
subsidiaries as of August 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
October 18, 1996 (November 20, 1996 with respect to Note 12)
52
<PAGE> 53
QUARTERLY FINANCIAL INFORMATION:
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal 1996 First Second Third Fourth
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
DTCA and other $ 8,023 $ 7,691 $ 7,874 $ 7,815
AmSurg 5,881 6,714 8,086 8,525
------- ------- ------- -------
Total revenues $13,904 $14,405 $15,960 $16,340
Income before income taxes and minority interests $ 2,526 $ 2,631 $ 2,716 $ 2,014
Net income $ 800 $ 705 $ 653 $ 1,102
Net income per share $ 0.10 $ 0.09 $ 0.08 $ 0.13
Components of net income:
DTCA and other $ 651 $ 508 $ 366 $ 936
AmSurg 149 197 287 166
------- ------- ------- -------
Total net income $ 800 $ 705 $ 653 $ 1,102
Fiscal 1995 First Second Third Fourth
- --------------------------------------------------------------------------------------------------
Revenues:
DTCA and other $ 9,498 $ 9,455 $ 8,970 $ 8,660
AmSurg 3,997 4,681 5,417 5,931
------- ------- ------- -------
Total revenues $13,495 $14,136 $14,387 $14,591
Income before income taxes and minority interests $ 2,628 $ 2,531 $ 2,484 $ 2,788
Net income $ 1,171 $ 976 $ 875 $ 894
Net income per share $ 0.14 $ 0.12 $ 0.11 $ 0.11
Components of net income:
DTCA and other $ 1,034 $ 823 $ 727 $ 658
AmSurg 137 153 148 236
------- ------- ------- -------
Total net income $ 1,171 $ 976 $ 875 $ 894
</TABLE>
53
<PAGE> 54
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company is included in pages
4-6 under the caption "Election of Directors" of the Company's Proxy Statement
for the Annual Meeting of Stockholders to be held January 21, 1997 and is
incorporated herein by reference.
Pursuant to General Instruction G(3), information concerning executive
officers of the Company is included in Part I, under the caption "Executive
Officers of the Registrant" of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 21, 1997,
to be filed with the Securities and Exchange Commission pursuant to Rule
14a-6(c) and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 21, 1997,
to be filed with the Securities and Exchange Commission pursuant to Rule
14a-6(c) and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 21, 1997,
to be filed with the Securities and Exchange Commission pursuant to Rule
14a-6(c) and is incorporated herein by reference.
54
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
1. Consolidated financial statement schedule
<TABLE>
<S> <C>
Independent Auditors' Report on Schedule............................S-2
Schedule VIII - Valuation and Qualifying Accounts...................S-3
</TABLE>
3. EXHIBITS
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to Registration Statement on Form S-1 (Registration No.
33-41119))
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-41119))
4.1 Article IV of the Company's Restated Certificate of Incorporation
(included in Exhibit 3.1)
10.1 Registration Agreement dated as of August 31, 1988, as amended, by
and among the Company, as successor to AHC Merger, Inc., and certain
stockholders identified therein (incorporated by reference to Exhibit
10.2 to Registration Statement on Form S-1 (Registration No.
33-41119))
10.2 Revolving Credit Agreement as Amended and Restated dated as of July
14, 1992 and May 10, 1995, between the Company and Bank of America,
N.A. (incorporated by reference to Exhibit 10.2 to Form 10-K of the
registrant for its fiscal year ended August 31, 1992 and Exhibit 10.1
to Form 10-Q of the registrant for its quarter ended May 31, 1995)
10.3 Amended and Restated Loan Agreement dated June 25, 1996, between
AmSurg and SunTrust Bank, Nashville, N.A. (incorporated by reference
to Exhibit 10.1 to Form 10-Q of the registrant for its quarter ended
May 31, 1996)
Management Contracts and Compensatory Plans
10.4 Employment Agreement as Amended and Restated dated August 31, 1988
between the Company and Thomas G. Cigarran (incorporated by reference
to Exhibit 10.3 to Form 10-K of the registrant for its fiscal year
ended August 31, 1992)
10.5 Employment Agreement as Amended and Restated dated August 31, 1988
between the Company and Henry D. Herr (incorporated by reference to
Exhibit 10.4 to Form 10-K of the registrant for its fiscal year ended
August 31, 1992)
55
<PAGE> 56
10.6 Employment Agreement as Amended and Restated dated August 31, 1988
between the Company and James A. Deal (incorporated by reference to
Exhibit 10.5 to Form 10-K of the registrant for its fiscal year
ended August 31, 1992)
10.7 Employment Agreement as Amended and Restated dated August 31, 1988
between the Company and Robert E. Stone (incorporated by reference
to Exhibit 10.6 to Form 10-K of the registrant for its fiscal year
ended August 31, 1992)
10.8 Employment Agreement dated May 15, 1983 between the Company and
David A. Sidlowe (incorporated by reference to Exhibit 10.10 to
Registration Statement on Form S-1 (Registration No. 33-41119))
10.9 Capital Accumulation Plan, as amended (incorporated by reference to
Exhibit 10.11 to Registration Statement on Form S-1 (Registration
No. 33-41119) and Exhibit 10.8 to Form 10-K of the registrant for
its fiscal year ended August 31, 1995)
10.10 Non-Statutory Stock Option Plan of 1988 (incorporated by reference
to Exhibit 10.12 to Registration Statement on Form S-1 (Registration
No. 33-41119))
10.11 1991 Employee Stock Incentive Plan, as amended (incorporated by
reference to Exhibit 10.10 to Form 10-K of the registrant for its
fiscal year ended August 31, 1992)
10.12 1991 Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 10.14 to Registration Statement on Form S-1
(Registration No. 33-41119))
10.13 1991 Outside Directors Discretionary Stock Option Plan (incorporated
by reference to Exhibit 4(c) to Registration Statement on Form S-8
(Registration No. 33-42909))
10.14 Form of Indemnification Agreement by and among the Company and the
Company's directors (incorporated by reference to Exhibit 10.15 to
Registration Statement on Form S-1 (Registration No. 33-41119))
10.15 1996 Stock Incentive Plan (incorporated by reference to the
Company's proxy statement for the annual meeting of stockholders to
be held January 23, 1996)
10.16 Management and Accounting Services Agreement dated November 30, 1992
between the Company and AmSurg (incorporated by reference to Exhibit
10.18 to Form 10-K of the registrant for its fiscal year ended
August 31, 1993)
21 Subsidiaries of the registrant
27 Financial Data Schedule (SEC Use Only)
56
<PAGE> 57
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fiscal quarter ended
August 31, 1996.
57
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN HEALTHCORP, INC.
November 20, 1996 By: /s/ Thomas G. Cigarran
-----------------------------
Thomas G. Cigarran
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- --------------------------------- -----------------
<S> <C> <C>
/s/ Thomas G. Cigarran Chairman of the Board, November 20, 1996
- ---------------------- President and Chief Executive
Thomas G. Cigarran Officer, Director (Principal
Executive Officer)
/s/ Henry D. Herr Executive Vice President November 20, 1996
- ----------------- Finance and Administration,
Henry D. Herr Chief Financial Officer,
Secretary, Director (Principal
Financial Officer)
/s/ David A. Sidlowe Vice President and Controller November 20, 1996
- -------------------- (Principal Accounting Officer)
David A. Sidlowe
/s/ Frank A. Ehmann Director November 20, 1996
- -------------------
Frank A. Ehmann
/s/ Martin J. Koldyke Director November 20, 1996
- ---------------------
Martin J. Koldyke
/s/ C. Warren Neel Director November 20, 1996
- ------------------
C. Warren Neel
/s/ William C. O'Neil, Jr. Director November 20, 1996
- --------------------------
William C. O'Neil, Jr.
</TABLE>
58
<PAGE> 59
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Schedule No. Schedule Name Page No.
- ------------ ---------------------------------------- --------
<S> <C> <C>
Independent Auditors' Report on Schedule S-2
VIII Valuation and Qualifying Accounts S-3
</TABLE>
All other financial statement schedules are either not required or are not
applicable to the Company.
S-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
Board of Directors
American Healthcorp, Inc.
Nashville, Tennessee
We have audited the consolidated financial statements for American Healthcorp,
Inc. as of August 31, 1996 and 1995 and for each of the three years in the
period ended August 31, 1996, and have issued our report thereon dated October
18, 1996 (November 20, 1996 with respect to Note 12); such consolidated
financial statements and report are included in this Form 10-K. Our audits
also included the consolidated financial statement schedule of American
Healthcorp, Inc., listed in Item 14. This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
October 18, 1996 (November 20, 1996 with respect to Note 12)
S-2
<PAGE> 61
SCHEDULE VIII
AMERICAN HEALTHCORP, INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
of Period Expenses Accounts Deductions of Period
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1994:
Allowance for Uncollectible Accounts
included under balance sheet caption
"Accounts receivable" $464,742 $ 534,737 $ 86,492 (2) $531,248 (1) $554,723
Reserve for self-insured deductibles under
balance sheet caption "Other Long-Term
Liabilities" 687,490 192,648 (1) 494,842
Year ended August 31, 1995:
Allowance for Uncollectible Accounts
included under balance sheet caption
"Accounts receivable" $554,723 $ 736,294 $ 58,974 (2) $630,873 (1) $405,992
313,126 (3)
Reserve for self-insured deductibles under
balance sheet caption "Other Long-Term
Liabilities" 494,842 86,192 (1) 408,650
Year ended August 31, 1996:
Allowance for Uncollectible Accounts
included under balance sheet caption
"Accounts receivable" $405,992 $,014,335 $241,632 (2) $816,100 (1) $845,859
Reserve for self-insured deductibles under
balance sheet caption "Other Long-Term
Liabilities" 408,650 52,981 (1) 355,669
</TABLE>
(1) Charge-off against reserve.
(2) Valuation of allowance for uncollectible accounts at the acquisition of
AmSurg physician practice-based ambulatory surgery centers and physician
practice. Between 51% and 70% was charged to excess of cost over net
assets of purchased companies. See Note 2 of Notes to the Consolidated
Financial Statements.
(3) Written off on sale of supplies business.
S-3
<PAGE> 1
EXHIBIT 21
SUBSIDIARY LIST
AS OF NOVEMBER 20, 1996
(PAGE 1 OF 4)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
- --------------------------------------------- ------------ --------------------------- ------------
<S> <C> <C> <C>
Diabetes Treatment Centers of America, Inc. DE American Healthcorp, Inc. 100%
Arthritis and Osteoporosis Care Center, Inc. DE American Healthcorp, Inc. 100%
American Healthcorp of Texas, Inc. DE American Healthcorp, Inc. 100%
AmSurg Corp. TN American Healthcorp, Inc. 61%
AmSurg KEC, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of Knoxville, L.P. TN AmSurg KEC, Inc. 51%
AmSurg EC Topeka, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of Topeka, L.P. TN AmSurg EC Topeka, Inc. 60%
AmSurg EC St. Thomas, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of St. Thomas, L.P. TN AmSurg EC St. Thomas, Inc. 60%
AmSurg EC Centennial, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of Centennial, L.P. TN AmSurg EC Centennial, Inc. 60%
AmSurg EC Beaumont, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of Southeast Texas, L.P. TN AmSurg EC Beaumont, Inc. 60%
AmSurg EC Santa Fe, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of Santa Fe, L.P. TN AmSurg EC Santa Fe, Inc. 60%
AmSurg EC Washington, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of Washington D.C., L.P. TN AmSurg EC Washington, Inc. 60%
AmSurg Torrance, Inc. TN AmSurg Corp. 100%
The Endoscopy Center of the South Bay, L.P. TN AmSurg Torrance, Inc. 51%
AmSurg Encino, Inc. TN AmSurg Corp. 100%
The Valley Endoscopy Center, L.P. TN AmSurg Encino, Inc. 51%
AmSurg Brevard, Inc. TN AmSurg Corp. 100%
The Ophthalmology Center of Brevard, L.P. TN AmSurg Brevard, Inc. 51%
AmSurg Sebastopol, Inc. TN AmSurg Corp. 100%
The Sebastopol ASC, L.P. TN AmSurg Sebastopol, Inc. 60%
AmSurg ENT Brevard, Inc. TN AmSurg Corp. 100%
The ENT Center of Brevard, L.P. TN AmSurg ENT Brevard, Inc. 51%
</TABLE>
<PAGE> 2
SUBSIDIARY LIST
AS OF NOVEMBER 20, 1996
(PAGE 2 OF 4)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
- --------------------------------------------- ------------ --------------------------- ------------
<S> <C> <C> <C>
AmSurg Abilene, Inc. TN AmSurg Corp. 100%
The Abilene ASC, L.P. TN AmSurg Abilene, Inc. 60%
AmSurg West Tennessee, Inc. TN AmSurg Corp. 100%
The West Tennessee Center, L.P. TN AmSurg West Tennessee, Inc. 40%
AmSurg Lakeland, Inc. TN AmSurg Corp. 100%
The Lakeland Ophthalmology Center, L.P. TN AmSurg Lakeland, Inc. 51%
AmSurg SWFLA, Inc. TN AmSurg Corp. 100%
AmSurg Southwest Florida, L.P. TN AmSurg SWFLA, Inc. 60%
AmSurg Lorain, Inc. TN AmSurg Corp. 100%
The Lorain ASC, L.P. TN AmSurg Lorain, Inc. 51%
AmSurg Maryville, Inc. TN AmSurg Corp. 100%
The Maryville ASC TN AmSurg Maryville, Inc. 51%
AmSurg Holdings, Inc. TN AmSurg Corp. 100%
The Knoxville Ophthalmology ASC, LLC TN AmSurg Holdings, Inc. 60%
The West Monroe Endoscopy ASC, LLC TN AmSurg Holdings, Inc. 55%
Montgomery Eye Surgery Center, LLC TN AmSurg Holdings, Inc. 51%
The Evansville ASC, LLC TN AmSurg Holdings, Inc. 40%
The Sidney ASC, LLC TN AmSurg Holdings, Inc. 51%
The Bloomington ASC, LLC TN AmSurg Holdings, Inc. 51%
The Union City ASC, LLC TN AmSurg Holdings, Inc. 51%
The Cleveland ASC, LLC TN AmSurg Holdings, Inc. 51%
The Milwaukee ASC, LLC TN AmSurg Holdings, Inc. 51%
The Eye Care Network, LLC TN AmSurg Holdings, Inc. 51%
The Alabama Eye Care Network, LLC TN AmSurg Holdings, Inc. 51%
The Columbia ASC, LLC TN AmSurg Holdings, Inc. 51%
The Wichita Orthopaedic ASC, LLC TN AmSurg Holdings, Inc. 51%
The Minneapolis Endoscopy ASC, LLC TN AmSurg Holdings, Inc. 51%
AmSurg Miami, Inc. TN AmSurg Corp. 100%
The Miami ASC, L.P. TN AmSurg Miami, Inc. 70%
</TABLE>
<PAGE> 3
SUBSIDIARY LIST
AS OF NOVEMBER 20, 1996
(PAGE 3 OF 4)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
- --------------------------------------------- ------------ ------------------------------ ------------
<S> <C> <C> <C>
AmSurg North Platte, Inc. TN AmSurg Corp. 100%
The North Platte ASC, L.P. TN AmSurg North Platte, Inc. 51%
AmSurg Fort Collins, Inc. TN AmSurg Corp. 100%
The Fort Collins ASC, L.P. TN AmSurg Fort Collins, Inc. 51%
AmSurg Hanford, Inc. TN AmSurg Corp. 100%
The Hanford ASC, L.P. TN AmSurg Hanford, Inc. 63%
AmSurg Dallas, Inc. TN AmSurg Corp. 100%
AmSurg Port Arthur, Inc. TN AmSurg Corp. 100%
The Port Arthur ASC, L.P. TN AmSurg Port Arthur, Inc. 51%
AmSurg Melbourne, Inc. TN AmSurg Corp. 100%
The Melbourne ASC, L.P. TN AmSurg Melbourne, Inc. 51%
AmSurg Chicago, Inc. TN AmSurg Corp. 100%
The Chicago Endoscopy ASC, L.P. TN AmSurg Chicago, Inc. 51%
AmSurg Hillmont, Inc. TN AmSurg Corp. 100%
The Hillmont ASC, L.P. TN AmSurg Hillmont, Inc. 51%
AmSurg Northwest Florida, Inc. TN AmSurg Corp. 100%
The Northwest Florida ASC, L.P. TN AmSurg Northwest Florida, Inc. 51%
AmSurg Palmetto, Inc. TN AmSurg Corp. 100%
The Palmetto ASC, L.P. TN AmSurg Palmetto, Inc. 51%
AmSurg Hallandale, Inc. TN AmSurg Corp. 100%
The Hallandale Surgery ASC, L.P. TN AmSurg Hallandale, Inc. 51%
AmSurg Ocala, Inc. TN AmSurg Corp. 100%
The Ocala Endoscopy ASC, L.P. TN AmSurg Ocala, Inc. 51%
AmSurg South Florida Network, Inc. TN AmSurg Corp. 100%
The GI Network of South Florida, L.P. TN AmSurg South Florida Network, Inc. 51%
AmSurg Largo, Inc. TN AmSurg Corp. 100%
The Largo Urology ASC, L.P. TN AmSurg Largo, Inc. 40%
AmSurg Dade County, Inc. TN AmSurg Corp. 100%
Gastroenterology Group of South Florida TN AmSurg Dade County, Inc. 70%
</TABLE>
<PAGE> 4
SUBSIDIARY LIST
AS OF NOVEMBER 20, 1996
(PAGE 4 OF 4)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
- ------------------------------------- -------------------- --------------------------- ------------
<S> <C> <C> <C>
AmSurg Panama City, Inc. TN AmSurg Corp. 100%
The Panama City Eye ASC, L.P. TN AmSurg Panama City, Inc. 51%
AmSurg MEA, Inc. TN AmSurg Corp. 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<CASH> 13,989,848
<SECURITIES> 0
<RECEIVABLES> 7,922,084
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,062,728
<PP&E> 16,979,495
<DEPRECIATION> 4,711,066
<TOTAL-ASSETS> 78,204,610
<CURRENT-LIABILITIES> 8,995,755
<BONDS> 0
0
0
<COMMON> 7,986
<OTHER-SE> 41,603,103
<TOTAL-LIABILITY-AND-EQUITY> 78,204,610
<SALES> 0
<TOTAL-REVENUES> 60,609,341
<CGS> 0
<TOTAL-COSTS> 45,967,734
<OTHER-EXPENSES> 3,926,858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 827,821
<INCOME-PRETAX> 9,886,928
<INCOME-TAX> 1,358,000
<INCOME-CONTINUING> 3,259,621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,259,621
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
