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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, 1997
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 19, 1997, 8,061,624 shares of Common Stock were outstanding. The
aggregate market value of the shares held by non-affiliates of the Registrant
was approximately $71,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held January 21, 1998 are incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
The continuing operations of American Healthcorp, Inc. (the "Company")
consist primarily of Diabetes Treatment Centers of America, Inc. ("DTCA"), a
wholly-owned subsidiary that is a national provider of diabetes patient services
to hospitals and managed care payors designed to enhance the quality and lower
the cost of treatment of individuals with diabetes. The Company's discontinued
operations represent AmSurg Corp. ("AmSurg"), a majority-owned (58% at August
31, 1997) subsidiary that develops, acquires and operates physician
practice-based ambulatory surgery centers and specialty physician networks in
partnerships with surgical and other group practices.
In March of 1997 the Company's Board of Directors approved a plan to
distribute, on a substantially (approximately 98.5%) tax-free basis, all of the
shares of AmSurg common stock owned by the Company to the holders of Company
common stock (the "Distribution"). The Distribution is described in more detail
in an Information Statement provided prior to the Distribution to all holders of
the Company's common stock. No vote was required by holders of the Company's
common stock to approve the Distribution. While the Distribution is subject to
several conditions, including the receipt of either a favorable ruling from the
IRS or legal opinions from the Company's tax counsel on the substantially
tax-free nature of the Distribution, the Company anticipates that the
Distribution will be completed during December 1997.
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 "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 replace
discontinued contracts in a market; DTCA's ability to effect estimated cost
savings under certain managed care agreements or to effect such savings within
the time frames contemplated by DTCA; unusual and unforeseen patterns of
healthcare utilization by individuals with diabetes in the HMOs with which DTCA
has executed an agreement; the ability of the HMOs to maintain the number of
covered lives enrolled in the plans during the terms of the agreements between
the HMOs and DTCA; and DTCA's ability to attract and/or retain and effectively
manage the employees required to implement the agreements. The important factors
for the AmSurg Distribution include the ability to receive and the timing of the
receipt of a favorable ruling from the IRS or favorable opinions from the
Company's tax counsel regarding the substantially tax-free nature of the
Distribution and the satisfaction of the other conditions to the Distribution.
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SOURCES OF REVENUES - DIABETES SERVICES
The following table sets forth the sources of the Company's revenues by
customer type as a percentage of total revenues from continuing operations for
the three years ended August 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Year Ended August 31, 1997 1996 1995
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<S> <C> <C> <C>
DTCA Hospital Contracts 91% 95% 93%
DTCA Managed Care Payor Contracts 7 2 -
Mail Order Diabetes Supply Business - - 5
Other 2 3 2
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100% 100% 100%
---------------------------------------
</TABLE>
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.
While DTCA's revenues have historically been generated primarily by its
operating contracts with hospitals, DTCA has also developed and has continued to
refine additional products which are designed to assist managed care payors in
reducing the total costs and improving the quality of care for individuals
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with diabetes enrolled in their plans, and believes that a substantial portion
of its future revenue growth will result from healthcare management contracts
with managed care payors. These disease management products enable DTCA to
manage the total healthcare needs and/or the specific diabetes care needs of
populations of individuals with diabetes. DTCA believes that its intensive
diabetes education, patient support and treatment regimens, delivered and/or
supervised 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 Co., U.S. Pharmaceuticals ("Bristol-Myers") located in central and
western New Jersey and eastern Pennsylvania. During June 1996, DTCA executed
contracts to provide these services for enrollees of Principal Health Care, Inc.
("Principal") at six of its 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. During fiscal 1997 an additional HMO contract location
was added under both the Principal and the Health Options arrangement. These
contracts, which the Company believes are the first comprehensive diabetes
disease management contracts signed in the industry, include almost 500,000
covered lives, of which approximately 10,000 to 11,000 have diabetes. The
Bristol-Myers contract became operational in March 1996 and all of the Principal
and Health Options locations became operational during fiscal 1997. During
September 1997, DTCA also signed an agreement with CIGNA HealthCare ("CIGNA") to
provide diabetes disease management services for members in six CIGNA HMO
markets that encompass approximately 1.3 million covered lives. DTCA anticipates
that it will begin to provide services under the CIGNA agreement during March
1998. See "DTCA's Contractual Relationship with Clients."
At each of the Bristol-Myers, Principal and Health Options locations,
DTCA provides an office with a staff of six to eight individuals consisting of
case managers, nurse educators, dietitians, 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. Under the CIGNA
agreement, DTCA will provide a tailored version of its NetLink(TM) telephone-
based diabetes management program. These services, which will be provided from a
telephone center located in Nashville, Tennessee, will be designed primarily to
improve blood glucose management for diabetes patients and to monitor and
promote compliance with certain standards of care for diabetes patients. The
services under the CIGNA agreement do not encompass comprehensive management of
all healthcare services such as that provided under the Bristol Myers, Principal
and Health Options agreements.
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 meets
DTCA's information management needs for its diabetes population management
services and has installed and is utilizing the system at each of its managed
care contract locations.
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During fiscal 1997 and 1996 DTCA's managed care operations reduced the
Company's pretax profitability by approximately $6.1 million and $2.8 million,
respectively. This negative impact resulted primarily from initial operating
losses for the new managed care payor contracts signed by DTCA at the end of
fiscal 1996 and during fiscal 1997 together with the overhead costs related to
these contracts and from the costs associated with marketing efforts to enter
into additional disease management contracts. While the magnitude of the
negative impact of the managed care operations is expected to be significantly
reduced during fiscal 1998, the Company anticipates continuing to experience a
negative impact on its operations during fiscal 1998 as a result of its managed
care payor disease management efforts.
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 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 for this business were $1,898,000 for fiscal 1995.
The business produced no material profit or loss to the Company from its
operation or from its sale.
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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, 1997 are located and the aggregate number of licensed beds in these
hospitals:
<TABLE>
<CAPTION>
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Number of Client Hospitals'
State Client Hospitals Licensed Beds (1)
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<S> <C> <C>
Florida 9 2,374
Utah 7 773
Georgia 6 1,835
Virginia 6 1,311
Oregon 4 936
Tennessee 4 1,928
Texas 4 1,280
Alabama 3 840
California 3 743
New Jersey 3 990
New York 3 704
North Carolina 3 556
South Carolina 3 868
Pennsylvania 2 449
Wisconsin 2 421
Colorado 1 250
Kentucky 1 144
Indiana 1 342
Iowa 1 549
Louisiana 1 172
Massachusetts 1 344
Minnesota 1 386
Missouri 1 238
Nebraska 1 296
Nevada 1 225
Oklahoma 1 445
Ohio 1 584
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TOTAL 74 19,983
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</TABLE>
(1) Numbers based upon the American Hospital Association's 1997/98 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 58 contracts in effect in
27 states at August 31, 1997. 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, 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Contracts in effect at beginning
of period 61 69 69 70 65
Contracts signed 6 5 9 11 9
Contracts discontinued (9) (13) (9) (12) (4)
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Contracts in effect at end of
period 58 61 69 69 70
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Hospital sites where services
are delivered 74 72 74 71 70
==========================================================
</TABLE>
During fiscal 1996 and 1997, DTCA also signed contracts with three healthcare
payors for its new diabetes disease management products to be provided in ten
managed care payor markets.
The Company's growth strategy is primarily to further develop and
expand its hospital-based diabetes treatment center business and to develop new
relationships directly with managed care payors responsible for the healthcare
costs of individuals with diabetes. The Company believes that the healthcare
payor market is recognizing the potential cost-savings and improved outcome
benefits of chronic disease management programs, including diabetes population
management services. The Company also believes that its position as the leading
provider of diabetes treatment services to hospitals and physicians, as well as
the positive clinical and financial results it believes it has produced at its
initial managed care contracts, will be an advantage in comparison with other
potential competitors and with payors who are considering developing and
providing such services themselves but who have no actual large-scale diabetes
population disease management 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
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, for most of the contracts, only been in their initial months
of ramp up operations during fiscal 1997. However, based on the limited
information obtained from these contracts, the Company does believe that the
initial clinical and financial savings data are supportive of the efficacy of
its disease management approach.
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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. These efforts increase the visibility of the client hospital
within its community and additional diabetes patients who 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 Bristol-Myers,
Principal and Health Options, 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
treatment standards and protocols that have been developed by DTCA and have been
approved by the medical leadership at each managed care plan. The actual
treatment of the individuals is provided by physicians and hospitals who are
part of the payor's network of providers. Services under the CIGNA contract will
be provided telephonically by a team of diabetes treatment and support staff
from a telephone center located in Nashville, Tennessee, and are designed
primarily to improve blood glucose management for diabetes patients and to
monitor and promote compliance with certain standards of care for diabetes
patients.
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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 patients 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.
DTCA currently has 10 operating contracts covering services at 17
hospitals that are owned by Columbia/HCA Healthcare Corporation ("Columbia").
The revenues from the Columbia contracts were approximately 25%, 28% and 24% of
the Company's total revenues for fiscal years ended August 31, 1997, 1996 and
1995, respectively. The Company believes that the majority of these ten
contracts with Columbia hospitals will be discontinued over the next two years.
During fiscal 1998, six DTCA contracts with Columbia hospitals will reach the
end of their terms unless renewed. In several markets where DTCA contracts with
Columbia hospitals have been discontinued, the Company has been successful in
signing a contract with a not-for-profit hospital system in the same market. No
assurances can be given, however, that the Company will continue to be
successful in relocating any of its discontinued Columbia contracts or that the
loss of these contracts would not have a significant adverse effect on the
Company's operations.
During September 1997, the Company also announced the execution of a
new one year contract with United Healthcare of Georgia ("United") to make
available DTCA's outpatient diabetes services to the approximately 240,000
United members in the greater Atlanta area and also announced the signing of an
expanded three year contract with Aetna U.S. Healthcare ("Aetna") to make
available DTCA's outpatient diabetes education services to Aetna's members
diagnosed with diabetes in markets where both DTCA and Aetna provide services.
Aetna currently has an enrollment of more than 14 million members. Both the
United and the Aetna contracts are fee-for-service arrangements that will be
provided primarily from DTCA's hospital contract sites and will require the
enrollment of the patient by the patient's primary care physician and will also
require the consent of the patient. Physicians and patients of both United and
Aetna may have other choices of providers for similar services to those provided
by DTCA in their markets. The services encompassed in these contracts are
primarily educational, behavioral and motivational support and, in some cases,
also include patient assessment and outcomes reporting. The United contract will
begin implementation in the first quarter of fiscal 1998. The Aetna contract
will begin to be implemented in the Atlanta market during the first quarter of
fiscal 1998 and current plans provide for the expansion of this contract to
additional markets during fiscal 1998.
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 provided
Bristol-Myers an exclusive, one-year right, which expired 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 less than operating costs. Implementation of these contracts
began on a market-by-market basis during July 1996, with all markets having
begun implementation by April 1, 1997. Because of expected ramp-up periods at
each of the agreement sites and the time lag in calculating healthcare cost
savings, if any, upon which DTCA's revenues are calculated, it is anticipated
that DTCA's profitability will be negatively affected by these agreements during
the first 12 to 18 months of operation at each of these sites. Losses at several
of these sites are expected to continue into fiscal 1998. During the third and
fourth quarter of fiscal 1997, these contracts began to show aggregate
healthcare cost savings and, therefore, DTCA began to report revenues to begin
to offset some of the operating expenses of these contracts.
The contract with CIGNA is for a three year term and provides for the
payment of a monthly fee to DTCA based on the number of their members enrolled
in the program and, because this is not a cost savings sharing arrangement as
provided in the Principal and the Health Options agreements, the Company does
not anticipate any significant start-up losses from this contract. In addition,
the CIGNA contract provides for a fee payment prior to the anticipated start
date of services of March 1, 1998 which is designed to approximate DTCA's
start-up expenses prior to the initiation of the monthly per enrolled member
service fee payment from CIGNA. Of the fees to be received by DTCA for these
services, approximately 20% will be at risk of repayment unless certain
standards of care and cost reduction targets are achieved as measured at each
contract site year-end. It is anticipated that the program will be in operation
in six CIGNA HMO markets by the end of fiscal 1998.
The Company anticipates that additional disease management contracts
that the Company may sign with managed care payors may take one of several forms
including shared savings of overall diabetes enrollee healthcare costs,
capitated payments to DTCA to cover DTCA's services to enrollees but not the
responsibility for enrollee healthcare claims or some combination of these
arrangements. However, the Company believes that the majority of future managed
care disease management contracts that will be signed by DTCA will not entail
the type of intial operating losses as the Company has incurred and is incurring
with respect to the Principal and the Health Options agreements.
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 hospital
contracts generally range from two to five years and are subject to periodic
renegotiation and renewal that may include reduction in fee structures that have
a negative impact on the Company's revenues and profitability. 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.
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During fiscal 1997, 20 hospital contracts were renewed. Several 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 1998, 28 contracts,
including six contracts with Columbia hospitals, will reach the end of their
terms unless renewed.
Also during fiscal 1997, nine hospital contracts were discontinued;
eight of these discontinued contracts were with hospitals owned by Columbia. The
Company believes that its relationships with its hospital customers other than
Columbia have improved significantly during fiscal 1997 as evidenced by only one
hospital contract termination during fiscal 1997 versus 11 hospital contract
terminations during fiscal 1996 with hospitals other than those owned by
Columbia. The Company believes that this improvement has resulted from its
efforts to better identify to its client hospitals the benefits to the hospital,
its medical staff and the diabetes patients of its relationship with DTCA as
well as growing recognition of DTCA's ability to contract with large payors on
both regional and national bases. During fiscal 1997 there were no material
continuing obligations or costs for the Company associated with the termination
of any client hospital contracts.
DTCA'S PHYSICIAN RELATIONSHIPS AT ITS HOSPITAL CENTERS
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 hospital-based 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 physicians in the market area of the hospital center
in its awareness efforts. Members of the center staff are 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 hospital 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, have begun to market diabetes disease
management services to managed care payors or have announced an intention to
offer such services. While the Company believes it has significant advantages
over its competitors because of its early successful entry into the market and
because of its established
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reputation in the provision of diabetes care through its network of hospital
centers, there is no assurance that the Company could compete effectively with
these companies.
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. Recent federal legislation will significantly limit the
rate of increase in Medicare and Medicaid. These funding limitations could
negatively impact hospital revenues and operations. There can also be no
assurance that these changes or future legislative initiatives or government
regulation would 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.
All of these preliminary motions have now been resolved and the lawsuit has
entered the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the
12
<PAGE> 13
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.
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.
EMPLOYEES
As of August 31, 1997, excluding the 54 employees of AmSurg, the
Company had 320 full-time employees and 132 part-time employees distributed by
position as follows: 130 center management and administrative personnel; 129
clinical nurse specialists; 109 other healthcare professionals, including
counselors, dietitians and exercise therapists; and 84 center support and
Company management personnel. 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 nine
of DTCA's managed care payor contract sites, DTCA rents office space of
approximately 2,000 square feet for terms of two to five years.
ITEM 3. LEGAL PROCEEDINGS
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. 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
13
<PAGE> 14
amended complaints and the dismissal of the Company as a defendant. DTCA
continues to be a defendant. All of these preliminary motions have now been
resolved and the lawsuit has entered the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
<PAGE> 15
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company as of August 31, 1997. 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 55 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 47 Executive Vice President since 1991, Vice
President from 1982-1990, President of DTCA
since 1985. Director of AmSurg since 1992.
Henry D. Herr 51 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 51 Vice President since 1981, Executive Vice
President of DTCA since 1989.
David A. Sidlowe 47 Vice President since 1984, Controller since
1982.
</TABLE>
15
<PAGE> 16
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, 1997
First Quarter $11.88 $8.38
Second Quarter 14.13 9.88
Third Quarter 13.88 10.00
Fourth Quarter 11.75 9.88
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
</TABLE>
(b) Holders
At November 19, 1997 there were approximately 2,500 holders of the
Company's Common Stock, including 117 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.
16
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
For the Twelve Months Ended and At August 31,
(In thousands except per share data)
<TABLE>
<CAPTION>
--------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues: $ 30,537 $31,403 $36,583 $41,144 $ 39,682
-------- ------- ------- ------- --------
Expenses:
Salaries and benefits 21,437 19,866 18,878 18,699 16,972
Other operating expenses 8,702 7,254 10,865 12,271 11,771
Depreciation and amortization 1,342 1,273 1,339 1,293 1,340
Interest 6 5 7 6 8
-------- ------- ------- ------- --------
Total expenses 31,487 28,398 31,089 32,269 30,091
-------- ------- ------- ------- --------
Income (loss) before income taxes and discontinued operations (950) 3,005 5,494 8,875 9,591
Income tax expense (benefit) (207) 544 2,252 3,586 3,884
-------- ------- ------- ------- --------
Income (loss) from continuing operations (743) 2,461 3,242 5,289 5,707
Discontinued operations (940) 799 674 38 (170)
-------- ------- ------- ------- --------
Net income (loss) ($1,683) $ 3,260 $ 3,916 $ 5,327 $ 5,537
======== ======= ======= ======= ========
Income (loss) per share from continuing operations ($0.09) $ 0.30 $ 0.40 $ 0.63 $ 0.68
Income (loss) per share from discontinued operations (0.12) 0.10 0.08 0.00 (0.02)
-------- ------- ------- ------- --------
Net income (loss) per share ($0.21) $ 0.40 $ 0.48 $ 0.63 $ 0.66
======== ======= ======= ======= ========
Weighted average common shares and equivalents 8,022 8,161 8,211 8,461 8,404
BALANCE SHEET DATA:
Cash and cash equivalents $ 12,227 $12,562 $11,076 $ 9,909 $ 9,016
Working capital 11,564 13,324 11,089 11,972 12,772
Net assets of discontinued operations 16,407 16,361 14,695 11,475 5,354
Total assets 49,373 48,943 45,873 43,354 36,848
Long-term debt and other long-term liabilities 2,186 2,657 2,156 2,138 1,892
Stockholders' equity 40,441 41,611 38,299 36,460 30,850
</TABLE>
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The continuing operations of American Healthcorp, Inc. (the "Company")
consist primarily of Diabetes Treatment Centers of America, Inc. ("DTCA"), a
wholly-owned subsidiary that is a national provider of diabetes patient services
to hospitals and managed care payors designed to enhance the quality and lower
the cost of treatment of individuals with diabetes. The Company's discontinued
operations represent AmSurg Corp. ("AmSurg"), a majority-owned (58% at August
31, 1997) subsidiary that develops, acquires and operates physician
practice-based ambulatory surgery centers and specialty physician networks in
partnerships with surgical and other group practices.
In March of 1997 the Company's Board of Directors approved a plan to
distribute, on a substantially (approximately 98.5%) tax-free basis, all of the
shares of AmSurg common stock owned by the Company to the holders of Company
common stock (the "Distribution"). The Distribution is designed to separate the
two principal operating businesses of the Company so that each may maximize its
value by adopting strategies and pursuing objectives appropriate to its specific
needs. The principal purpose of the Distribution for the AmSurg operating
business is to enable it to have access to debt and equity capital markets as an
independent, publicly traded company in order to finance the development and
acquisition of ambulatory surgery centers and specialty physician networks. The
principal purpose of the Distribution for the Company is to enable it to focus
its capital resources on the development of DTCA's diabetes disease management
services for managed care payors.
The plan of Distribution has been amended based on discussions with the
Internal Revenue Service ("IRS") in its response to the Company's requests for
an IRS ruling that the Distribution could be completed on a substantially
tax-free basis. The Distribution is described in more detail in an Information
Statement provided to all holders of the Company's common stock prior to the
Distribution. No vote was required by holders of the Company's common stock to
approve the Distribution. While the Distribution is subject to several
conditions, including the receipt of either a favorable ruling from the IRS or
legal opinions from the Company's tax counsel on the substantially tax-free
nature of the Distribution, the Company anticipates that the Distribution will
be completed during December 1997.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements which are based upon current
expectations and involve a number of risks and uncertainties. In order for the
Company to utilize the "safe harbor" provisions of the Private Litigation 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 replace discontinued
contracts in a market; DTCA's ability to effect estimated cost savings under
certain managed care agreements or to effect such savings within the time frames
contemplated by DTCA; unusual and unforeseen patterns of healthcare utilization
by individuals with diabetes in the HMOs with which DTCA has executed an
agreement; the ability of the HMOs to maintain the number of covered lives
enrolled in the plans during the terms of the agreements between the HMOs and
DTCA; and DTCA's ability to attract and/or retain and effectively manage the
employees required to implement the agreements. The important factors for the
AmSurg Distribution include the ability to receive and the timing of the
18
<PAGE> 19
receipt of a favorable ruling from the IRS or favorable opinions from the
Company's tax counsel regarding the substantially tax-free nature of the
Distribution and the satisfaction of the other conditions to the Distribution.
DTCA
The principal sources of revenues for DTCA were its operating contracts
for hospital-based diabetes treatment centers. Fee structures under the hospital
contracts consist of either incentive-based fees, fixed management fees or a
combination thereof. Incentive arrangements generally provide for fee payments
to DTCA based on changes in the client hospital's market share of diabetes
inpatients and the costs of providing care to these patients. The form of these
contracts includes various structures ranging from arrangements where all costs
of the DTCA program for center professional personnel, medical director fees and
community relations are the responsibility of DTCA to structures where all DTCA
program costs are the responsibility of the client hospital.
The following table presents the number of DTCA contracts in effect and
the number of hospital sites where DTCA provided services or was in the process
of initiating operations as of the end of fiscal years 1997, 1996 and 1995. 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,
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
Hospital Hospital Hospital
Contracts Sites Contracts Sites Contracts Sites
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hospital contracts/sites 55 59 59 61 68 70
Network contracts/sites 3 15 2 11 1 4
----------------------------------------------------------
Total contracts/sites 58 74 61 72 69 74
==========================================================
</TABLE>
19
<PAGE> 20
The components of changes to the total number of DTCA hospital contracts for
fiscal years 1997, 1996 and 1995 are presented below.
<TABLE>
<CAPTION>
Fiscal year ended August 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------
Hospital Hospital Hospital
Contracts Sites Contracts Sites Contracts Sites
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 61 72 69 74 69 71
New contracts/sites
signed 6 11 6 11 9 9
Contracts/sites
discontinued (9) (9) (13) (13) (9) (9)
Conversion of stand
alone hospital contract
to hospital network
contract -- -- (1) -- -- 3
----------------------------------------------------------------------
Total contracts/sites 58 74 61 72 69 74
======================================================================
</TABLE>
During fiscal 1997 and 1996, 20 and 14 contracts, respectively, were
renewed for DTCA hospital-based diabetes treatment centers. During fiscal 1998,
there will be 28 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.
During fiscal 1997 nine DTCA hospital contracts were discontinued and
during fiscal 1996 13 DTCA hospital contracts were discontinued. During fiscal
1997 and 1996, eight DTCA contracts and two DTCA contracts, respectively, that
were discontinued were with hospitals owned by Columbia/HCA Healthcare
Corporation ("Columbia"). While DTCA did renew three contracts with Columbia
hospitals in both fiscal 1997 and in fiscal 1996, it believes that the majority
of its ten contracts with Columbia, as of August 31, 1997, will be discontinued
over the next two years. During fiscal 1998, six DTCA contracts with Columbia
hospitals will reach the end of their terms unless renewed. In several markets
where DTCA contracts with Columbia hospitals have been discontinued, the Company
has been successful in signing a contract with a not-for-profit hospital system
in the same market. No assurances can be given that the Company will continue to
be successful in relocating any of its discontinued Columbia contracts.
The Company believes that its relationships with its hospitals
customers other than Columbia have improved significantly during fiscal 1997 as
evidenced by only one hospital contract termination during fiscal 1997 versus 11
hospital contract terminations during fiscal 1996 with entities other than
Columbia.
20
<PAGE> 21
The Company believes that this improvement has resulted from its efforts to
better identify to its client hospitals the benefits to the hospital, the
medical staff and the diabetes patients of its relationship with DTCA as well as
growing recognition of DTCA's ability to contract with large payors on both
regional and national bases.
While DTCA's revenues have historically been generated primarily by its
operating contracts with hospitals, the Company believes that the substantial
portion of its future revenue growth will result from healthcare management
contracts with managed care payors for their enrollees with diabetes. During
fiscal 1997 and 1996 DTCA's managed care payor operations reduced the Company's
pretax profitability by approximately $6.1 million and $2.8 million,
respectively. This negative impact resulted primarily from initial operating
losses for the new managed care payor contracts signed by DTCA at the end of
fiscal 1996 and during fiscal 1997 together with the overhead costs related to
these contracts and from the costs associated with marketing efforts to enter
into additional disease management contracts. While the magnitude of the
negative impact of the managed care operations is expected to be significantly
reduced during fiscal 1998, the Company anticipates continuing to experience a
negative impact on its operations during fiscal 1998 as a result of its managed
care disease management efforts.
As a result of its managed care efforts, during January 1996, DTCA
entered into an agreement with Bristol-Myers Squibb Co., U.S. Pharmaceuticals
("Bristol Myers") whereby DTCA provides 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 two year
term of this agreement, Bristol Myers continues to be at risk for all healthcare
costs for this population, reimburses DTCA for DTCA's costs associated with
implementing its comprehensive diabetes disease management program for this
group of individuals and has paid DTCA $1,000,000. Implementation of this
agreement began during the Company's third quarter of fiscal 1996. In addition,
the agreement provided an exclusive one year right, which expired December 31,
1996, 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 at-risk enrollees with diabetes in selected markets. The Principal
agreements originally encompassed six market sites and was amended during the
first quarter of fiscal 1997 to add an additional HMO contract location. The
original Health Options agreement was for one market site but an additional HMO
contract location was added during the second quarter of fiscal 1997. The
Principal agreements now cover seven of the largest HMO subsidiaries of
Principal totaling approximately 360,000 at-risk members, including an estimated
7,500 members with diabetes. The Health Options agreements cover approximately
135,000 at-risk members, including an estimated 3,000 members with diabetes.
Both the Principal and the Health Options agreements have an initial term of
five years. DTCA is at risk for the costs of operating its comprehensive
healthcare management system at each of the HMO sites and Principal and Health
Options continue to be at risk for all of their members' healthcare costs. Cost
savings anticipated to be produced by the management system are shared according
to formulae set forth in the agreements.
DTCA anticipates that revenues and profits from the Principal and
Health Options agreements will be more heavily weighted toward the later years
of the agreements' initial terms and that, during the first full year of
operations at each site, revenues will be less than operating costs.
Implementation of these contracts began on a market-by-market basis during July
1996, with all markets having begun
21
<PAGE> 22
implementation by April 1, 1997. Because of expected ramp-up periods at each of
the agreement sites and the timing delay in calculating healthcare cost savings,
if any, upon which DTCA's revenues are calculated, it is anticipated that DTCA's
profitability will be negatively affected by these agreements during the first
12 to 18 months of operation at each of these sites. Losses at several of these
sites are expected to continue into fiscal 1998. During the third and fourth
quarter of fiscal 1997, these contracts began to show aggregate healthcare cost
savings and, therefore, DTCA began to report revenues to begin to offset some of
the operating expenses of these contracts.
During September 1997 DTCA also signed an agreement with CIGNA
HealthCare ("CIGNA") to provide diabetes disease management services for members
at six CIGNA HMO markets that encompass approximately 1.3 million covered lives.
Under the three year agreement, DTCA will provide, through a fee-based
arrangement, a tailored version of its NetLink(TM) telephone-based diabetes
management program. These services, which will be provided from a telephone
center located in Nashville, Tennessee, will be designed primarily to improve
blood glucose management for diabetes patients and to monitor and promote
compliance with certain standards of care for diabetes patients. The services do
not encompass comprehensive management of all healthcare services such as that
provided under the Bristol Myers, Principal and Health Options agreements.
Because CIGNA will pay a monthly fee to DTCA based on the number of their
members enrolled in the program and because this is not a cost savings sharing
arrangement as provided in the Principal and the Health Options agreements, the
Company does not anticipate any significant start-up losses from these
contracts. In addition, the CIGNA contract provides for a fee payment prior to
the effective start date of services of March 1, 1998 which is designed to
approximate DTCA's start-up expenses prior to the initiation of the monthly per
enrolled member service fee payment from CIGNA. Of the fees to be received by
DTCA for these services, slightly less than 20% will be at risk of repayment
unless certain standards of care and cost reduction targets are achieved as
measured as of each contract site year-end. It is anticipated that the program
will be in operation in six CIGNA HMO markets by the end of fiscal 1998.
During September 1997, the Company also announced the execution of a
new one year contract with United Healthcare of Georgia ("United") to make
available DTCA's outpatient diabetes services to the approximately 240,000
United members in the greater Atlanta area and also announced the signing of an
expanded three year contract with Aetna U.S. Healthcare ("Aetna") to make
available DTCA's outpatient diabetes education services to Aetna's members
diagnosed with diabetes in markets where both DTCA and Aetna provide services.
Aetna currently has an enrollment of more than 14 million members. Both the
United and the Aetna contracts are fee-for-service arrangements that will be
provided primarily from DTCA's hospital contract sites and will require the
enrollment of the patient by the patient's primary care physician and will also
require the consent of the patient. Physicians and patients of both United and
Aetna may have other choices of providers for similar services to those provided
by DTCA in their markets. The services encompassed in these contracts are
primarily educational, behavioral and motivational support and, in some cases,
also includes patient assessment and outcomes reporting. The United contract
will begin implementation in the first quarter of fiscal 1998. The Aetna
contract will begin to be implemented in the Atlanta market during the first
quarter of fiscal 1998 and current plans provide for the expansion of this
contract to additional markets during fiscal 1998.
The Company's growth strategy is primarily to develop new relationships
directly with managed care payors and others who are ultimately responsible for
the healthcare costs of individuals with diabetes and to further develop its
hospital-based diabetes treatment business. Pursuant to its strategy with
managed care payors, DTCA is expected to provide management services designed to
improve the quality of care
22
<PAGE> 23
for individuals with diabetes while lowering the overall cost of care. DTCA fees
under these arrangements with payors may take the form of shared savings of
overall diabetes enrollee healthcare costs, capitated payments to DTCA to cover
DTCA's services to enrollees but not the responsibility for enrollee healthcare
claims or some combination of these arrangements. However, the Company believes
that the majority of future managed care disease management contracts that will
be signed by DTCA will not entail the type of intial operating losses as the
Company has incurred and is incurring with respect to the Principal and the
Health Options agreements.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of DTCA under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal government had declined
to take over and pursue a civil "whistle blower" action brought under seal in
June 1994 on behalf of the government by a former employee dismissed by the
Company in February 1994. The Company believes that this lawsuit triggered the
OIG investigation. The civil suit was filed in June 1994 against the Company,
DTCA, and certain named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine whether to take over
the lawsuit. Following its review, the government made the determination not to
take over the litigation, and the complaint was unsealed on February 10, 1995.
Various preliminary motions have been filed regarding jurisdictional and
pleading matters, resulting in the filing of a number of amended complaints and
the dismissal of the Company as a defendant. DTCA continues to be a defendant.
All of these preliminary motions have now been resolved and the lawsuit has
entered the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
AMSURG
Through investments made since fiscal 1993, the Company owns
approximately 58% of the outstanding common stock of AmSurg, a company that
develops, acquires and operates physician practice-based ambulatory surgery
centers with physician practice groups through partnership or limited liability
companies. As of August 31, 1997, AmSurg owned a majority interest (51% or
greater) in 35 surgery centers, owned a majority interest (60% or greater) in
two physician practices and had established and was the majority owner (51%) of
three start-up specialty physician networks.
Because the Company owns approximately 58% of the common stock of
AmSurg, the calculations of the Company's results of discontinued operations
includes a minority interest provision to reflect the AmSurg minority
stockholders' share of the net income or loss of AmSurg.
Only limited information has been provided for AmSurg operations
because AmSurg is being reported by the Company as a discontinued operation as a
result of the decision by the Company's Board of Directors to distribute all of
the common stock of AmSurg held by the Company to the shareholders of
23
<PAGE> 24
the Company. AmSurg itself is a separate reporting company under the Securities
Exchange Act of 1934 and has been subject to its own filing and reporting
requirements since May 1997.
RESULTS OF OPERATIONS
DTCA represents the continuing operations of the Company and includes
the results of operations of two Arthritis and Osteoporosis Care centers and
corporate costs attributable to DTCA. Included in AmSurg's results from
discontinued operations are charges for general management, administrative and
accounting services provided by the Company. Charges to AmSurg for such services
approximate the Company's cost.
DTCA
The following table presents the operations of DTCA for fiscal 1997,
1996 and 1995 and associated percentage changes for fiscal 1997 from 1996 and
the percentage changes for fiscal 1996 from 1995.
<TABLE>
<CAPTION>
Fiscal Year Ended August 31, 1997 % Change 1996 % Change 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 30,536,776 (2.8)% $31,403,644 (14.2)% $36,583,573
----------------------------------------------------------------
Expenses:
Salaries and benefits 21,437,253 7.9 19,866,459 5.2 18,877,972
Other operating expenses 8,701,748 19.9 7,254,703 (33.2) 10,865,505
Depreciation and amortization 1,341,825 5.4 1,272,756 (5.0) 1,339,357
Interest 5,512 5.0 5,248 (25.9) 7,081
----------------------------------------------------------------
Total expenses 31,486,338 10.9 28,399,166 (8.7) 31,089,915
----------------------------------------------------------------
Income (loss) before income taxes (949,562) (131.6) 3,004,478 (45.3) 5,493,658
Income taxes (207,000) (138.1) 544,000 (75.8) 2,252,000
================================================================
Net income (loss) $ (742,562) (130.2)% $ 2,460,478 (24.1)% $ 3,241,658
================================================================
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
The DTCA revenues decrease for 1997 from 1996 resulted primarily from
the impact of DTCA hospital contract rate renegotiations and restructurings and
hospital contract terminations, offset somewhat by revenues from new DTCA
hospital contracts and by revenues generated during 1997 under the managed care
payor contracts with Bristol Myers, Principal and Health Options. Hospital
contract rate renegotiations and restructurings were the primary reasons for a
3% decrease in same contract revenues for contracts in operation as of September
1, 1995. The Company believes that the impact of hospital contract
restructurings and contract terminations will negatively impact same-contract
revenue comparisons and contract renewals during fiscal 1998. In addition, costs
associated with DTCA's managed care payor operations are expected to exceed
anticipated revenues during fiscal 1998, but such losses from its managed care
payor operations are expected to be significantly less than those incurred in
1997 primarily because of increased managed care revenues anticipated for fiscal
1998.
24
<PAGE> 25
The increase in overall DTCA salaries and benefits for 1997 over 1996
resulted primarily from higher staffing costs associated with DTCA's managed
care contracts with Bristol Myers, Principal and Health Options and from normal
salary and benefit increases. Salaries and benefits as a percentage of revenues
for 1997 were 70% as compared with 63% for 1996. This increase resulted
primarily from the impact of additional salary costs associated with the
Company's managed care contract operations which produced limited revenues
during 1997. The Company anticipates that salaries and benefits will increase
during 1998 compared with 1997 primarily as a result of the full year of
operations at several of the Principal and Health Options managed care sites in
1998 as compared with a partial year of operations at these sites during 1997
and as a result of the implementation of the CIGNA contract during 1998.
The increase in DTCA's other operating expenses for 1997 over 1996
resulted primarily from increased costs associated with the implementation of
the Bristol Myers, Principal and Health Options contracts causing other
operating expenses as a percentage of revenues for 1997 to increase to 28%
compared with 23% for 1996. The Company anticipates that other operating
expenses will increase during fiscal 1998 compared with 1997 primarily as a
result of the full year of operations at several of the Principal and Health
Options managed care sites as compared with a partial year of operations at
these sites during 1997 and as a result of the implementation of the CIGNA
contract during 1998.
The increase in DTCA's depreciation and amortization expense for 1997
from 1996 resulted from additional amortization expense associated with the
costs of hospital contract development at contracts recently placed in operation
plus the depreciation expense associated with furniture, equipment and
computer-related capital expenditures at the managed care payor sites partially
offset by reduced amortization at DTCA hospital contracts where the costs of
contract development have been fully amortized.
The decrease in income tax expense (resulting in an income tax benefit
for 1997 compared with income tax expense for 1996) for 1997 from 1996 resulted
from a non-recurring favorable $760,000 adjustment to income tax expense in 1996
from the favorable resolution of prior year income tax issues with the IRS as
well as from decreased operating results for 1997. The differences between the
federal statutory income tax rate of 34% and the Company's effective income tax
rates during the periods are due primarily to the favorable nonrecurring
adjustment in 1996, 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.
The Distribution will result in certain nonrecurring expenses being
recognized by the Company as part of its discontinued operations. For the
Company, the non-recurring expenses of the Distribution are expected to be
approximately $1,000,000 of which $615,000 has been incurred and expensed during
the year ended August 31, 1997. In addition, as a result of the Distribution and
pursuant to the terms of the American Healthcorp, Inc. stock option plans, the
exercise price per share of outstanding options to purchase shares of the
Company's common stock will be reduced and the number of shares underlying such
options will be in certain cases increased to maintain the value of these stock
options following the Distribution at pre-Distribution levels. Holders of these
stock options on the Distribution record date will not be entitled to receive
shares of AmSurg common stock with respect to such options. The amount by which
the options will be adjusted will depend on the comparison of the market price
per share of American Healthcorp common stock before and after the Distribution.
In addition, the vesting of options will be accelerated for options that have
not yet vested. As a result of this adjustment of the American Healthcorp, Inc.
stock options, generally accepted accounting principles requires that the
Company record
25
<PAGE> 26
non-cash compensation expense and an equal increase in stockholders' equity
(additional paid-in capital) in an amount equal to the difference between the
aggregate exercise price of outstanding options to purchase shares of the
Company's common stock having an exercise price below the market price of the
Company's common stock and the aggregate market price for such shares
immediately prior to the Distribution. The compensation expense and associated
increase in additional paid-in capital will be recognized because generally
accepted accounting principles require such recognition when an adjustment
results in a change in the ratio of the exercise price to the market price per
share even though no change in the aggregate value of the options will take
place. Although it would be possible to adjust the options without changing this
ratio, it could only be accomplished by issuing a large number of new options
which would result in substantial dilution to the Company's stockholders. While
the adjustment management anticipates making will result in additional new
option issuances, such new issuances will be significantly less than those which
would be required to avoid recognition of compensation expense as of the
Distribution Date. The option adjustment, on a one-time basis, will reduce
earnings as a result of the recognition of compensation expense less the income
tax benefit associated with the compensation expense deduction and will increase
additional paid-in capital by the amount of the compensation expense. If the
Distribution were to have occurred on August 31, 1997, on which date the closing
price of American Healthcorp, Inc. Common Stock was $11.13, the estimated impact
on earnings and stockholders' equity would have been as follows:
<TABLE>
<CAPTION>
Net Income
Increase
(Decrease)
-----------
<S> <C>
Compensation expense $(3,750,000)
Estimated income tax benefit 1,450,000
-----------
Net decrease in net income $(2,300,000)
===========
Stockholders'
Equity
Increase
(Decrease)
-----------
Increase in paid-in capital from stock options $ 3,750,000
Net decrease in net income (2,300,000)
-----------
Net increase in stockholders' equity $ 1,450,000
===========
</TABLE>
In addition, the option adjustment described above will also have the
effect of decreasing future earnings per share primarily because of the impact
of the additional options on the calculation of common stock equivalents used in
the calculation of earnings per share. Because the amount of these adjustments
will depend upon the market price of American Healthcorp, Inc. common stock
immediately prior to and after the Distribution, it is not possible to predict
the future impact on weighted average common shares and equivalents.
26
<PAGE> 27
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.
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 1996 and its contracts with Principal and
Health Options signed during the fourth quarter of 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. 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.
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.
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,
27
<PAGE> 28
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.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities from continuing operations for fiscal 1997
generated $1.6 million in cash flow. Cash flow from operating activities
includes contract payments made by Principal and by Health Options to DTCA that
approximate DTCA's operating costs at the managed care sites covered by these
contracts. Approximately $2.0 million of the contract fee payments made by
Principal and Health Options during 1997 were not earned as revenues by DTCA as
of August 31, 1997 and such unearned fee payments must be repaid to Principal
and to Health Options to the extent these advance payments are not earned as
revenues in the future under the terms of these contracts. Investing activities
during this period used $2.3 million which consisted primarily of $1.3 million
used for the acquisition of property and equipment purchases for DTCA, and
$976,103 invested in AmSurg during the year. Financing activities associated
with continuing operations for fiscal 1997 provided $424,702 in cash flow in
proceeds from the exercise of options to purchase the Company's common stock.
The Company believes that cash flow from DTCA operating activities and
the Company's available cash balances of $12.2 million at August 31, 1997 will
continue to enable the Company to fund DTCA's current working capital needs,
including its diabetes disease management efforts and to pay the Company's costs
associated with the Distribution. During the year ended August 31, 1997, the
Company terminated its $10 million bank revolving credit agreement as it had no
outstanding borrowings or plans to borrow under this agreement.
The Company is currently in the process of evaluating its computer
software and databases to ensure that any modifications required to be year 2000
compliant are made in a timely manner. Management does not expect the financial
impact of such modifications to be material to the Company's financial position
or results of operations in any given year.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1b) $ 12,226,821 $ 12,561,703
Accounts receivable, net 3,469,839 3,521,379
Other current assets (Note 1c) 1,307,075 1,479,935
Deferred tax assets (Notes 1g and 2) 1,306,000 436,000
------------ ------------
Total current assets 18,309,735 17,999,017
------------ ------------
Net assets of discontinued operations (Note 10) 16,407,271 16,360,898
------------ ------------
Property and equipment (Note 1d):
Leasehold improvements 77,434 100,712
Equipment 3,581,093 2,289,193
------------ ------------
3,658,527 2,389,905
Less accumulated depreciation (1,851,087) (1,304,465)
------------ ------------
Net property and equipment 1,807,440 1,085,440
------------ ------------
Long-term deferred tax assets (Notes 1g and 2) 691,000 740,000
------------ ------------
Other assets, net (Note 1e) 309,998 527,950
------------ ------------
Excess of cost over net assets of purchased
companies, net (Note 1f) 11,847,358 12,229,578
------------ ------------
$ 49,372,802 $ 48,942,883
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE> 30
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 785,674 $ 732,718
Accrued salaries and benefits 1,457,139 1,791,691
Accrued liabilities 1,240,660 1,140,897
Unearned contract fees (Note 1h) 2,251,176 416,667
Income taxes payable (Notes 1g and 2) 885,950 456,241
Current portion of other long-term liabilities (Note 4) 125,000 136,823
----------- -----------
Total current liabilities 6,745,599 4,675,037
----------- -----------
Other long-term liabilities (Note 4) 2,186,481 2,656,757
----------- -----------
Commitments and contingencies (Notes 5 and 9)
Stockholders' equity (Notes 6 and 7)
Preferred stock
$.001 par value, 5,000,000 shares authorized,
none outstanding -- --
Common stock
$.001 par value, 15,000,000 shares authorized,
8,051,559 and 7,985,884 shares outstanding 8,052 7,986
Additional paid-in capital 18,142,278 17,629,678
Retained earnings 22,290,392 23,973,425
----------- -----------
Total stockholders' equity 40,440,722 41,611,089
----------- -----------
$49,372,802 $48,942,883
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
30
<PAGE> 31
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Revenues (Note 1h) $ 30,536,776 $31,403,644 $36,583,573
------------ ----------- -----------
Expenses:
Salaries and benefits 21,437,253 19,866,459 18,877,972
Other operating expenses 8,701,748 7,254,703 10,865,505
Depreciation and amortization (Note 1) 1,341,825 1,272,756 1,339,357
Interest 5,512 5,248 7,081
------------ ----------- -----------
Total expenses 31,486,338 28,399,166 31,089,915
------------ ----------- -----------
Income (loss) before income taxes and discontinued operations (949,562) 3,004,478 5,493,658
Income tax expense (benefit) (Notes 1g and 2) (207,000) 544,000 2,252,000
------------ ----------- -----------
Income (loss) from continuing operations (742,562) 2,460,478 3,241,658
Income (loss) from discontinued operations, net of
income taxes (Note 10) (940,471) 799,143 674,665
------------ ----------- -----------
Net income (loss) $ (1,683,033) $ 3,259,621 $ 3,916,323
============ =========== ===========
Income (loss) per share from continuing operations $ (0.09) $ 0.30 $ 0.40
Income (loss) per share from discontinued operations (0.12) 0.10 0.08
------------ ----------- -----------
Net income (loss) per share (Note 1i) $ (0.21) $ 0.40 $ 0.48
============ =========== ===========
Weighted average common shares and equivalents
(Note 1i) 8,022,257 8,160,764 8,211,097
</TABLE>
See accompanying notes to the consolidated financial statements.
31
<PAGE> 32
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, 1994 $ - $ 8,281 $ 19,653,849 $ 16,797,481 $ 36,459,611
Exercise of stock options (Note 7) - 35 138,075 - 138,110
Stock repurchase (Note 6) - (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 7) - 22 179,453 - 179,475
Stock repurchase (Note 6) - (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
Exercise of stock options (Note 7) - 66 512,600 - 512,666
Net loss - - - (1,683,033) (1,683,033)
----------- ----------- --------------- -------------- ---------------
Balance, August 31, 1997 $ - $ 8,052 $ 18,142,278 $ 22,290,392 $ 40,440,722
=========== =========== =============== ============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
32
<PAGE> 33
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,683,033) $ 3,259,621 $ 3,916,323
Income (loss) from discontinued operations (Note 10) (940,471) 799,143 674,665
------------ ------------ ------------
Net income (loss) from continuing operations (742,562) 2,460,478 3,241,658
Income tax expense (benefit) (Notes 1g and 2) (207,000) 544,000 2,252,000
------------ ------------ ------------
Income (loss) before income taxes (949,562) 3,004,478 5,493,658
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization (Note 1) 1,341,825 1,272,756 1,339,357
Decrease in working capital items 1,877,076 187,498 2,106,410
Other noncash transactions 150,982 (96,713) 666,503
------------ ------------ ------------
2,420,321 4,368,019 9,605,928
Income taxes (net paid) 3,673 (1,419,382) (2,432,713)
Additions to other long-term liabilities -- 583,333 --
Increase in other assets (143,901) (237,203) (734,174)
Payments on other long-term liabilities (Note 4) (715,139) (394,610) (228,245)
------------ ------------ ------------
Net cash flows provided by operating activities 1,564,954 2,900,157 6,210,796
------------ ------------ ------------
Cash flows from investing activities:
Investment in discontinued operations (Note 10) (976,103) (831,949) (2,533,495)
Acquisition of property and equipment (1,304,235) (651,676) (434,117)
Decrease (increase) in long-term receivables and deposits (44,200) 36,200 54,453
------------ ------------ ------------
Net cash flows used in investing activities (2,324,538) (1,447,425) (2,913,159)
------------ ------------ ------------
Cash flows from financing activities:
Stock repurchase (Note 6) -- (127,503) (2,214,548)
Exercise of stock options (Note 7) 424,702 160,429 84,166
------------ ------------ ------------
Net cash flows provided by (used in) financing activities 424,702 32,926 (2,130,382)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (334,882) 1,485,658 1,167,255
Cash and cash equivalents, beginning of period 12,561,703 11,076,045 9,908,790
------------ ------------ ------------
Cash and cash equivalents, end of period $ 12,226,821 $ 12,561,703 $ 11,076,045
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
33
<PAGE> 34
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended August 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Decrease (increase) in other working capital items
excluding income taxes:
Accounts receivable, net $ 51,540 $ 80,979 $ 1,145,884
Other current assets 172,860 118,243 230,333
Accounts payable 52,956 (33,190) (224,171)
Accrued expenses (234,789) (395,201) 954,364
Unearned contract fees 1,834,509 416,667 --
------------ ------------ ------------
$ 1,877,076 $ 187,498 $ 2,106,410
============ ============ ============
SUPPLEMENTAL NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
1. Other noncash transactions consist of the following:
Deferred compensation agreements $ 397,956 $ 551,775 $ 571,013
Deferred income (125,000) (458,333) --
Liability insurance reserves 8,800 (50,000) (86,192)
Miscellaneous other (130,774) (140,155) 181,682
------------ ------------ ------------
$ 150,982 $ (96,713) $ 666,503
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The continuing operations of American Healthcorp, Inc. (the "Company")
consist primarily of Diabetes Treatment Centers of America, Inc. ("DTCA"), a
wholly-owned subsidiary that is a national provider of diabetes patient services
to hospitals and managed care payors. The Company's discontinued operations
represent AmSurg Corp. ("AmSurg"), a majority-owned (58% at August 31, 1997)
subsidiary that develops, acquires and operates physician practice-based
ambulatory surgery centers and specialty physician networks in partnerships with
surgical and other group practices. The net assets and operations of AmSurg are
shown as discontinued operations due to the proposed distribution of AmSurg
common stock held by the Company to the Company's shareholders. (See Note 10).
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. AmSurg is reflected as a discontinued operation.
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.
c. Other Current Assets - Other current assets at August 31, 1997 and 1996
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 7 years for leasehold improvements and 3 to 10 years for equipment.
e. Other Assets - Other assets principally include costs incurred in
obtaining DTCA hospital contracts which are being amortized over the lives of
the related contracts (generally 2 to 5 years), and the opening activities of
DTCA hospital contract centers which are being amortized over 12 months. Total
accumulated amortization of other assets at August 31, 1997 and 1996 was
$654,145 and $978,045, respectively.
f. Excess of Cost Over Net Assets of Purchased Companies - The excess
costs at August 31, 1997 and 1996 arose solely 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. Accumulated amortization at August 31, 1997 and 1996
was $3,439,973 and $3,057,753, respectively. The Company assesses the impairment
of the value of excess of cost over net assets of purchased companies in
accordance with criteria consistent with the provisions of Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
g. Income Taxes - The Company files a consolidated federal income tax
return which includes all of its wholly-owned subsidiaries and computes its
income tax provision under Financial Accounting Standard No. 109, "Accounting
for Income Taxes".
35
<PAGE> 36
h. Revenue Recognition - Revenues under the Company's contracts are
calculated based on various performance-based and fixed-fee methodologies and
are recognized when the related service has been provided. Performance-based
revenues include estimates which are subject to adjustment in subsequent
periods. Unearned contract fees constitute contractual payments received from
managed care payor organizations in excess of performance-based revenues earned.
During the years ended August 31, 1997, 1996 and 1995, approximately 25%, 28%
and 24%, respectively, of the Company's revenues were derived from DTCA
contracts with hospitals which had a common parent company.
i. Net Income (Loss) Per Share - Net income (loss) per share is computed
by dividing net income by the weighted average number of common shares and
equivalents outstanding. Calculation of net loss per share for the year ended
August 31, 1997 does not include common stock equivalents as their effect would
be antidilutive.
j. 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.
k. 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.
l. Recently Issued Accounting Standards - In February 1997, the Financial
Accounting Standards Board issued Financial Accounting Standard No. 128 ("FAS
128") "Earnings per Share." FAS 128 specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS"). This new standard
requires the presentation of basic earnings per share based upon average common
shares outstanding and a diluted EPS based on average common shares outstanding
plus the dilutive effect of potential common shares. FAS 128 is effective for
years ending after December 15, 1997 and early adoption is not permitted. Upon
the adoption of FAS 128, EPS for prior periods will be restated to conform to
the new standard. The Company does not believe that the adoption of FAS 128 will
have any material effect on its financial statements.
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 130 ("FAS 130") "Reporting Comprehensive Income" and
Financial Accounting Standard No. 131 ("FAS 131") "Disclosures about Segments of
an Enterprise and Related Information." Both FAS 130 and FAS 131 become
effective for fiscal years beginning after December 15, 1997 and early
application is permitted. The Company does not believe that the adoption of FAS
130 and FAS 131 will have any material effect on its financial statements.
36
<PAGE> 37
2. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year Ended August 31, 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes
Federal $ 492,000 $ 491,000 $ 1,873,000
State 122,000 66,000 407,000
Deferred taxes (821,000) (13,000) (28,000)
- ------------------------------------------------------------------------------
Total $(207,000) $ 544,000 $ 2,252,000
- ------------------------------------------------------------------------------
</TABLE>
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, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
---------------------------
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets:
Financial accruals without economic performance $1,346,000 $ 532,000
Deferred compensation 842,000 906,000
---------------------------
2,188,000 1,438,000
---------------------------
Deferred tax liability:
Tax over book depreciation 76,000 60,000
Tax over book amortization 115,000 202,000
---------------------------
191,000 262,000
---------------------------
Net deferred tax assets $1,997,000 $1,176,000
---------------------------
Net current deferred tax assets $1,306,000 $ 436,000
Net long-term deferred tax assets 691,000 740,000
---------------------------
$1,997,000 $1,176,000
----------------------------
</TABLE>
The Company has not provided any significant valuation allowance on its
deferred tax assets as it believes such allowance is unnecessary because it
believes its deferred tax assets are likely to be realized.
37
<PAGE> 38
The difference between income tax expense (benefit) computed using the
effective tax rate and the statutory federal income tax rate follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended August 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax $(323,000) $ 1,022,000 $ 1,868,000
State income taxes, less Federal income tax benefit 7,000 152,000 265,000
Amortization of excess of cost over net assets of
purchased companies 130,000 130,000 130,000
Internal Revenue Service settlement -- (760,000) --
Other (21,000) -- (11,000)
- ---------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) $(207,000) $ 544,000 $ 2,252,000
===============================================================================================================
</TABLE>
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.
3. REVOLVING CREDIT AGREEMENT
The Company had a revolving credit agreement with a lending institution
which permitted the Company to borrow up to $10,000,000. In April 1997, the
Company terminated this agreement as it had no outstanding borrowings or plans
to borrow under the agreement.
4. 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 $1,822,012 and $2,127,372 as of August 31, 1997 and
1996, respectively, net of the current portion of $125,000 and $136,823,
respectively. Plan payments required in the five years subsequent to August 31,
1997 for the Company are $125,000, $214,213, $122,653, $149,424 and $63,776.
Other long-term liabilities at August 31, 1997 and 1996 also include
$364,469 and $355,669, respectively, of reserves related to self-insured
deductibles under the Company's liability insurance
38
<PAGE> 39
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 deductibles
on claims and incurred but not reported claims under these policies based on
historical loss patterns and management projections.
5. LEASES
The Company has operating lease agreements principally for its corporate
office space and for certain DTCA managed care payor contract site offices. The
corporate office lease extends through 1999 with an option to renew for an
additional five year period. The Company subleases to AmSurg approximately
15,000 square feet of its corporate office headquarters pursuant to a sublease
which also expires December 1999. The payor office rentals are approximately
2,000 square feet each and have terms of two to five years. Rent expense under
lease agreements for the years ended August 31, 1997, 1996 and 1995 was
approximately $591,000, $367,000 and $337,000, respectively.
The future minimum lease commitments, net of sublease income, for each of
the next five years following August 31, 1997 for the Company for all
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------
Year Ended August 31,
-------------------------------------------------
<S> <C>
1998 $ 708,574
1999 701,960
2000 399,250
2001 229,630
2002 73,052
-------------------------------------------------
Total $2,112,466
=================================================
</TABLE>
6. 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 enabled the Company to make the repurchases from time
to time in the open market prior to December 26, 1996. The Company had
repurchased 351,900 shares at a cost of $2,342,051 pursuant to this
authorization.
7. STOCK OPTIONS
The Company has several stock option plans under which non-qualified
options to purchase the Company's common stock have been granted. Options under
these plans are granted at market value at the time of the grant and vest over
four years at the rate of 25% per year. Options have a term of 10 years from the
date of grant. At August 31, 1997, 213,085 shares were reserved for future
option grants.
39
<PAGE> 40
Stock option activity for the three years ended August 31, 1997 is
summarized below:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
---------- --------------
<S> <C> <C>
Outstanding at August 31, 1994 956,845 $.001 - $21.93
Options granted 279,665 $5.10 - $7.88
Options exercised (35,136) $.001 - $2.78
Options terminated (274,098) $2.78 - $21.93
----------
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
Options granted 123,275 $9.38 - $12.83
Options exercised (62,075) $.001 - $11.39
Options terminated (63,652) $5.10 - $12.69
----------
Outstanding at August 31, 1997 1,170,851 $.001 - $21.43
==========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at August 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life(Yrs.) Price Exercisable Price
- ---------------------- ------------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$.001 - $5.00 165,090 2.5 $ 2.40 165,090 $ 2.40
$5.01 - $10.00 529,486 6.7 $ 6.95 332,350 $ 7.14
$10.01 - $15.00 470,275 7.2 $ 11.56 275,568 $ 12.13
$15.01 + 6,000 6.4 $ 21.43 6,000 $ 21.43
--------- -------
1,170,851 6.3 $ 8.23 779,008 $ 8.01
========= =======
</TABLE>
40
<PAGE> 41
The Company accounts for its stock options issued to employees and outside
directors pursuant to Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation expense has been
recognized in connection with the issuance of stock options. The estimated
weighted average fair values of the options at the date of grant using the
Black-Scholes option pricing model as promulgated by Financial Accounting
Standard No. 123, "Accounting for Stock Based Compensation" in the years ended
August 31, 1997 and 1996 are $6.19 and $4.72 per share, respectively. In
applying the Black-Scholes model, the Company assumed no dividends, an expected
life for the options of six and one-half years, and a forfeiture rate of 4.5% in
both years ended August 31, 1997 and 1996 and an average risk free interest rate
of 6.4% and 6.2% for the years ended August 31, 1997 and 1996, respectively. The
Company also utilized a volatility rate of 53% and 55% for the years ended
August 31, 1997 and 1996, respectively. Had the Company used the Black-Scholes
estimates to determine compensation expense for options granted during the years
ended August 31, 1997 and 1996, net income and net income per share would have
been reduced to the following pro forma amounts.
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net income (loss)
As reported $ (1,683,033) $ 3,259,621
Pro forma $ (2,148,000) $ 2,807,000
Net income (loss) per share
As reported $ (.21) $ .40
Pro forma $ (.27) $ .34
</TABLE>
As a result of the Company's Distribution of its AmSurg common stock (See
note 10), the number of shares issued pursuant to the Company's outstanding
options and the exercise price per share will be adjusted to maintain the value
of the options subsequent to the Distribution at the predistribution level. It
is anticipated that this adjustment will have the effects of reducing the
exercise price of the outstanding options and increasing the number of shares
subject to the options. Vesting will also be accelerated. Because of accounting
rules concerning revisions to the terms of existing options, it will be
necessary for the Company to record a one-time non-cash compensation expense
charge against earnings equal to the total value of the adjusted options even
though the post Distribution value will be no greater than the predistribution
value. This charge against earnings will be accompanied by an associated
increase in stockholders' equity. The value of the options will depend upon the
price of the Company's common stock
41
<PAGE> 42
immediately preceding the Distribution. If the Distribution had taken place on
August 31, 1997, at which time the price of the Company's stock was $11.13 per
share, the estimated resulting impact on the Company's financial statements
would be as follows:
<TABLE>
<CAPTION>
Net Income
Increase
(Decrease)
-----------
<S> <C>
Compensation expense $(3,750,000)
Estimated income tax benefit 1,450,000
-----------
Net decrease in net income $(2,300,000)
===========
Stockholders'
Equity
Increase
(Decrease)
-----------
Increase in paid-in-capital from stock options $3,750,000
Net decrease in net income (2,300,000)
-----------
Net increase in stockholder's equity $1,450,000
===========
</TABLE>
The Company has also reserved 50,000 shares of common stock to be granted
as restricted stock as part of the Company's Board of Directors compensation
program of which 7,924 shares have been granted.
8. 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 $318,382, $265,528 and $195,716 for the years ended
August 31, 1997, 1996 and 1995, respectively.
9. 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,
42
<PAGE> 43
the government made the determination not to take over the litigation, and the
complaint was unsealed on February 10, 1995. Various preliminary motions have
been filed regarding jurisdictional and pleading matters, resulting in the
filing of a number of amended complaints and the dismissal of the Company as a
defendant. DTCA continues to be a defendant. All of these preliminary motions
have now been resolved and the lawsuit has entered the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
10. AMSURG - DISCONTINUED OPERATIONS
In March of 1997, the Company's Board of Directors approved a plan to
distribute on a substantially tax-free basis all of the shares of AmSurg common
stock owned by the Company to the holders of Company common stock ("the
Distribution"). The plan of Distribution has been amended based on discussions
with the Internal Revenue Service ("IRS") in response to the Company's requests
for a favorable IRS ruling on the Distribution. The Distribution is expected to
occur in December 1997 and will result in AmSurg operating as an independent
entity with publicly traded common stock. The terms of the Distribution provide
that the Company and AmSurg will bear their own expenses in connection with the
Distribution. Costs incurred through August 31, 1997 of $615,000 for the Company
and $458,000 for AmSurg have been expensed.
Summary operating results of AmSurg are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year Ended August 31, 1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $50,319,564 $29,205,697 $20,025,821
Net income (loss) $ (366,088) $1,285,255 $ 1,084,878
</TABLE>
43
<PAGE> 44
A reconciliation of AmSurg net income (loss) to the Company's income
(loss) from discontinued operations is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended August 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $(366,088) $ 1,285,255 $ 1,084,878
AmSurg minority
stockholders' interest 40,617 (486,112) (410,213)
Distribution costs incurred
by American Healthcorp (615,000) -- --
--------- ----------- -----------
Net income (loss) from
discontinued operations $(940,471) $ 799,143 $ 674,665
========= =========== ===========
</TABLE>
Net assets of AmSurg are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
At August 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets $ 12,517,548 $ 6,959,396
Property and equipment, net 16,846,453 11,182,989
Other assets 1,308,750 1,458,915
Excess of cost over net assets of
purchased companies, net 35,702,748 26,965,725
Current liabilities (7,321,799) (5,216,402)
Deferred taxes (765,000) (456,000)
Long-term debt (15,972,412) (10,736,825)
Minority interests (25,909,017) (13,796,900)
- ----------------------------------------------------------------------------------------------
Net assets of discontinued operations $ 16,407,271 $ 16,360,898
==============================================================================================
</TABLE>
44
<PAGE> 45
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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
October 17, 1997
45
<PAGE> 46
QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands except per share data)
<TABLE>
<CAPTION>
FISCAL 1997 First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $7,979 $7,353 $7,246 $7,959
Income (loss) before income taxes and discontinued operations $378 ($601) ($614) ($113)
Net income (loss) $463 ($194) ($1,435) ($517)
Income (loss) per share from continuing operations * $0.03 ($0.05) ($0.05) ($0.01)
Net income (loss) per share * $0.06 ($0.02) ($0.18) ($0.06)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996 First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $8,023 $7,691 $7,874 $7,815
Income before income taxes and discontinued operations $1,150 $898 $647 $310
Net income $800 $705 $653 $1,102
Income per share from continuing operations * $0.08 $0.06 $0.05 $0.11
Net income per share * $0.10 $0.09 $0.08 $0.13
</TABLE>
* Income (loss) per share calculations for each of the quarters were based on
the weighted average number of shares and dilutive options outstanding for
each period. Accordingly, the sum of the quarters may not necessarily be
equal to the full year income (loss) per share.
46
<PAGE> 47
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, 1998 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, 1998, 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, 1998, 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, 1998, to
be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c)
and is incorporated herein by reference.
47
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
3. EXHIBITS
<TABLE>
<S> <C>
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 Second Amended and Restated Loan Agreement dated as of April 15, 1997 among
AmSurg, SunTrust Bank, Nashville, N.A., and NationsBank of Tennessee,
N.A., as amended on May 6, 1997 and on September 2, 1997 (incorporated by
reference to Exhibit 10.4 to Form 10/A-3 of AmSurg Corp. filed November 3, 1997)
10.3 Amended and Restated Distribution Agreement dated November 3, 1997
between American Healthcorp, Inc. and AmSurg Corp. (incorporated by
reference to Exhibit 2.1 to Form 10/A-3 of AmSurg Corp. filed November 3,
1997)
10.4 Management and Accounting Services Agreement dated December 31, 1996
between American Healthcorp, Inc. and AmSurg Corp. (incorporated by
reference to Exhibit 10.6 to Form 10/A-3 of AmSurg Corp. filed November 3,
1997)
</TABLE>
Management Contracts and Compensatory Plans
<TABLE>
<S> <C>
10.5 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)
10.6 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)
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C>
10.7 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)
10.8 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)
10.9 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))
10.10 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)
10.11 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))
10.12 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)
10.13 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))
10.14 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))
10.15 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))
10.16 1996 Stock Incentive Plan (incorporated by reference to the Company's proxy
statement for the annual meeting of stockholders held January 23, 1996)
21 Subsidiaries of the registrant
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
A report on Form 8-K dated June 10, 1997 was filed during the quarter
ended August 31, 1997 reporting a delay in the proposed distribution of AmSurg
common stock to the Company's shareholders.
49
<PAGE> 50
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 26, 1997 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 26, 1997
- ------------------------------------- President and Chief Executive
Thomas G. Cigarran Officer, Director (Principal
Executive Officer)
/s/ Henry D. Herr Executive Vice President November 26, 1997
- ------------------------------------- Finance and Administration, Chief
Henry D. Herr Financial Officer, Secretary,
Director (Principal Financial
Officer)
/s/ David A. Sidlowe Vice President and Controller November 26, 1997
- ------------------------------------- (Principal Accounting Officer)
David A. Sidlowe
/s/ Frank A. Ehmann Director November 26, 1997
- -------------------------------------
Frank A. Ehmann
/s/ Martin J. Koldyke Director November 26, 1997
- -------------------------------------
Martin J. Koldyke
/s/ C. Warren Neel Director November 26, 1997
- -------------------------------------
C. Warren Neel
/s/ William C. O'Neil, Jr. Director November 26, 1997
- -------------------------------------
William C. O'Neil, Jr.
</TABLE>
50
<PAGE> 1
Exhibit 21
SUBSIDIARY LIST
As of November 18, 1997
(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. 58%
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. 51%
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
Exhibit 21
SUBSIDIARY LIST
AS OF NOVEMBER 18, 1997
(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%
AmSurg Lakeland, Inc. TN AmSurg Corp. 100%
AmSurg SWFLA, Inc. TN AmSurg Corp. 100%
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, L.P. TN AmSurg Maryville, Inc. 51%
AmSurg Miami, Inc. TN AmSurg Corp. 100%
The Miami ASC, L.P. TN AmSurg Miami, Inc. 70%
AmSurg North Platte, Inc. TN AmSurg Corp. 100%
AmSurg Fort Collins, Inc. TN AmSurg Corp. 100%
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%
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%
</TABLE>
<PAGE> 3
Exhibit 21
SUBSIDIARY LIST
AS OF NOVEMBER 18, 1997
(PAGE 3 OF 4)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
- ----------------------------------------- ------------ --------------------------------- ----------
<S> <C> <C> <C>
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%
AmSurg Panama City, Inc. TN AmSurg Corp. 100%
AmSurg Santa Monica, Inc. TN AmSurg Corp. 100%
AmSurg Miami Urology, Inc. TN AmSurg Corp. 100%
The Miami Urology Group, L.P. TN AmSurg Miami Urology, Inc. 60%
The Miami Urology ASC, L.P. TN AmSurg Miami Urology, Inc. 60%
AmSurg Crystal River, Inc. TN AmSurg Corp. 100%
The Crystal River Endoscopy, ASC, L.P. TN AmSurg Crystal River, Inc. 51%
AmSurg Abilene Eye, Inc. TN AmSurg Corp. 100%
The Abilene Eye ASC, L.P. TN AmSurg Abilene Eye, 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%
The 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 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%
</TABLE>
<PAGE> 4
Exhibit 21
SUBSIDIARY LIST
AS OF NOVEMBER 18, 1997
(PAGE 4 OF 4)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
- ------------------------------------------- ------------ ---------------------- ----------
<S> <C> <C> <C>
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%
The West Glen Endoscopy Center, LLC TN AmSurg Holdings, Inc. 40%
West Texas Eyecare Network, LLC TN AmSurg Holdings, Inc. 51%
Cleveland Eyecare Network, LLC TN AmSurg Holdings, Inc. 51%
The Willoughby ASC, LLC TN AmSurg Holdings, Inc. 51%
The Chevy Chase ASC, LLC TN AmSurg Holdings, Inc. 51%
The Oklahoma City ASC, LLC TN AmSurg Holdings, Inc. 51%
The Mountain West Gastroenterology ASC, LLC TN AmSurg Holdings, Inc. 51%
The Cincinnati ASC, LLC TN AmSurg Holdings, Inc. 51%
The Fayetteville ASC, LLC TN AmSurg Holdings, Inc. 51%
The Independence ASC, LLC TN AmSurg Holdings, Inc. 60%
AmSurg Northern Kentucky GI, LLC TN AmSurg Holdings, Inc. 100%
AmSurg Louisville GI, LLC TN AmSurg Holdings, Inc. 100%
AmSurg Kentucky Ophthalmology, LLC TN AmSurg Holdings, Inc. 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 12,226,821
<SECURITIES> 0
<RECEIVABLES> 3,469,839
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,309,735
<PP&E> 3,658,527
<DEPRECIATION> 1,851,087
<TOTAL-ASSETS> 49,372,802
<CURRENT-LIABILITIES> 6,745,599
<BONDS> 0
0
0
<COMMON> 8,052
<OTHER-SE> 40,432,670
<TOTAL-LIABILITY-AND-EQUITY> 49,372,802
<SALES> 0
<TOTAL-REVENUES> 30,536,776
<CGS> 0
<TOTAL-COSTS> 30,139,001
<OTHER-EXPENSES> 1,341,825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,512
<INCOME-PRETAX> (949,562)
<INCOME-TAX> (207,000)
<INCOME-CONTINUING> (742,562)
<DISCONTINUED> (940,471)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,683,033)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
