<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 FEBRUARY 28, 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 April 10, 1997 there were outstanding 8,034,181 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>
February 28, August 31,
1997 1996
------------ -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 10,109,858 $12,561,703
Accounts receivable, net 3,258,370 3,521,379
Other current assets 2,316,976 1,479,935
Deferred tax asset 436,000 436,000
------------ -----------
Total current assets 16,121,204 17,999,017
------------ -----------
Net assets of discontinued operations 17,559,866 16,360,898
------------ -----------
Property and equipment:
Leasehold improvements 77,434 100,712
Equipment 3,279,806 2,289,193
------------ -----------
3,357,240 2,389,905
Less accumulated depreciation (1,556,699) (1,304,465)
------------ -----------
Net property and equipment 1,800,541 1,085,440
------------ -----------
Long-term deferred tax asset 740,000 740,000
------------ -----------
Other assets, net 357,945 527,950
------------ -----------
Excess of cost over net assets
of purchased operations, net 12,038,468 12,229,578
------------ -----------
$ 48,618,024 $48,942,883
============ ===========
</TABLE>
2
<PAGE> 3
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
February 28, August 31,
1997 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 660,988 $ 732,718
Accrued salaries and benefits 1,037,614 1,791,691
Accrued liabilities 1,612,978 1,557,564
Income taxes payable 390,426 456,241
Current portion of other long-term
liabilities 767,422 136,823
------------ ------------
Total current liabilities 4,469,428 4,675,037
------------ ------------
Other long-term liabilities 2,025,032 2,656,757
------------ ------------
Stockholders' equity
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,020,139 and 7,985,884
shares outstanding 8,020 7,986
Additional paid-in capital 17,873,306 17,629,678
Retained earnings 24,242,238 23,973,425
------------ ------------
Total stockholders' equity 42,123,564 41,611,089
------------ ------------
$ 48,618,024 $ 48,942,883
============ ============
</TABLE>
3
<PAGE> 4
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28/29, February 28/29,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <S> <C> <C> <C>
Revenues $ 7,352,800 $ 7,691,181 $15,332,220 $15,714,595
----------- ----------- ----------- -----------
Expenses
Salaries and benefits 5,493,934 4,794,581 10,754,958 9,738,400
Other operating expenses 2,114,057 1,704,044 4,122,776 3,275,378
Depreciation and amortization 344,957 293,280 675,479 649,661
Interest 1,022 1,112 2,058 3,364
----------- ----------- ----------- -----------
Total expenses 7,953,970 6,793,017 15,555,271 13,666,803
----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes (601,170) 898,164 (223,051) 2,047,792
Income tax expense (benefit) (171,000) 390,000 - 889,000
----------- ----------- ----------- -----------
Income (loss) from continuing operations (430,170) 508,164 (223,051) 1,158,792
Income from discontinued operations,
net of income taxes 235,875 196,597 491,864 345,960
----------- ----------- ----------- -----------
Net income (loss) $ (194,295) $ 704,761 $ 268,813 $ 1,504,752
=========== =========== =========== ===========
Income (loss) per share
from continuing operations $ (0.05) $ 0.06 $ (0.03) $ 0.15
Income per share from
discontinued operations 0.03 0.03 0.06 0.04
----------- ----------- ----------- -----------
Net income (loss) per share $ (0.02) $ 0.09 $ 0.03 $ 0.19
=========== =========== =========== ===========
Weighted average common
shares and equivalents 8,258,886 8,154,858 8,228,862 8,122,495
</TABLE>
4
<PAGE> 5
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED FEBRUARY 28, 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 34 243,628 - 243,662
Net income - - 268,813 268,813
---------- ----------- ------------ ------------
Balance, February 28, 1997 $ 8,020 $17,873,306 $ 24,242,238 $ 42,123,564
========== =========== ============ ============
</TABLE>
5
<PAGE> 6
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
February 28/29,
-----------------------------
1997 1996
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 268,813 $ 1,504,752
Less: income from discontinued operations (491,864) (345,960)
----------- -------------
Income (loss) from continuing operations (223,051) 1,158,792
Income tax expense - 889,000
----------- -------------
Income (loss) before income taxes (223,051) 2,047,792
Noncash expeses, revenues, losses and gains
included in income (loss):
Depreciation and amortization 675,479 649,661
Increase in working capital items (1,344,425) (794,657)
Other noncash transactions (277,007) 237,851
----------- -------------
(1,169,004) 2,140,647
Increase in other assets (48,401) (132,344)
Income taxes (net paid) (24,688) (1,020,995)
Additions to other long-term liabilities 363,179 333,333
Payments on others long-term liabilities (86,620) (245,029)
----------- -------------
Net cash flows provided by (used in) operating activities (965,534) 1,075,612
----------- -------------
Cash flows from investing activities:
Investment in discontinued operations (700,001) (231,948)
Acquisition of property and equipment (971,360) (265,593)
Decrease (increase) in long-term receivables
and deposits (17,485) 7,109
----------- -------------
Net cash flows used in investing activities (1,688,846) (490,432)
----------- -------------
Cash flows from financing activities:
Exercise of stock options 202,535 4,086
----------- -------------
Net cash flows provided by
financing activities 202,535 4,086
----------- -------------
Net increase (decrease) in cash and cash equivalents (2,451,845) 589,266
Cash and cash equivalents, beginning of period 12,561,703 11,076,047
----------- -------------
Cash and cash equivalents, end of period $10,109,858 $ 11,665,313
=========== =============
</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 periods ended
February 28, 1997 and February 29, 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. 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 is expected to occur in May 1997
and will result in AmSurg operating 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.
Summary operating results of AmSurg are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
February 28/29, February 28/29,
--------------------------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $11,995,476 $6,714,085 $22,198,044 $12,594,766
Income before minority
interest and income taxes $ 2,516,270 $1,732,836 $ 4,818,790 $ 3,109,127
Minority interest $ 1,745,565 $1,219,009 $ 3,353,046 $ 2,225,951
Net income $ 462,705 $ 315,827 $ 879,744 $ 554,176
Net income attributable to
American Healthcorp, Inc. $ 235,875 $ 196,597 $ 491,864 $ 345,960
</TABLE>
7
<PAGE> 8
Net assets of AmSurg are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
At February 28, 1997
- -------------------------------------------------------------------------------
<S> <C>
Current assets $ 10,814,228
Property and equipment 13,364,594
Other assets 1,104,346
Excess of cost over net assets of purchased operations 36,101,135
Current liabilities (6,008,005)
Deferred taxes (765,000)
Long-term debt (13,536,830)
Minority interests (23,514,602)
- -------------------------------------------------------------------------------
Net assets of discontinued operations $ 17,559,866
- -------------------------------------------------------------------------------
</TABLE>
3. AMSURG ACQUISITIONS
In two separate transactions during the quarter ended February 28, 1997,
AmSurg acquired a majority interest in a physician practice-based surgery
center and a physician practice and related entities. The purchase price paid
for the interests acquired was $4,928,110 which consisted of cash of $4,227,747
and AmSurg common stock valued at $700,363. With these transactions, AmSurg
acquired tangible assets of $561,517, excess cost over net assets of purchased
operations of $4,712,626 and assumed liabilities of $346,033.
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 (59% at February 28,
1997) subsidiary which is reported as a discontinued operation, develops,
acquires and manages 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
8
<PAGE> 9
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.
It is anticipated that the Distribution will take place in the latter part
of May 1997. The record date for the Distribution will be five business days
prior to the actual Distribution date. Stockholders of record of the Company
on the record date for the Distribution will be entitled automatically to
participate in the Distribution and are not required to do anything to become
entitled to so participate. There can be no assurances that all of the
conditions of the Distribution will be met or that the Distribution will be
accomplished as discussed above.
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 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.
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 February 28, 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.
9
<PAGE> 10
<TABLE>
<CAPTION>
As of February 28/29,
----------------------------------------------
1997 1996
----------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
--------------------- ---------------------
<S> <C> <C> <C> <C>
Hospital contracts/sites 58 61 60 62
Network contracts/sites 2 11 2 11
--------------------- ---------------------
Total contracts/sites 60 72 62 73
--------------------- ---------------------
</TABLE>
The components of changes to the total number of DTCA hospital contracts
during the quarters and the six months ended February 28/29, 1997 and 1996 are
presented below.
<TABLE>
<CAPTION>
For the Three Months Ended February 28/29,
----------------------------------------------
1997 1996
----------------------------------------------
Hospital Hospital
Contracts Sites Contracts Sites
--------------------- ---------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 61 73 65 70
New contracts/sites signed 2 2 1 4
Contracts/sitesdiscontinued (3) (3) (4) (3)
--------------------- ---------------------
Total contracts/sites 60 72 62 71
--------------------- ---------------------
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended February 28/29,
----------------------------------------------
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 2 3 4 9
Contracts/sites discontinued (3) (3) (10) (10)
Conversion of stand alone
hospital contract to
hospital network contract - - (1) -
--------------------- ---------------------
Total contracts/sites 60 72 62 73
--------------------- ---------------------
</TABLE>
During the three month period ended February 28, 1997, seven contracts were
renewed for DTCA hospital-based diabetes treatment centers. During the
remainder of fiscal 1997, 12 contracts will reach the end of their terms unless
renewed. The Company periodically renegotiates existing DTCA hospital
contracts and, in that connection, has
10
<PAGE> 11
to reduce its fee structure in certain of these contracts in order to maintain
favorable long-term client relationships with these hospitals. The Company
anticipates that it will continue to make such fee reductions or center
contract restructurings which will have a negative impact on the Company's
revenues and profitability. Three of the contracts that will expire during the
remainder of fiscal 1997 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 an adverse effect on hospital contract
profitability in future periods. While the Company believes that its programs
reduce the costs of care for hospitalized diabetes patients, certain hospitals
faced with pressures to make immediate cost reductions have decided that the
short-term benefit of eliminating the costs associated with programs such as
the Company's diabetes program is justified. However, the Company also
believes that the growth in healthcare payor demand for effective chronic
disease management programs from healthcare providers such as hospitals will
eventually stabilize DTCA's hospital contract business and will provide an
opportunity for future growth in this business.
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 continues to incur substantial expenditures associated
with these comprehensive diabetes disease management efforts. These
expenditures are expected to continue with an increasingly larger portion being
related to the operation of managed care contracts and a decreasingly smaller
portion related to managed care product development. For the three month
periods ended February 28, 1997 and February 29, 1996, DTCA's managed care
operations reduced the Company's pretax profits by approximately $1.8 million
and $584,000, respectively.
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. The Principal agreement was amended during
the first quarter of fiscal 1997 to add an additional HMO contract location
and, during the second quarter of fiscal 1997, a second HMO contract location
was added with Health Options. 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 contracts 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 continues 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, the significant start-up costs
for the implementation program and the timing delay in calculating DTCA's share
of savings, if any, which may be produced by the program, it is anticipated
that DTCA's profitability will be negatively affected by these agreements
during fiscal 1997.
11
<PAGE> 12
In June 1996, DTCA also reached agreement with U.S. Healthcare ("USHC") to
provide outpatient services to USHC enrollees with diabetes, including patient
assessment and patient stratification based on the scope and intensity of
needed services, as well as educational, behavioral and motivational support
and outcomes tracking and reporting. Services are provided on a packaged
fee-for-services basis and are delivered through DTCA centers currently
operating in USHC markets. Implementation has begun at DTCA hospital contract
sites in markets which contain the greatest concentration of USHC enrollees.
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 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
59% of the outstanding common stock of AmSurg, a company that develops,
acquires and manages physician practice-based ambulatory surgery centers and
specialty physician networks through partnership or limited liability company
("LLC") interests in these centers and networks.
AmSurg's principal source of revenue is a facility fee charged for
surgical procedures performed in its surgery centers. The facility fee is
generally paid through third party reimbursement programs including
governmental and private insurance programs.
While AmSurg generally owns 51% to 70% of the entities that own the
surgery center or 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 59% of
the common stock of AmSurg, the calculation of consolidated net income of the
Company includes a minority interest provision to reflect the AmSurg minority
stockholders' share of the net income or loss of AmSurg.
The following table presents the components of changes in the number of
AmSurg surgery centers in operation for the three and six month periods ended
February 28/29, 1997 and 1996.
<TABLE>
<CAPTION>
Three months ended Six months ended
February 28/29, February 28/29,
---------------------------------------------
1997 1996 1997 1996
---------------------------------------------
<S> <C> <C> <C> <C>
Centers in operation at beginning of period 26 18 22 18
New center acquisitions placed in operation 1 - 4 -
New development centers placed in operation 1 - 2 -
-------------------- ------------------
Centers in operation at end of period 28 18 28 18
-------------------- ------------------
</TABLE>
12
<PAGE> 13
Twenty-two of the AmSurg surgery centers in operation as of February 28,
1997, perform gastrointestinal endoscopy procedures, three centers perform eye
surgery procedures, one center performs orthopaedic procedures, one center
performs ear, nose and throat procedures and one center performs ophthalmology,
urology, general surgery and otolaryngology procedures. In addition, as of
February 28, 1997, AmSurg also owned a majority interest in 21 partnerships or
LLCs, including four projects requiring certificate of need approval, each of
which will develop, own and operate a surgery center. As of February 29, 1996,
AmSurg owned a majority interest in thirteen partnerships or LLCs that were
developing centers.
As part of its network development strategy, in January 1997, AmSurg
acquired an undivided 60% interest in the operations of Miami Urological
Associates, a urology practice comprised of three urologists and seven
additional contract physicians in Miami, Florida, and a urology network which
contracts with two managed care payors to provide physician and certain
outpatient procedures for approximately 170,000 covered lives. AmSurg and the
Miami Urological Associates physicians have entered into a partnership to
develop an ambulatory surgery center for the urology practice. This is the
second physician practice in which AmSurg has purchased a majority interest as
part of its network development strategy.
AmSurg intends to expand primarily through the development and acquisition
of additional surgery centers in targeted surgical specialties. In addition,
AmSurg's surgery centers, combined with its relationships with specialty
physician surgical practices in their markets, will provide other opportunities
for AmSurg growth from surgical specialty network acquisition and development
that may include the acquisition of specialty physician practices. By using
AmSurg surgery centers as a base to develop specialty physician networks that
are designed to serve large numbers of covered lives, the Company believes that
AmSurg will strengthen its market position in contracting with managed care
organizations. As of February 28, 1997, AmSurg operated four specialty
physician networks, located in the south Florida market and in Knoxville,
Tennessee and Montgomery, Alabama.
13
<PAGE> 14
RESULTS OF OPERATIONS
The Company operates two business segments, DTCA and AmSurg. 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.
DTCA
The following table presents the operations of DTCA for the three and six
month periods ended February 28, 1997 and associated percentage changes from
the corresponding period in fiscal 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, 1997 February 28, 1997
---------------------------------------------
Actual % Change Actual % Change
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $7,352,800 (4.4)% $15,332,220 (2.4)%
--------------------- ----------------------
Expenses:
Salaries and benefits 5,493,934 14.6% 10,754,958 10.4%
Other operating expenses 2,114,057 24.1% 4,122,776 25.9%
Depreciation and amortization 344,957 17.6% 675,479 4.0%
Interest 1,022 (8.1)% 2,058 (38.8)%
--------------------- ----------------------
Total expenses 7,953,970 17.1% 15,555,271 13.8%
--------------------- ----------------------
Loss before income taxes (601,170) (166.9)% (223,051) (110.9)%
Income taxes (171,000) (143.8)% - (100.0)%
--------------------- ----------------------
Net loss $ (430,170) (184.7)% $ (223,051) (119.2)%
--------------------- ----------------------
</TABLE>
The DTCA revenue decrease for the three and six month periods ended
February 28, 1997 from the comparable periods last year resulted primarily from
the impact of contract terminations, offset somewhat by the revenues associated
with the Bristol-Myers disease management contract which was signed in January
of 1996. In addition, while there was no change in same-center revenues for
the six month period ended February 28, 1997 compared to the same six month
period in fiscal 1996, DTCA revenues were impacted by a 2% decrease in same
contract revenues for the three month period ended February 28, 1997 for
centers in operation as of September 1, 1995. The decrease in same contract
revenues during the second quarter of fiscal 1997 resulted primarily from the
negative impact of contract fee renegotiations and restructurings. 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. While the comprehensive healthcare
management contract with Bristol-Myers for enrollees with diabetes at select
locations did generate a small amount of revenue for DTCA during the three
month period ended February 28, 1997, the new managed care agreements signed
by DTCA with Principal and Health Options did not generate any significant
revenues during the quarter and are not anticipated to begin generating
revenues until the fourth quarter of fiscal 1997, though costs associated with
such contracts are expected to initially exceed anticipated revenues.
14
<PAGE> 15
The increase in overall DTCA salaries and benefits for the three and six
month periods ended February 28, 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,
offset somewhat by the impact of fewer hospital contracts in operation during
the fiscal 1997 periods than during the comparable fiscal 1996 periods.
Salaries and benefits as a percentage of revenues for the three and six month
periods ended February 28, 1997 were 75% and 70%, 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 efforts which produced minimal revenues during the
quarter. DTCA anticipates that salaries and benefits will increase during the
remainder of fiscal 1997 as a result of the implementation and operation of the
managed care contracts with Principal and Health Options.
The increase in DTCA's other operating expenses for the three and six
month periods ended February 28, 1997 from the comparable periods last year
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 the three and six month
periods ended February 28, 1997 to increase to 29% and 27%, respectively,
compared with 22% and 21%, respectively, for the comparable periods last year.
DTCA anticipates that other operating costs will continue to increase during
fiscal 1997 as a result of the implementation and operation of the managed care
contracts with Principal and Health Options.
The increase in DTCA's depreciation and amortization expense for the three
and six month periods ended February 28, 1997 from the comparable periods last
year resulted from additional amortization expense associated with the costs of
center development at centers recently placed in operation partially offset by
reduced amortization expense at DTCA centers where the costs of center contract
development have been fully amortized.
The decrease in income tax expense attributable to DTCA's operations for
the three and six month periods ended February 28, 1997 from the comparable
periods last year resulted from decreased operating results during fiscal 1997.
The differences between the federal statutory income tax rate and the
Company's effective income tax rate 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 and related transactions are
expected to be approximately $550,000. 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.
15
<PAGE> 16
If the Distribution were to have occurred on March 31, 1997, on which date the
closing price of American Healthcorp, Inc. Common Stock was $11.38, the
estimated impact on earnings and stockholders' equity would have been as
follows:
<TABLE>
<CAPTION>
Net Income
Increase
(Decrease)
------------
<S> <C>
Compensation expense $ (4,300,000)
Estimated income tax benefit 1,200,000
------------
Net decrease in net income $ (3,100,000)
============
<CAPTION>
Stockholders'
Equity
Increase
(Decrease)
------------
Increase in paid-in capital from stock options $ 4,300,000
Net decrease in net income (3,100,000)
------------
Net increase in stockholders' equity $ 1,200,000
============
</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 impact on weighted average common shares and
equivalents.
16
<PAGE> 17
AMSURG
The following table presents the operations of AmSurg for the three and
six month periods ended February 28, 1997 and associated percentage changes
from the corresponding periods in fiscal 1996. The results of operations for
AmSurg have been reported as a discontinued operation in the Company's
financial statements.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
February 28, 1997 February 28, 1997
---------------------------------------------
Actual % Change Actual % Change
--------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues $11,995,476 78.7% $22,198,044 76.2%
--------------------- ---------------------
Expenses:
Salaries and benefits 3,868,028 87.5% 7,289,776 97.0%
Other operating expenses 4,291,051 106.2% 7,607,677 84.3%
Depreciation and amortization 1,025,791 58.4% 1,898,060 48.6%
Interest 294,336 54.8% 583,741 53.6%
--------------------- ---------------------
Total expenses 9,479,206 90.3% 17,379,254 83.2%
--------------------- ---------------------
Income before minority interest
and income taxes 2,516,270 45.2% 4,818,790 55.0%
AmSurg minority partners' interest 1,745,565 43.2% 3,353,046 50.6%
--------------------- ---------------------
Income before income taxes 770,705 50.0% 1,465,744 66.0%
Income taxes 308,000 55.6% 586,000 78.1%
--------------------- ---------------------
Net Income 462,705 46.5% 879,744 58.7%
Accretion of preferred stock discount 66,584 N/A 66,584 N/A
--------------------- ---------------------
Net income attributable to common
stockholders 396,121 25.4% 813,160 46.7%
AmSurg minority stockholders' interest 160,246 34.4% 321,296 54.3%
--------------------- ---------------------
Net income attributable to
American Healthcorp, Inc. $ 235,875 20.0% $ 491,864 42.2%
--------------------- ---------------------
</TABLE>
The increase in AmSurg revenues for the three and six month periods ended
February 28, 1997 from the comparable periods last year resulted primarily from
more surgery centers in operation, the acquisitions of one physician practice
in January 1996 and one physician practice in January 1997 and from increases
of 7% and 10% in same-center revenues for the three month and six month
periods, respectively, at the 18 centers in operation since September 1, 1995.
The Company anticipates further revenue growth in fiscal 1997 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.
The increase in salaries and benefits expense and in other operating
expenses for the three and six month periods ended February 28, 1997 from the
comparable periods last year resulted primarily from the acquisition of the
physician practices, from additional AmSurg centers in operation between the
periods and from an increase in AmSurg corporate staff primarily to support
anticipated future growth in the number of centers in operation. Salaries and
benefits expense
17
<PAGE> 18
and other operating expenses represented in the aggregate approximately 68% and
67%of revenues for the three month and six month periods ended February 28,
1997, respectively, compared with 62% for the comparable periods during fiscal
1996. Physician group practices generally have lower operating margins than
ambulatory surgery centers. Because the physician practices have both greater
revenues and greater operating expenses as a percentage of revenues than an
average ambulatory surgery center, these acquisitions had a disproportionately
large negative impact on operating margins.
AmSurg's depreciation and amortization expense increases for the three and
six month periods ended February 28, 1997 from the comparable periods last year
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. The increase in interest
expense is primarily attributable to debt assumed or incurred by AmSurg in
connection with additional 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 AmSurg minority partners' interest in earnings for the three and six
month periods ended February 28, 1997 increased by $527,000 and $1.1 million,
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 profitability at same-centers.
The effective income tax rate for the three and six month periods ended
February 28, 1997 for AmSurg was 40% for both of these periods compared with
39% and 37% for the comparable periods last year. The increase in the
effective income tax rate resulted primarily from the utilization of prior
period net operating loss carryforwards during the fiscal 1996 periods. The
difference between the federal statutory income tax rate 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 fiscal 1996 period.
Accretion of preferred stock discount resulted from the issuance during
November 1996 of redeemable preferred stock with a redemption amount of $3.0
million in November 1996. 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 earnings for the three and six
month periods ended February 28, 1997 increased by $41,000 and $113,000 from
the comparable fiscal 1996 periods primarily as a result of improved AmSurg
profitability offset somewhat by the impact of the preferred stock accretion
that began during the second quarter of fiscal 1997 and the impact of a
slightly lower ownership interest that the Company had in AmSurg during the
fiscal 1997 periods compared with the fiscal 1996 periods.
AmSurg will 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 six month period
ended February 28, 1997 utilized $965,534 in cash flow. Investing activities
during this period used $1.7 million which consisted primarily of $971,360 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
six month period ended February 28, 1997 provided $202,535 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 $10.1 million at February 28, 1997 will
continue to enable the Company to fund DTCA's current working capital
18
<PAGE> 19
needs, including the implementation and operation of the new agreements with
Principal and Health Options and to pay the Company's costs associated with the
Distribution. At February 28, 1997, the Company had no outstanding borrowings
under its $10 million bank revolving credit agreement, which expires January
29, 1998 and has no plans to borrow under this agreement.
DISCONTINUED OPERATIONS
Operating activities for AmSurg for the six month period ended February
28, 1997 generated $5.3 million in cash flow. Investing activities during this
period used $11.5 million which consisted primarily of $8.7 million used by
AmSurg to acquire interests in additional practice-based ambulatory surgery
centers and an interest in a physician practice and $2.8 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 $7.1 million in cash
flow primarily as a result of (i) net proceeds of $5.0 million from the
issuance of preferred stock, (ii) net additions to long-term debt of $2.5
million, (iii) $1.5 million in cash proceeds from the issuance of AmSurg common
stock and (iv) $1.1 million in minority partner capital contributions to
AmSurg's partnerships and limited liability companies developing start-up
surgery centers; these financing proceeds were partially offset by $3.0 million
in distributions to surgery center minority partners. At February 28, 1997,
AmSurg had $4.8 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 $6.9 million under a related
revolving credit facility which provides up to $12.0 million in available
credit through June 1998 for acquisitions and development projects, with
repayment of these borrowings being made through June 2002. 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.
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 or 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
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.
19
<PAGE> 20
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.
(a) The Annual Meeting of Stockholders of American Healthcorp, Inc. was
held on January 21, 1997.
(c) Nominations to elect Henry D. Herr and Martin S. Koldyke as
Directors of the Company were voted upon at the Annual Meeting of
Stockholders. The results of the election of the above mentioned
nominees were as follows:
<TABLE>
<CAPTION>
For Against Withheld
--------- ------- --------
<S> <C> <C> <C>
Henry D. Herr 5,543,124 - 3,950
Martin S. Koldyke 5,543,124 - 3,950
</TABLE>
ITEM 5. Other Information.
Not Applicable.
20
<PAGE> 21
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))
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the
quarter for which this report is filed.
21
<PAGE> 22
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 April 14, 1997 By /s/ Henry D. Herr
---------------------------- -------------------------------------
HENRY D. HERR
Executieve Vice President
Finance and Administration,
(Principal Financial Office)
Date April 14, 1997 By /s/ David A. Sidlowe
---------------------------- -------------------------------------
DAVID A. SIDLOWE
Vice President and Controller
(Principal Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 10,109,858
<SECURITIES> 0
<RECEIVABLES> 3,258,370
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,121,204
<PP&E> 3,357,240
<DEPRECIATION> (1,556,699)
<TOTAL-ASSETS> 48,618,024
<CURRENT-LIABILITIES> 4,469,428
<BONDS> 0
0
0
<COMMON> 8,020
<OTHER-SE> 42,115,544
<TOTAL-LIABILITY-AND-EQUITY> 48,618,024
<SALES> 0
<TOTAL-REVENUES> 15,332,220
<CGS> 0
<TOTAL-COSTS> 14,877,734
<OTHER-EXPENSES> 675,479
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,058
<INCOME-PRETAX> (223,051)
<INCOME-TAX> 0
<INCOME-CONTINUING> (223,051)
<DISCONTINUED> 491,864
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 268,813
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
