<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended MAY 31, 1997
Commission File Number 000-19364
---------
AMERICAN HEALTHCORP, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1117144
------------------------------ ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Burton Hills Boulevard, Nashville, TN 37215
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(615) 665-1122
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------- -------
As of July 8, 1997 there were outstanding 8,036,357 shares of the Registrant's
Common Stock, par value $.001 per share.
<PAGE> 2
PART I.
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,732,214 $ 12,561,703
Accounts receivable, net 3,153,088 3,521,379
Other current assets 1,716,524 1,479,935
Deferred tax asset 436,000 436,000
------------ ------------
Total current assets 17,037,826 17,999,017
------------ ------------
Net assets of discontinued operations 16,538,616 16,360,898
------------ ------------
Property and equipment:
Leasehold improvements 77,434 100,712
Equipment 3,404,010 2,289,193
------------ ------------
3,481,444 2,389,905
Less accumulated depreciation (1,709,847) (1,304,465)
------------ ------------
Net property and equipment 1,771,597 1,085,440
------------ ------------
Long-term deferred tax asset 740,000 740,000
------------ ------------
Other assets, net 345,833 527,950
------------ ------------
Excess of cost over net assets
of purchased operations, net 11,942,913 12,229,578
------------ ------------
$ 48,376,785 $ 48,942,883
============ ============
</TABLE>
2
<PAGE> 3
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 862,580 $ 732,718
Accrued salaries and benefits 1,154,923 1,791,691
Accrued liabilities 1,087,186 1,140,897
Deferred revenue 1,597,727 416,667
Income taxes payable 137,680 456,241
Current portion of long-term liabilities 493,059 136,823
----------- -----------
Total current liabilities 5,333,155 4,675,037
----------- -----------
Long-term liabilities 2,214,009 2,656,757
----------- -----------
Stockholders' equity
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,036,357 and 7,985,884
shares outstanding 8,036 7,986
Additional paid-in capital 18,014,587 17,629,678
Retained earnings 22,806,998 23,973,425
----------- -----------
Total stockholders' equity 40,829,621 41,611,089
----------- -----------
$48,376,785 $48,942,883
=========== ===========
</TABLE>
3
<PAGE> 4
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------ --------------------------
1997 1996 1997 1996
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 7,246,162 $7,873,924 $ 22,578,382 $23,588,519
----------- ---------- ------------ -----------
Expenses
Salaries and benefits 5,399,511 4,920,552 16,154,469 14,658,952
Other operating expenses 2,126,648 1,995,238 6,249,424 5,270,616
Depreciation and amortization 331,290 309,980 1,006,769 959,641
Interest 3,455 942 5,513 4,306
----------- ---------- ------------ -----------
Total expenses 7,860,904 7,226,712 23,416,175 20,893,515
----------- ---------- ------------ -----------
Income (loss) from continuing
operations before income taxes (614,742) 647,212 (837,793) 2,695,004
Income tax expense (benefit) (203,000) 281,000 (203,000) 1,170,000
----------- ---------- ------------ -----------
Income (loss) from continuing operations (411,742) 366,212 (634,793) 1,525,004
Income (loss) from discontinued
operations, net of income taxes (1,023,498) 286,634 (531,634) 632,594
----------- ---------- ------------ -----------
Net income (loss) $(1,435,240) $ 652,846 $ (1,166,427) $ 2,157,598
=========== ========== ============ ===========
Income (loss) per share
from continuing operations $ (0.05) $ 0.04 $ (0.08) $ 0.19
Income (loss) per share from
discontinued operations (0.13) 0.04 (0.07) 0.08
----------- ---------- ------------ -----------
Net income (loss) per share $ (0.18) $ 0.08 $ (0.15) $ 0.27
=========== ========== ============ ===========
Weighted average common
shares and equivalents 8,032,095 8,171,903 8,016,482 8,138,964
</TABLE>
4
<PAGE> 5
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MAY 31, 1997
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, August 31, 1996 $7,986 $17,629,678 $ 23,973,425 $ 41,611,089
Exercise of stock
options 46 343,593 -- 343,639
Issuance of stock 4 41,316 -- 41,320
Net loss -- -- (1,166,427) (1,166,427)
------ ----------- ------------ ------------
Balance, May 31, 1997 $8,036 $18,014,587 $ 22,806,998 $ 40,829,621
====== =========== ============ ============
</TABLE>
5
<PAGE> 6
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,166,427) $ 2,157,598
Income (loss) from discontinued operations (531,634) 632,594
------------ ------------
Income (loss) from continuing operations (634,793) 1,525,004
Income tax expense (benefit) (203,000) 1,170,000
------------ ------------
Income (loss) before income taxes (837,793) 2,695,004
Noncash expenses, revenues, losses and gains
included in income (loss):
Depreciation and amortization 1,006,769 959,641
Decrease (increase) in working capital items 752,145 (884,105)
Other noncash transactions 241,266 174,131
------------ ------------
1,162,387 2,944,671
Increase in other assets (116,526) (172,028)
Income taxes (net paid) (45,638) (1,155,794)
Additions to long-term liabilities -- 497,705
Payments on long-term liabilities (274,363) (287,699)
------------ ------------
Net cash flows provided by operating activities 725,860 1,826,855
------------ ------------
Cash flows from investing activities:
Investment in discontinued operations (700,001) (231,948)
Acquisition of property and equipment (1,095,573) (404,986)
Decrease (increase) in long-term receivables
and deposits (33,493) 32,600
------------ ------------
Net cash flows used in investing activities (1,829,067) (604,334)
------------ ------------
Cash flows from financing activities:
Stock repurchase -- (127,503)
Exercise of stock options 273,718 70,959
------------ ------------
Net cash flows provided by (used in)
financing activities 273,718 (56,544)
------------ ------------
Net increase (decrease) in cash and cash equivalents (829,489) 1,165,977
Cash and cash equivalents, beginning of period 12,561,703 11,076,047
------------ ------------
Cash and cash equivalents, end of period $ 11,732,214 $ 12,242,024
============ ============
</TABLE>
6
<PAGE> 7
AMERICAN HEALTHCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL REPORTING
The accompanying consolidated financial statements of American
Healthcorp, Inc. and its subsidiaries (the "Company") for the three month and
nine month periods ended May 31, 1997 and 1996 are unaudited. However, in the
opinion of the Company, all adjustments consisting of normal, recurring accruals
necessary for a fair presentation, have been reflected therein.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1996.
2. RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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.
3. DISCONTINUED OPERATIONS
On March 7, 1997, the Company's Board of Directors approved a plan to
distribute on a substantially tax-free basis all of the shares of AmSurg Corp
("AmSurg") common stock owned by the Company to the holders of Company common
stock ("the Distribution"). The Distribution was expected to occur in May 1997
and was subject to the receipt of a favorable Internal Revenue Service ("IRS")
ruling that the transaction could be completed on a substantially tax-free
basis. The Company has been advised by the IRS that a favorable ruling will not
be issued on the transaction as submitted in the original ruling request. The
Company is submitting to the IRS an alternative structure which it believes
should result in a favorable ruling. If the Distribution occurs, AmSurg will
operate as an independent entity with publicly traded common stock. As a result
of the Board of Directors' approval of the plan, the consolidated financial
statements of the Company and the related Notes to Consolidated Financial
Statements have been adjusted and restated to reflect the results of operations
and net assets of AmSurg as a discontinued operation in accordance with
generally accepted accounting principles.
During the three months ended May 31, 1997, AmSurg recorded an
impairment loss of $2,321,168 ($1,363,918 net of minority stockholders'
interest) which represents a charge in accordance with Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." AmSurg determined that an
impairment in the asset carrying value at one of its partnerships that owns two
surgery centers acquired in 1994 had taken place. AmSurg projected the
undiscounted
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<PAGE> 8
cash flows from these centers and determined these cash flows to be less than
the carrying value of the long-lived assets attributable to this partnership.
Accordingly, an impairment loss equal to the excess of the carrying value of the
long-lived assets over the present value of the estimated future cash flows was
recorded.
Summary operating results of AmSurg are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, May 31,
----------------------------------- ------------------------------------
1997 1996 1997 1996
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues $ 13,598,471 $ 8,085,584 $ 35,796,515 $ 20,680,350
Income before minority
interest and income taxes $ 1,064,775 $ 2,068,765 $ 5,883,565 $ 5,177,892
Minority interest $ 2,301,726 $ 1,301,978 $ 5,654,772 $ 3,527,929
Net income (loss) $ (1,670,951) $ 460,787 $ (791,207) $ 1,014,963
Net income (loss)
attributable to American
Healthcorp, Inc. $ (1,023,498) $ 286,634 $ (531,634) $ 632,594
</TABLE>
Net assets of AmSurg are as follows:
---------------------------------------------------------------
At May 31, 1997
---------------------------------------------------------------
Current assets $12,078,105
Property and equipment 15,662,672
Other assets 1,237,990
Excess of cost over net assets of
purchased operations, net 35,996,650
Current liabilities (6,057,885)
Deferred taxes (765,000)
Long-term debt (16,327,230)
Minority interests (25,286,686)
---------------------------------------------------------------
Net assets of discontinued operations $ 16,538,616
---------------------------------------------------------------
4. AMSURG ACQUISITIONS
In two separate transactions during the quarter ended May 31, 1997,
AmSurg acquired a majority interest in two physician practice-based surgery
centers. The purchase price paid for the interests acquired was $2,839,503 which
consisted of cash of $2,350,512 and AmSurg common stock valued at $488,991. With
these transactions,
8
<PAGE> 9
AmSurg acquired tangible assets of $578,442, excess cost over net assets of
purchased operations of $2,547,048 and assumed liabilities of $285,987.
5. AMSURG LONG-TERM DEBT
On April 15, 1997, AmSurg executed an amended and restated credit
agreement with two lending institutions. The credit agreement permits AmSurg to
borrow up to $15,000,000 to finance AmSurg acquisitions and development
projects. All borrowings under this agreement bear interest at prime or 1.75%
above LIBOR or a combination thereof. The agreement provides for a fee of .35%
on unused commitments and all outstanding borrowings are to be repaid April 15,
1999. The agreement contains covenants relating to the ratio of debt to net
worth, operating performance and minimum net worth and prohibits the payment of
dividends to common stockholders. Borrowings under the credit agreement totaled
$10,033,658 at May 31, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The continuing operations of American Healthcorp, Inc. and its
subsidiaries (the "Company") consist primarily of Diabetes Treatment Centers of
America, Inc. ("DTCA") a wholly-owned subsidiary, which is the nation's leading
provider of diabetes services to physicians, hospitals and healthcare payors
designed to enhance the quality and lower the cost of treatment of patients with
diabetes. AmSurg Corp. ("AmSurg"), a majority-owned (58% at May 31, 1997)
subsidiary which is reported as a discontinued operation, develops, acquires and
operates physician practice-based ambulatory surgery centers and specialty
physician networks in partnership with surgical and other group practices.
On March 7, 1997, the Company's Board of Directors approved a plan to
distribute on a substantially tax-free basis all of the shares of AmSurg common
stock owned by the Company to the holders of Company common stock (the
"Distribution"). The Distribution 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 comprehensive diabetes
disease management services for managed care organizations and other third party
payors.
The proposed Distribution was expected to occur in late May 1997 and
was subject to the receipt of a favorable Internal Revenue Service ruling that
the transaction could be completed on a substantially tax-free basis. On June
10, 1997, the Company announced that it has been advised by the Internal Revenue
Service that a favorable ruling will not be issued on the transaction as
submitted in the original ruling request. The Company is submitting to the
Internal Revenue Service an alternative structure which the Company believes, on
the basis of advice from its legal counsel and tax advisors, should result in
the receipt of a favorable ruling. However, there can be no assurances that all
of the conditions of the Distribution, including the receipt of the favorable
ruling from the Internal Revenue Service, will be met or that the Distribution
will be completed. In addition, the anticipated date that these matters will be
resolved cannot be estimated at this time.
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
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<PAGE> 10
hospital-based treatment centers on terms that are favorable to DTCA; DTCA's
ability to execute contracts for new hospital-based treatment centers; DTCA's
ability to effect estimated cost savings under certain managed care agreements
or to effect such savings within the time frames contemplated by DTCA; unusual
and unforeseen patterns of healthcare utilization by individuals with diabetes
in the HMOs with which DTCA has executed an agreement; the ability of the HMOs
to maintain the number of covered lives enrolled in the plans during the terms
of the agreements between the HMOs and DTCA; and DTCA's ability to attract
and/or retain and effectively manage the employees required to implement the
agreements. The important factors for AmSurg include: AmSurg's ability to enter
into partnership agreements for new practice-based ambulatory surgery centers
and new specialty physician networks; AmSurg's ability to develop or acquire new
centers on the schedules currently anticipated; AmSurg's ability to contract
with managed care payors for its existing centers and its centers that are
currently under development; AmSurg's ability to obtain and retain appropriate
licensing approvals for its existing centers and centers currently under
development; and AmSurg's ability to maintain favorable relations with its
physician partners. Additional factors for the Company are the Company's receipt
of a favorable ruling from the Internal Revenue Service regarding the
substantially tax-free nature of the proposed Distribution and the receipt of
other approvals required to complete the Distribution on terms acceptable to the
Company.
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 May 31, 1997 and 1996. The number of contracts
and hospital sites for these periods includes two Arthritis and Osteoporosis
Care Center ("AOCC") contracts with hospitals to provide comprehensive arthritis
and osteoporosis services that are operated by DTCA.
<TABLE>
<CAPTION>
As of May 31,
-----------------------------------------------------------
1997 1996
-----------------------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Hospital contracts/sites 59 63 58 60
Network contracts/sites 2 11 2 11
-----------------------------------------------------------
Total contracts/sites 61 74 60 71
===========================================================
</TABLE>
10
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The components of changes to the total number of DTCA hospital
contracts during the quarters and the nine months ended May 31, 1997 and 1996
are presented below.
<TABLE>
<CAPTION>
For the Three Months Ended May 31,
-----------------------------------------------------------
1997 1996
-----------------------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 60 72 62 73
New contracts/sites signed 2 3 0 0
Contracts/sites discontinued (1) (1) (2) (2)
-----------------------------------------------------------
Total contracts/sites 61 74 60 71
===========================================================
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended May 31,
-----------------------------------------------------------
1997 1996
-----------------------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 61 72 69 74
New contracts/sites signed 4 6 4 9
Contracts/sites discontinued (4) (4) (12) (12)
Conversion of stand alone
hospital contract to
hospital network contract - - (1) -
-----------------------------------------------------------
Total contracts/sites 61 74 60 71
===========================================================
</TABLE>
During the nine month period ended May 31, 1997, fifteen contracts were
renewed for DTCA hospital-based diabetes treatment centers. During the remainder
of fiscal 1997, eight contracts 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
the nine months ended May 31, 1997 all four of the contracts discontinued and
two of the contracts renewed were with hospitals owned by Columbia/HCA
Healthcare Corporation. Two of the contracts that will expire during the
remainder of fiscal 1997 and seven of the contracts that will expire during
fiscal 1998 are with hospitals owned by Columbia/HCA Healthcare Corporation.
The Company believes that general uncertainties associated with the
changes taking place in the healthcare industry and hospital pressures to reduce
operating costs as a result of increasing managed care payor influences have
adversely affected DTCA's revenues and contract retention during recent periods
and may continue to have
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an adverse effect on hospital contract profitability in future periods. While
the Company believes that its programs reduce the costs of care for hospitalized
diabetes patients, certain hospitals faced with pressures to make immediate cost
reductions have decided that the short-term benefit of eliminating the costs
associated with programs such as the Company's diabetes program is justified.
However, the Company also believes that the growth in healthcare payor demand
for effective chronic disease management programs from healthcare providers such
as hospitals will stabilize DTCA's hospital contract business and will provide
an opportunity for future growth in this business.
While DTCA's revenues have historically been generated primarily by its
operating contracts with hospitals, the Company believes that the substantial
portion of its future revenue growth will result from comprehensive healthcare
management contracts with managed care payors for their enrollees with diabetes.
The Company anticipates continuing to incur substantial expenditures associated
with these comprehensive diabetes disease management efforts. For the three
month periods ended May 31, 1997 and 1996, DTCA's managed care operations
reduced the Company's pretax profitability by approximately $1.7 million and
$585,000, respectively. Unless new managed care contracts are signed which
involve significant startup losses, the Company does not anticipate that the
future quarterly losses from its managed care operations will materially exceed
those incurred during the quarter ended May 31, 1997.
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 initial
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.
Also as a result of its managed care payor efforts, in June 1996 DTCA
reached agreement with two HMOs, Principal Healthcare, Inc. ("Principal") and
Health Options, Inc. ("Health Options"), an HMO subsidiary of Blue Cross and
Blue Shield of Florida, to provide comprehensive healthcare management services
for their enrollees with diabetes in selected markets. The Principal agreement
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
agreement now covers seven of the largest HMO subsidiaries of Principal totaling
approximately 400,000 members, including an estimated 10,000 to 12,000 members
with diabetes. The Health Options agreements cover approximately 160,000
members, including an estimated 3,200 to 3,800 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 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 system is shared according to formulae set forth in the agreements.
DTCA anticipates that revenues and profits from the Principal and
Health Options agreements will be more heavily weighted toward the later years
of the agreements' initial terms and that, during the first full year of
operations at each site, revenues will be slightly less than operating costs.
Implementation of these contracts began on a market-by-market basis during July
1996, with all markets except the new Health Options market added during the
second quarter of fiscal 1997 having begun implementation by December 1996.
Implementation began at the new Health Options market site on April 1, 1997.
Because of expected ramp-up periods at each of the agreement sites and the
timing delay in calculating DTCA's share of savings, if any, which may be
produced by the program, it is anticipated that DTCA's profitability will be
negatively affected by these agreements during the first full year of operation
at each of these sites. However, the Company believes that several of these
contracts which have been in operation the longest will begin to produce
diabetes population healthcare cost savings which will result in increased DTCA
managed care payor contract revenues beginning in the fourth quarter of 1997.
The Company's growth strategy is primarily to develop new relationships
directly with payors and others who are ultimately responsible for the
healthcare costs of individuals with diabetes and to further develop its
hospital-based diabetes treatment center business. Pursuant to the strategy with
payors, DTCA is expected to provide management services designed to improve the
quality of care for individuals with diabetes while lowering
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<PAGE> 13
the overall cost of care. DTCA fees under these agreements with payors may take
the form of shared savings of overall diabetes enrollee healthcare costs,
capitated payments to DTCA that cover DTCA's services to enrollees but do not
include responsibility for enrollee healthcare claims or some combination of
these arrangements.
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 in partnership with physician practice groups through partnerships or
limited liability companies. As of May 31, 1997, AmSurg owned a majority
interest (51% or greater) in 30 surgery centers, operated another center
pursuant to a management agreement, 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.
The following table presents the components of changes in the number of
AmSurg surgery centers in operation for the three and nine month periods ended
May 31, 1997 and 1996.
<TABLE>
<CAPTION>
Three months ended Nine months ended
May 31, May 31,
---------------------------------------------
1997 1996 1997 1996
---------------------------------------------
<S> <C> <C> <C> <C>
Centers in operation at beginning of period 28 18 22 18
New center acquisitions placed in operation 2 - 6 -
New development centers placed in 1 - 3 -
operation
---------------------------------------------
Centers in operation at end of period 31 18 31 18
=============================================
</TABLE>
Twenty-three of the AmSurg surgery centers in operation as of May 31,
1997, perform gastrointestinal endoscopy procedures, five centers perform
ophthalmology procedures, one center performs orthopaedic procedures, one center
performs otolaryngology procedures and one center performs ophthalmology,
urology, general surgery and otolaryngology procedures. In addition, as of May
31, 1997, AmSurg also owned a majority interest in 19 partnerships or LLCs,
including four projects requiring certificate of need approval, each of which
will develop, own and operate a surgery center. As of May 31, 1996, AmSurg owned
a majority interest in 14 partnerships or LLCs that were developing centers.
The limited partnerships and limited liability companies formed by
AmSurg own and operate the AmSurg surgery centers, with the exception of one
center in which AmSurg has no ownership interest but which is operated by AmSurg
under a management agreement. The other partner or member in each partnership
and limited liability company is in each case an entity owned by physicians who
perform procedures at the center.
The two physician group practices are also owned through limited
partnerships in which AmSurg is the general partner and owns a majority
interest. The other partner in each partnership is an entity owned by the
principal physicians who provide professional medical services to patients of
the practice. All third party payor contracts under which the two physician
group practices provide professional services are entered into by the group
practice entity in which AmSurg is the general partner and owns a majority
interest.
13
<PAGE> 14
AmSurg's sources of revenues are set forth in the table below.
<TABLE>
<CAPTION>
Percentage of Total Revenues
--------------------------------------------
Three months ended Nine months ended
May 31, 1997 May 31, 1997
------------------ -----------------
<S> <C> <C>
Surgery centers 81% 82%
Physician practices 16 15
Management fee 1 1
Interest and other 2 2
------------------ -----------------
Total 100% 100%
================== =================
</TABLE>
The facility fees and the fees for physician services received by AmSurg surgery
centers and by the two physician practices in which AmSurg owns a majority
interest are generally paid by third party reimbursement programs including
governmental and private insurance programs.
AmSurg intends to expand primarily through the development and
acquisition of additional practice-based surgery centers in targeted surgical
specialties. In addition, the Company believes that AmSurg's surgery centers,
combined with AmSurg's relationships with specialty physician practices in the
surgery centers' markets, will provide other opportunities for growth from
surgical specialty network development that, if appropriate, may include the
acquisition of specialty physician practices. By using AmSurg surgery centers as
a base to develop specialty physician networks that are designed to serve large
numbers of covered lives, the Company believes that AmSurg will strengthen its
market position in contracting with managed care organizations. As of May 31,
1997, AmSurg operated three startup specialty physician networks, located in the
south Florida market and in Knoxville, Tennessee and Montgomery, Alabama.
The start-up specialty physician networks are owned through limited
partnerships and limited liability companies. AmSurg owns a majority interest in
these entities, and the other partners are individual physicians who will
provide the medical services to the patient population covered by the contracts
the network will seek to enter into with managed care payors. It is not expected
that the specialty physician networks in themselves will be a significant source
of income for AmSurg. These networks were and will be formed primarily as a
contracting vehicle to generate revenues for AmSurg's practice-based surgery
centers and physician practices. These networks have not yet generated any
revenues.
While AmSurg generally owns 51% to 70% of the entities that own the
surgery center or physician group practice, AmSurg's consolidated statements of
operations include 100% of the results of operations of the entities, reduced by
the minority partners' share of the net income or loss of the surgery
center/practice entities. Also, because the Company owns approximately 58% of
the common stock of AmSurg, the calculation 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.
RESULTS OF OPERATIONS
DTCA represents the continuing operations of the Company and includes
the operations of two Arthritis and Osteoporosis Care centers and corporate
costs attributable to DTCA. AmSurg represents the discontinued operations of the
Company. Included in AmSurg expenses are charges for general management,
administrative and accounting services provided by the Company. Charges to
AmSurg for such services approximate the Company's cost.
14
<PAGE> 15
DTCA
The following table presents the operations of DTCA for the three and
nine month periods ended May 31, 1997 and associated percentage changes from the
corresponding period in fiscal 1996.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, 1997 May 31, 1997
-----------------------------------------------------------------------
Actual % Change Actual % Change
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,246,162 (8.0)% $ 22,578,382 (4.3)%
Expenses:
Salaries and benefits 5,399,511 9.7 16,154,469 10.2
Other operating expenses 2,126,648 6.6 6,249,424 18.6
Depreciation and amortization 331,290 6.9 1,006,769 4.9
Interest 3,455 266.8 5,513 28.0
-----------------------------------------------------------------------
Total expenses 7,860,904 8.8 23,416,175 12.1
-----------------------------------------------------------------------
Loss before income taxes (614,742) (195.0) (837,793) (131.1)
Income taxes (203,000) (172.2) (203,000) (117.4)
-----------------------------------------------------------------------
Net loss $ (411,742) (212.4)% $ (634,793) (141.6)%
=======================================================================
</TABLE>
The DTCA revenues decrease for the three and nine month periods ended
May 31, 1997 from the comparable periods last year resulted primarily from the
impact of hospital contract rate renegotiations and restructurings and hospital
contract terminations, offset somewhat by an increase in revenues associated
with certain of the managed care payor disease management contracts. Hospital
contract rate renegotiations and restructurings were the primary reasons for
decreases in same contract revenues for the three and nine month periods ended
May 31, 1997 of 10% and 3%, respectively, for contracts in operation as of
September 1, 1995. The Company believes that hospital pressures to immediately
reduce their operating costs may negatively impact same-contract revenue
comparisons and contract renewals during the remainder of fiscal 1997 and the
initial quarters of fiscal 1998. While the comprehensive healthcare management
contracts with managed care payors did generate a small amount of revenues for
DTCA during the three month and nine month periods ended May 31, 1997, and the
managed care agreements with Principal and Health Options are anticipated to
begin generating increased revenues during the quarter ending August 31, 1997,
costs associated with DTCA's managed care payor business are expected to exceed
anticipated revenues during that quarter and for fiscal 1997.
The increase in overall DTCA salaries and benefits for the three and
nine month periods ended May 31, 1997 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 the three and nine month
periods ended May 31, 1997 were 75% and 72%, respectively, as compared with 62%
for both the comparable fiscal 1996 periods. These increases resulted primarily
from the impact of additional salary costs associated with the Company's managed
care contract operations which produced minimal revenues to date during fiscal
1997.
The increase in DTCA's other operating expenses for the three and nine
month periods ended May 31, 1997 from the comparable periods last year resulted
primarily from increased costs associated with the
15
<PAGE> 16
implementation of the Bristol-Myers, Principal and Health Options contracts
causing other operating expenses as a percentage of revenues for the three and
nine month periods ended May 31, 1997 to increase to 29% and 28%, respectively,
compared with 25% and 22%, respectively, for the comparable periods last year.
The increase in DTCA's depreciation and amortization expense for the
three and nine month periods ended May 31, 1997 from the comparable periods last
year resulted from additional amortization expense associated with the costs of
contract development at contracts recently placed in operation partially offset
by reduced amortization expense at DTCA contracts where the costs of contract
development have been fully amortized.
The decrease in income tax expense (resulting in an income tax benefit
for the fiscal 1997 periods compared with income tax expense for the fiscal 1996
periods) attributable to DTCA's operations for the three and nine month periods
ended May 31, 1997 from the comparable periods last year resulted from decreased
operating results for the fiscal 1997 periods. 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 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 of the date of the Distribution. For the Company,
the non-recurring expenses of the Distribution are expected to be approximately
$600,000. 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
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 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 American Healthcorp, Inc.
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 May 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 $(4,000,000)
Estimated income tax benefit 1,520,000
------------------
Net decrease in net income $(2,480,000)
==================
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Stockholders'
Equity
Increase
(Decrease)
------------------
<S> <C>
Increase in paid-in capital from stock options $4,000,000
Net decrease in net income (2,480,000)
------------------
Net increase in stockholders' equity $1,520,000
==================
</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.
17
<PAGE> 18
AMSURG
The following table presents the operations of AmSurg for the three and
nine month periods ended May 31, 1997 and associated percentage changes from the
corresponding periods in fiscal 1996. These results of operations for AmSurg
have been reported as a discontinued operation in the Company's financial
statements.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, 1997 May 31, 1997
---------------------------------------------------------------------
Actual % Change Actual % Change
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 13,598,471 68.2% $ 35,796,515 73.1%
---------------------------------------------------------------------
Expenses:
Salaries and benefits 4,097,168 55.7 11,386,944 79.9
Other operating expenses 4,623,109 84.2 12,229,435 84.2
Depreciation and amortization 1,119,891 70.2 3,019,302 56.0
Interest 372,360 70.0 956,101 59.6
Impairment loss 2,321,168 N/A 2,321,168 N/A
---------------------------------------------------------------------
Total expenses 12,533,696 108.3 29,912,950 93.0
---------------------------------------------------------------------
Income before minority interest
and income taxes 1,064,775 (48.5) 5,883,565 13.6
AmSurg minority partners' interest 2,301,726 76.8 5,654,772 60.3
---------------------------------------------------------------------
Income (loss) before income taxes (1,236,951) (261.3) 228,793 (86.1)
Income taxes 434,000 41.8 1,020,000 60.6
---------------------------------------------------------------------
Net loss (1,670,951) (462.6) (791,207) (178.0)
Accretion of preferred stock discount 69,114 N/A 135,698 N/A
---------------------------------------------------------------------
Net loss attributable to common
stockholders (1,740,065) (477.6) (926,905) (191.3)
AmSurg minority stockholders' interest (716,567) (511.5) (395,271) (203.4)
---------------------------------------------------------------------
Net loss attributable to
American Healthcorp, Inc. $ (1,023,498) (457.1)% $ (531,634) (184.0)%
=====================================================================
</TABLE>
The increases in AmSurg revenues for the three and nine month periods
ended May 31, 1997 of 68% and 73%, respectively, from the comparable periods
last year resulted primarily from the growth in the number of surgery centers in
operation, the acquisitions of one physician practice in January 1996 and one
physician practice in January 1997 and from increases of 4% and 8% in
same-center revenues for the three month and nine month periods, respectively,
at the 18 centers in operation since September 1, 1995. Excluding the two
centers which are owned by the partnership in which the impairment loss as
described below was recorded, same-center revenues for the three month and nine
month periods ended May 31, 1997 increased by 7% and 9%, respectively. The
Company anticipates further revenue growth in the fourth quarter of fiscal 1997
and fiscal 1998 resulting from additional start-up and acquisition centers and
physician practices placed in operation in fiscal 1996 and fiscal 1997 and from
same-center revenue growth.
18
<PAGE> 19
Salaries and benefits expense plus other operating expense for the
three month and the nine month periods ended May 31, 1997, increased by 70% and
82%, respectively, compared with the comparable periods for fiscal 1996. These
increases resulted from additional centers in operation, the acquisition of an
additional physician practice during the second quarter of fiscal 1997, and an
increase in corporate staff primarily to support growth in the number of centers
in operation and anticipated future growth. Salaries and benefits expenses and
other operating expenses represented in the aggregate approximately 64% of
revenues for both the three month periods ended May 31, 1997 and May 31, 1996
and represented in the aggregate approximately 66% and 63%, respectively, of
revenues for the nine month periods ended May 31, 1997 and May 31, 1996. The
increase in the operating expenses as a percentage of revenues for the nine
months ended May 31, 1997 from the comparable fiscal 1996 period resulted
primarily from the acquisition of the physician group practices. Physician group
practices generally have lower operating margins than surgery centers. Because
the two physician practices in which AmSurg now has a majority ownership have
both greater revenues and greater operating expenses as a percentage of revenues
than any single surgery center, the acquisition of one of these practices during
the second quarter of fiscal 1996 and the acquisition of the other practice
during the second quarter of fiscal 1997 have negatively impacted operating
margin percentages.
AmSurg's depreciation and amortization expense for the three and nine
month periods ended May 31, 1997 increased by 70% and 56%, respectively, from
the comparable periods last year and resulted primarily from AmSurg's
acquisition of majority interests in additional surgery centers, the acquisition
of the physician practices and from new start-up surgery centers placed in
operation. Interest expense for the three and nine month periods ended May 31,
1997 increased by 70% and 60%, respectively, from the comparable periods last
year and is primarily attributable to debt assumed or incurred by AmSurg in
connection with acquisitions of interests in surgery centers and the physician
practices plus the interest expense associated with newly opened start-up
surgery centers financed partially with bank debt.
The impairment loss of $2.3 million in the three month period ended May
31, 1997 represents a charge in accordance with Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." AmSurg determined that an
impairment in the asset carrying value at one of its partnerships that owns two
surgery centers acquired in 1994 had taken place and as a result it recorded an
impairment of asset carrying value associated with these centers. Various
disagreements with the sole physician partner over the operation of these
centers have adversely impacted the operations of these centers. After a series
of discussions and attempts to resolve their differences occurring in March
1997, AmSurg determined in April 1997 that the partners would not resolve their
disagreements and that as a result the carrying value of the assets associated
with this partnership was not likely to be fully recovered. In determining that
an impairment had occurred, AmSurg projected the undiscounted cash flows from
these centers and determined these cash flows to be less than the carrying value
of the long-lived assets attributable to this partnership. Accordingly an
impairment loss equal to the excess of the carrying value of the long-lived
assets over the present value of the estimated future cash flows was recorded.
AmSurg believes that the most probable outcome will be the discontinuance of its
involvement with these centers. It is management's intent to pursue a course of
resolution that is as economically favorable as possible to AmSurg. The
physician partner has initiated arbitration proceedings and AmSurg has initiated
legal proceedings to resolve the disagreements between the parties. AmSurg
believes it has good relationships with its other physician partners and that
the impairment loss attributable to the partnership discussed above resulted
from a unique set of circumstances. The pretax losses after minority interest
for these two centers for the three and the nine month periods ended May 31,
1997 were $48,484 and $34,636, respectively, and the pretax profit after
minority interest for these two centers for the three and the nine month periods
ended May 31, 1996 were $20,036 and $19,369, respectively. AmSurg does not
believe that the operations of these two centers subsequent to May 31, 1997 will
have a significant impact on AmSurg's future ongoing results of operations.
The AmSurg minority partners' interest in center and physician practice
earnings for the three and nine month periods ended May 31, 1997 increased by
77% and 60%, respectively, from the comparable fiscal 1996 fiscal periods
primarily as a result of minority partners' interest in earnings at AmSurg
surgery centers recently added to operations and from increased same-center
profitability.
AmSurg's income tax expense for the three and nine month periods ended
May 31, 1997 increased by 42% and 61%, respectively, from the comparable periods
for fiscal 1996 primarily as a result of increased pretax profit
19
<PAGE> 20
during these periods prior to consideration of the impairment loss and from
utilization of prior period net operating loss carry-forwards during the nine
month period ended May 31, 1996. Because the impairment loss discussed above may
only be deducted for tax purposes against future capital gains for up to five
years, AmSurg has recognized no tax benefit associated with this loss in the
current period. AmSurg's effective income tax rate on pretax income prior to the
impairment loss for the three and nine month periods ended May 31, 1997 was 40%
for both of these periods compared with 40% and 38%, respectively, for the
comparable periods last year. The increase in the effective income tax rate for
the nine month period ended May 31, 1997 over the nine month period ended May
31, 1996 resulted primarily from the utilization of prior period net operating
loss carry-forwards during the first and second quarters of fiscal 1996. The
difference between the federal statutory income tax rate of 34% and AmSurg's
effective income tax rates is due primarily to the impact of state income taxes
for both the fiscal 1997 and the fiscal 1996 periods and to the utilization of
prior period net operating loss carry forwards during the nine month period
ended May 31, 1996.
Accretion of preferred stock discount resulted from the issuance during
November 1996 of redeemable preferred stock with a redemption amount of $3.0
million. The preferred stock was recorded at its fair market value, net of
issuance costs. The redeemable preferred stock is being accreted to its
redemption value including potential dividends which will begin in November 1998
unless redeemed by that date.
AmSurg minority stockholders' interest in the net loss attributable to
common stockholders for the three and nine month periods ended May 31, 1997
reflects the share of this net loss attributable to the common stock ownership
in AmSurg that is not held by American Healthcorp, Inc. as well as the accretion
of preferred stock discount. For the three and nine month periods ended May 31,
1997, this minority common stock ownership was 41% and 40%, respectively and for
the three and nine month periods ended May 31, 1996, this minority common stock
ownership was 38%.
AmSurg is expected to incur approximately $450,000 in non-recurring
expenses associated with the Distribution. These expenses will be recognized by
AmSurg as of the date of the Distribution.
LIQUIDITY AND CAPITAL RESOURCES
CONTINUING OPERATIONS
Operating activities from continuing operations for the nine month
period ended May 31, 1997 provided $725,860 in cash flow. Investing activities
during this period used $1.8 million in cash which consisted primarily of $1.1
million in capital expenditures primarily associated with equipment additions
for DTCA's new managed care contract locations and $700,000 invested in AmSurg
during the period. Financing activities associated with continuing operations
for the nine month period ended May 31, 1997 provided $273,718 in cash flow all
of which was attributable to proceeds from the exercise of stock options.
The Company believes that cash flow from DTCA operating activities and
the Company's available cash balances of $11.7 million at May 31, 1997 will
continue to enable the Company to fund DTCA's current working capital needs,
including the implementation and operation of the agreements with Principal and
Health Options and to pay the Company's costs associated with the Distribution.
During the quarter ended May 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.
DISCONTINUED OPERATIONS
Operating activities for AmSurg for the nine month period ended May 31,
1997 generated $8.9 million in cash flow. Investing activities during this
period used $16.6 million in cash which consisted primarily of $11.1 million
used by AmSurg to acquire interests in additional practice-based ambulatory
surgery centers and an interest in a physician practice and $5.6 million used
for the acquisition of property and equipment for new AmSurg start-up surgery
centers and for other equipment and leasehold improvement purchases for existing
AmSurg operations. Financing activities for the period provided $9.4 million in
cash flow primarily as a result of (i) net additions to
20
<PAGE> 21
long-term debt of $5.4 million, (ii) net proceeds of approximately $5.0 million
from the issuance of preferred stock, (iii) $2.1 million in minority partner
capital contributions to AmSurg's partnerships and limited liability companies
developing start-up surgery centers and (iv) $1.8 million in cash proceeds from
the issuance of AmSurg common stock; these financing proceeds were partially
offset by $4.9 million in distributions to surgery center minority partners. At
May 31, 1997, AmSurg had $4.4 million in outstanding term loan borrowings under
its amended and restated bank credit agreement which is repayable through June
2000. AmSurg also had outstanding borrowings of $10.0 million under a related
revolving credit facility which was amended during the quarter ended May 31,
1997 and which currently provides up to $15.0 million in available credit
through April 1999 for acquisition and development projects. Borrowings under
the bank credit agreement and related credit facility bear interest at a rate
equal to the prime rate or 1.75% above LIBOR or a combination thereof at
AmSurg's option, plus a .35% fee for unused commitments. At May 31, 1997, AmSurg
partnerships and limited liability companies had unfunded construction and
equipment purchase commitments for centers under development of approximately
$4.0 million. Of the $4.0 million, AmSurg expects that approximately $3.5
million will be borrowed under AmSurg's credit facility (and guaranteed on a pro
rata basis by the physicians), and that the remaining amount will be provided by
AmSurg and the physician partners in proportion to their respective ownership
interests. AmSurg intends to fund its portion out of cash flow from operations.
On November 20, 1996, AmSurg issued shares of its preferred stock to
certain unaffiliated institutional investors for cash proceeds of approximately
$5.0 million, after payment of offering expenses. The purpose of the offering
was to fund the acquisition and development of surgery centers and to provide
other working capital as needed prior to being in position to access capital
markets as an independent public company following the Distribution. The
redeemable preferred stock has a liquidation value of $3.0 million and will
accrue dividends of 8% per annum on such liquidation value commencing November
21, 1998. This stock is subject to redemption at the option of AmSurg at any
time, and is subject to redemption at the option of the holders on November 20,
2002 and upon the occurrence of certain events, including a public offering
yielding at least $20.0 million in net proceeds to AmSurg and/or its
stockholders (or $25.0 million in net proceeds if the Distribution does not
occur) (a "Qualified IPO"). The redeemable preferred stock may also be converted
into shares of AmSurg common stock at the option of the holders for a limited
period of time following the Distribution or upon a Qualified IPO at the then
current market price of the common stock. The convertible preferred stock, with
a liquidation value of $2.5 million, will be automatically converted into a
number of shares of common stock that approximates 6% of the equity of AmSurg
determined as of November 20, 1996, with that percentage being ratably increased
to 8% of the equity of AmSurg if a triggering event has not occurred by November
20, 2000. If a Qualified IPO or other triggering event does not occur by
November 20, 2002, the holders of the convertible preferred stock will have the
right to sell such stock to AmSurg at a formula price.
Historically AmSurg has depended on American Healthcorp, Inc. for the
majority of its equity financing. A principal purpose of the Distribution is to
permit AmSurg to have access to public debt and equity capital markets as an
independent public company. Management believes that AmSurg will have access to
such capital on more favorable terms as an independent public company than it
could have as a majority-owned subsidiary of American Healthcorp, Inc.
particularly in public equity markets. While AmSurg anticipates that its
operating activities will continue to provide positive cash flow, AmSurg will
require additional financing in order to fund its development and acquisition
plans and to achieve its long-term strategic growth plans. This additional
financing could take the form of a private or public offering of debt or equity
securities or additional bank financing. No assurances can be given that the
necessary financing will be obtainable on terms satisfactory to AmSurg. The
failure to raise the funds necessary to finance its future cash requirements
could adversely affect AmSurg's ability to pursue its strategy and could
adversely affect its results of operations for future periods.
21
<PAGE> 22
PART II
ITEM 1. Legal Proceedings.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of Inspector General ("OIG") of
the Department of Health and Human Services in connection with an investigation
of DTCA under certain federal Medicare and Medicaid statutes. On February 10,
1995, the Company learned that the federal government had declined to take over
and pursue a civil "whistle blower" action brought under seal in June 1994 on
behalf of the government by a former employee dismissed by the Company in
February 1994. The Company believes that this lawsuit triggered the OIG
investigation. The civil suit was filed in June 1994 against the Company, DTCA,
and certain named and unnamed medical directors and client hospitals and was
kept under seal to permit the government to determine whether to take over the
lawsuit. Following its review, the government made the determination not to take
over the litigation, and the complaint was unsealed on February 10, 1995.
Various preliminary motions have been filed regarding jurisdictional and
pleading matters, resulting in the filing of a number of amended complaints and
the dismissal of the Company as a defendant. DTCA continues to be a defendant.
Certain of these motions are still pending.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
ITEM 2. Changes in Securities.
Not Applicable.
ITEM 3. Defaults Upon Senior Securities.
Not Applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
ITEM 5. Other Information.
Not Applicable.
22
<PAGE> 23
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.1 Article IV of the Company's Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.1 to
Registration Statement on Form S-1 (Registration No. 33-41119))
10.1 Second Amended and Restated Loan Agreement dated April
17, 1997 among AmSurg, SunTrust Bank, Nashville, N.A., and
NationsBank of Tennessee, N.A., as amended May 6, 1997
(incorporated by reference to Exhibit 10.4 to Form 10 of
AmSurg Corp. filed May 9, 1997).
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
A report on Form 8-K dated March 17, 1997 was filed during
the quarter ended May 31,1997 reporting the proposed
Distribution of AmSurg common stock held by the Company to
the shareholders of the Company.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HEALTHCORP, INC.
(Registrant)
Date July 14, 1997 By /s/ Henry D. Herr
------------- ---------------------------
HENRY D. HERR
Executive Vice President
Finance and Administration
(Principal Financial Officer)
Date July 14, 1997 By /s/ David A. Sidlowe
------------- ---------------------------
DAVID A. SIDLOWE
Vice President and Controller
(Principal Accounting Officer)
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AMERICAN HEALTHCORP, INC. FOR THE NINE MONTHS ENDED MAY
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 11,732,214
<SECURITIES> 0
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0
0
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</TABLE>
