<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, 1998
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
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
As of July 10, 1998 there were outstanding 8,100,836 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,
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $10,183,178 $12,226,821
Accounts receivable, net 4,166,054 3,469,839
Other current assets 871,250 1,307,075
Deferred tax asset 1,306,000 1,306,000
----------- -----------
Total current assets 16,526,482 18,309,735
----------- -----------
Net assets of discontinued operations -- 16,407,271
----------- -----------
Property and equipment:
Leasehold improvements 174,380 77,434
Equipment 4,810,904 3,581,093
----------- -----------
4,985,284 3,658,527
Less accumulated depreciation (2,282,522) (1,851,087)
----------- -----------
Net property and equipment 2,702,762 1,807,440
----------- -----------
Long-term deferred tax asset 2,881,000 691,000
----------- -----------
Other assets, net 213,360 309,998
----------- -----------
Excess of cost over net assets
of purchased companies, net 11,560,694 11,847,358
----------- -----------
$33,884,298 $49,372,802
=========== ===========
</TABLE>
2
<PAGE> 3
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 31, August 31,
1998 1997
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,004,920 $ 785,674
Accrued salaries and benefits 1,525,256 1,457,139
Accrued liabilities 1,253,665 1,240,660
Unearned contract fees 1,610,599 2,251,176
Income taxes payable 437,606 885,950
Current portion of other long-term liabilities 412,656 125,000
----------- -----------
Total current liabilities 6,244,702 6,745,599
----------- -----------
Other long-term liabilities 2,356,861 2,186,481
----------- -----------
Stockholders' equity
Common stock
$.001 par value, 15,000,000 shares
authorized, 8,096,089 and 8,051,559
shares outstanding 8,096 8,052
Additional paid-in capital 23,993,251 18,142,278
Retained earnings 1,281,388 22,290,392
----------- -----------
Total stockholders' equity 25,282,735 40,440,722
----------- -----------
$33,884,298 $49,372,802
=========== ===========
</TABLE>
3
<PAGE> 4
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------ ----------------------------
1998 1997 1998 1997
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $9,470,527 $ 7,246,162 $ 25,670,256 $ 22,578,382
---------- ----------- ------------ ------------
Expenses
Salaries and benefits 6,257,112 5,399,511 17,877,387 16,154,469
Other operating expenses 2,867,164 2,126,648 7,249,717 6,249,424
Depreciation and amortization 295,870 331,290 920,846 1,006,769
Interest -- 3,455 113 5,513
Spin-off stock option adjustment -- -- 5,770,000 --
---------- ----------- ------------ ------------
Total expenses 9,420,146 7,860,904 31,818,063 23,416,175
---------- ----------- ------------ ------------
Income (loss) before income taxes
and discontinued operations 50,381 (614,742) (6,147,807) (837,793)
Income tax expense (benefit) 48,000 (203,000) (2,230,000) (203,000)
---------- ----------- ------------ ------------
Income (loss) from continuing operations 2,381 (411,742) (3,917,807) (634,793)
Income (loss) from discontinued
operations, net of income taxes -- (1,023,498) 56,483 (531,634)
---------- ----------- ------------ ------------
Net income (loss) $ 2,381 $(1,435,240) $(3,861,324) $(1,166,427)
========== =========== ============ ============
Basic and diluted income (loss) per share:
From continuing operations $ 0.0 $ (0.05) $ (0.49) $ (0.08)
From discontinued operations -- (0.13) 0.01 (0.07)
---------- ----------- ------------ ------------
$ 0.0 $ (0.18) $ (0.48) $ (0.15)
========== =========== ============ ============
Weighted average common shares
and equivalents:
Basic 8,089,595 8,032,095 8,072,948 8,016,482
Diluted 8,736,825 8,032,095 8,072,948 8,016,482
</TABLE>
4
<PAGE> 5
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MAY 31, 1998
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings Total
------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, August 31, 1997 $ 8,052 $ 18,142,278 $ 22,290,392 $ 40,440,722
Exercise of stock options 61 237,463 -- 237,524
Repurchase of stock (17) (156,490) -- (156,507)
Spin-off stock
option adjustment -- 5,770,000 -- 5,770,000
Distribution of
AmSurg stock -- -- (17,147,680) (17,147,680)
Net loss -- -- (3,861,324) (3,861,324)
------- ------------ ------------ ------------
Balance, May 31, 1998 $ 8,096 $ 23,993,251 $ 1,281,388 $ 25,282,735
======= ============ ============ ============
</TABLE>
5
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AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,861,324) $ (1,166,427)
Income (loss) from discontinued operations 56,483 (531,634)
------------ ------------
Net loss from continuing operations (3,917,807) (634,793)
Income tax benefit (2,230,000) (203,000)
------------ ------------
Loss before income taxes (6,147,807) (837,793)
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization 920,846 1,006,769
Spin-off stock option adjustment 5,770,000 --
Decrease (increase) in working capital items (600,599) 984,326
Other noncash transactions 508,609 241,266
------------ ------------
451,049 1,394,568
Income taxes (net paid) (554,625) (45,638)
Increase in other assets (62,825) (150,019)
Payments on other long-term liabilities (32,435) (274,363)
------------ ------------
Net cash flows provided by (used in) operating activities (198,836) 924,548
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (1,360,670) (1,095,573)
Investment in discontinued operations including spin-off costs (496,411) (932,182)
------------ ------------
Net cash flows used in investing activities (1,857,081) (2,027,755)
------------ ------------
Cash flows from financing activities:
Exercise of stock options 168,781 273,718
Repurchase of stock (156,507) --
------------ ------------
Net cash flows provided by
financing activities 12,274 273,718
------------ ------------
Net decrease in cash and cash equivalents (2,043,643) (829,489)
Cash and cash equivalents, beginning of period 12,226,821 12,561,703
------------ ------------
Cash and cash equivalents, end of period $ 10,183,178 $ 11,732,214
============ ============
</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 and nine
month periods ended May 31, 1998 and 1997 are unaudited. However, in the opinion
of the Company, all adjustments consisting of normal, recurring accruals
necessary for a fair presentation, have been reflected therein.
The continuing operations of the Company consist primarily of Diabetes
Treatment Centers of America, Inc., a wholly owned subsidiary. The Company's
discontinued operations represent AmSurg Corp. ("AmSurg"), formerly a majority
owned subsidiary. The net assets and operations of AmSurg are shown as
discontinued operations due to the distribution of all the AmSurg common stock
held by the Company to the Company's shareholders on December 3, 1997.
Certain financial information which is normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which is not required for interim reporting purposes, has been omitted. The
accompanying consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 1997.
2. AMSURG - 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 common
stock owned by the Company to the holders of Company common stock ("the
Distribution"). The Distribution to shareholders of record at November 25, 1997
based on an amended plan of distribution was completed on December 3, 1997. The
terms of the Distribution provide that the Company and AmSurg bear their own
expenses in connection with the Distribution. The effect of the Distribution was
a one time charge to retained earnings of $17,147,680 which represents the
Company's investment in AmSurg.
3. EARNINGS PER SHARE
For the three and nine month periods ended May 31, 1998 and 1997, the
Company has reported earnings per share under Financial Accounting Standard No.
128 ("FAS 128") "Earnings per Share". The presentation of basic earnings per
share is based upon average common shares outstanding during the period. Diluted
earnings per share is based on average common shares outstanding during the
period plus the dilutive effect of stock options outstanding. Calculation of
diluted earnings per share for the nine month period ended May 31, 1998 and the
three and nine month periods ended May 31, 1997 does not include 647,230 and
217,692, respectively, in common stock equivalents relative to outstanding stock
options as their effect would be antidilutive.
7
<PAGE> 8
4. STOCK REPURCHASE
In January 1998, the Company's Board of Directors authorized the
repurchase and cancellation of up to 400,000 shares of the Company's common
stock. The authorization enables the Company to make repurchases from time to
time prior to January 1, 2000. As of May 31, 1998 the Company has repurchased
16,956 shares at a cost of $156,507.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The continuing operations of American Healthcorp, Inc. (the "Company")
consist primarily of Diabetes Treatment Centers of America, Inc. ("DTCA"), a
wholly-owned subsidiary that is a national provider of diabetes patient services
to hospitals and managed care payors designed to enhance the quality and lower
the cost of treatment of individuals with diabetes.
The Company's discontinued operations represented AmSurg Corp.
("AmSurg"), formerly a majority-owned subsidiary that develops, acquires and
operates physician practice-based ambulatory surgery centers and specialty
physician networks in partnerships with surgical and other group practices. In
March of 1997 the Company's Board of Directors approved a plan to distribute, on
a substantially (approximately 98.5%) tax-free basis, all of the shares of
AmSurg common stock owned by the Company to the holders of Company common stock
(the "Distribution"). The Distribution, which is described in more detail in an
Information Statement provided to all holders of the Company's common stock
during November 1997, was completed on December 3, 1997. The Company has
received a letter ruling from the Internal Revenue Service confirming the
substantially tax-free nature of the Distribution.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements which are based upon current
expectations and involve a number of risks and uncertainties. In order for the
Company to utilize the "safe harbor" provisions of the Private Securities
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
include: DTCA's ability to renew contracts for hospital-based treatment centers
on terms that are acceptable to DTCA; DTCA's ability to execute contracts for
new hospital-based treatment centers and for diabetes healthcare management
agreements; 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; the ability of DTCA to negotiate favorable fee structures,
including per member per month payment terms, with managed care payors; unusual
and unforeseen patterns of healthcare utilization by individuals with diabetes
in the HMOs with which DTCA has executed 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; DTCA's ability to enroll additional
lives under existing per member per month contracts; and DTCA's ability to
attract and/or retain and effectively manage the employees required to implement
the managed care agreements. The Company undertakes no obligation to update or
revise any such forward-looking statements.
8
<PAGE> 9
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 fixed management fees, incentive-based fees or a
combination thereof. Incentive arrangements generally provide for fee payments
to DTCA based on changes in the client hospital's market share of diabetes
inpatients and the costs of providing care to these patients. The form of these
contracts includes various structures ranging from arrangements where all costs
of the DTCA program for center professional personnel, medical director fees and
community relations are the responsibility of DTCA to structures where all DTCA
program costs are the responsibility of the client hospital.
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, 1998 and 1997. 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. In addition, DTCA also
provides osteoporosis services at four other DTCA diabetes center hospital
locations.
<TABLE>
<CAPTION>
As of May 31,
==============================================================
1998 1997
==============================================================
Hospital Hospital
Contracts Sites Contracts Sites
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Hospital contracts/sites 50 54 59 63
Network contracts/sites 3 12 2 11
--------------------------------------------------------------
Total contracts/sites 53 66 61 74
==============================================================
</TABLE>
9
<PAGE> 10
The components of changes to the total number of DTCA hospital contracts during
the quarters and the nine months ended May 31, 1998 and 1997 are presented
below.
<TABLE>
<CAPTION>
For the Three Months Ended May 31,
==============================================================
1998 1997
==============================================================
Hospital Hospital
Contracts Sites Contracts Sites
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 56 72 60 72
New contracts/sites
signed - - 2 3
Contracts/sites discontinued (3) (6) (1) (1)
--------------------------------------------------------------
Total contracts/sites 53 66 61 74
==============================================================
For the Nine Months Ended May 31,
==============================================================
1998 1997
==============================================================
Hospital Hospital
Contracts Sites Contracts Sites
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 58 74 61 72
New contracts/sites signed 3 4 4 6
Contracts/sites discontinued (8) (12) (4) (4)
--------------------------------------------------------------
Total contracts/sites 53 66 61 74
==============================================================
</TABLE>
During the quarter ended May 31, 1998, one contract was renewed for a
DTCA hospital-based diabetes treatment center. During the remainder of fiscal
1998, nine contracts will reach the end of their terms unless renewed or
extended. 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.
Two of the contracts that will expire during the remainder of fiscal
1998 are with hospitals owned by Columbia/HCA Healthcare Corporation
("Columbia"). During the past two years, the majority of
10
<PAGE> 11
contracts that were up for renewal with Columbia hospitals have been
discontinued and during the nine months ended May 31, 1998, three contracts with
Columbia hospitals that were subject to renewal during the quarter have been
discontinued. The Company is currently in discussion with Columbia to renew or
extend the two contracts which expire during the remainder of fiscal 1998;
however, the outcome of these discussions cannot be predicted.
While DTCA's revenues and profits have historically been generated
primarily by its operating contracts with hospitals, the Company believes that
the substantial portion of its future revenue and profit growth will result from
healthcare management contracts with managed care payors for their enrollees
with diabetes.
During June 1996, DTCA entered into disease management agreements with
Principal Healthcare, Inc. ("Principal") to provide comprehensive healthcare
management services through DTCA's NetCareTM product. The Principal agreements
originally encompassed six market sites with an additional HMO contract site
being added during the first quarter of fiscal 1997. During the quarter ended
May 31, 1998, services were provided to approximately 7,900 individuals with
diabetes at these seven HMO sites. The Principal agreements have initial terms
of five years and provide that DTCA is at risk for the costs of its program and
that Principal is at risk for all of their members' healthcare costs. Under the
original Principal agreements, cost savings produced by DTCA's management
program are shared according to formulae set forth in the agreements. During the
quarter, six of the Principal HMOs where DTCA has a contract were acquired by
Coventry Healthcare Corporation. The remaining site was sold to United
Healthcare, Inc. on July 1, 1998. DTCA has restructured its agreement at the
site sold to United Healthcare to provide for a payment to DTCA that is
primarily a per member per month fee structure. Discussions are underway with
Coventry that may result in a restructuring of the remaining HMO contract
agreements; however, the outcome of these discussions cannot be predicted at
this time.
During June 1996, DTCA also entered into a contract with Health
Options, Inc. ("Health Options"), an HMO subsidiary of Blue Cross and Blue
Shield of Florida, to provide comprehensive healthcare management services
through DTCA's NetCareTM product at a Health Options HMO site. An additional
Health Options HMO site was added during the second quarter of fiscal 1997.
These original agreements are structured in a similar fashion to the Principal
agreements discussed above. DTCA's services are being provided to approximately
3,000 Health Options members at these two sites. During the second quarter of
fiscal 1998, DTCA entered into another contract with Health Options for its
NetCareTM product at a third HMO site which has approximately 10,000 commercial
and Medicare members with diabetes. In contrast to DTCA's two other contracts
with Health Options, DTCA is compensated under this contract primarily through a
per member per month payment for all members who elect to participate. A portion
of this payment is at risk subject to the achievement of specified outcomes
measures. This contract began operation on March 1, 1998 and approximately 3,000
members were enrolled as of May 31, 1998.
During September 1997, DTCA signed an agreement with CIGNA HealthCare
("CIGNA") to provide diabetes disease management services for members at six
CIGNA HMO markets that encompass approximately 22,000 members with diabetes.
Under the three year agreement, DTCA provides, through a fee-based arrangement,
a tailored version of its NetLinkTM telephone-based diabetes management program.
These services, which are provided from a telephone service center located in
Nashville, Tennessee, are designed primarily to improve blood glucose management
for diabetes patients and to monitor and promote compliance with certain
standards of care for diabetes patients. The services do not encompass
comprehensive management of all healthcare services such as that provided under
the Principal
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and Health Options agreements. A portion of the fees paid to DTCA for these
services are at risk of repayment unless certain standards of care and cost
reduction targets are achieved as measured as of each contract site year-end. As
of May 31, 1998, implementation was complete at one of these six markets and it
is anticipated that the program will be in operation in the remaining five CIGNA
HMO markets by the end of calendar 1998.
During the third quarter of fiscal 1998, the Company signed a
comprehensive diabetes disease management contract with Highmark Blue Cross Blue
Shield ("Highmark"). Under the terms of the contract, DTCA will provide its
NetCareTM diabetes disease management services to Highmark's managed healthcare
plans covering approximately 1.2 million enrollees located in Pittsburgh, Erie
and Johnstown, Pennsylvania, and surrounding areas in the western part of the
state of Pennsylvania. These plans include approximately 40,000 enrollees with
diabetes, who are insured under either commercial or Medicare risk plans. DTCA
will be compensated under the three-year contract through a per member per month
payment, a portion of which is tied to performance. The contract was effective
April 1, 1998 and approximately 30,000 diabetes members were enrolled in the
program as of May 31, 1998.
In early June 1998, DTCA also signed a managed care payor contract with
WellPath of Carolina, Inc. This Diabetes NetLinkTM population management
contract is scheduled to begin operation September 1, 1998. DTCA will be
compensated on a per member per month basis under this contract and initially
anticipates approximately 1,700 diabetes lives to be under DTCA management.
For the quarter ended May 31, 1998, DTCA's managed care payor
operations, including the overhead costs related to the managed care operations
and the costs associated with marketing efforts to enter into additional disease
management contracts, reduced the Company's pretax profitability by
approximately $322,000. This compares to a reduction in DTCA's pretax
profitability of approximately $1.0 million from managed care payor operations
for the immediately preceding fiscal quarter ended February 28, 1998. This
improvement resulted primarily from the addition of new managed care contracts
during the third quarter of fiscal 1998 which were structured primarily on a per
member per month fee basis.
The Company's growth strategy is primarily to develop new relationships
directly with managed care payors and others who are ultimately responsible for
the healthcare costs of individuals with diabetes and to further develop its
hospital-based diabetes treatment business. Pursuant to its strategy with
managed care payors, DTCA is expected to provide management services designed to
improve the quality of care for individuals with diabetes while lowering the
overall cost of care. DTCA fees under these arrangements with payors may take
the form of shared savings of overall diabetes enrollee healthcare costs,
capitated payments to DTCA to cover DTCA's services to enrollees but not the
responsibility for enrollee healthcare claims or some combination of these
arrangements. However, the Company believes that the majority of future managed
care disease management contracts that will be signed by DTCA will be similar in
the per member per month structure to the latest Health Options contract, the
CIGNA contract and the Highmark contract and will not entail the level of
initial operating losses the Company has incurred with respect to the Principal
and two initial Health Options agreements.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of DTCA under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal government had declined
to take
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<PAGE> 13
over and pursue a civil "whistle blower" action brought under seal in June 1994
on behalf of the government by a former employee dismissed by the Company in
February 1994. The Company believes that this lawsuit triggered the OIG
investigation. The civil suit was filed in June 1994 against the Company, DTCA,
and certain named and unnamed medical directors and client hospitals and was
kept under seal to permit the government to determine whether to take over the
lawsuit. Following its review, the government made the determination not to take
over the litigation, and the complaint was unsealed on February 10, 1995.
Various preliminary motions have been filed regarding jurisdictional and
pleading matters, resulting in the filing of a number of amended complaints and
the dismissal of the Company as a defendant. DTCA continues to be a defendant.
All of these preliminary motions have now been resolved and the lawsuit has
entered the discovery stage.
The Company 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 will 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 will 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.
RESULTS OF CONTINUING OPERATIONS
DTCA represents the continuing operations of the Company and includes
the results of operations of two Arthritis and Osteoporosis Care centers and
corporate costs attributable to DTCA.
Revenues for the quarter and nine months ended May 31, 1998 increased
31% and 14%, respectively, over the same periods in 1997. The principal sources
of the increase in revenues were managed care payor contracts and new hospital
contracts offset by reductions in revenues from discontinued hospital contracts
and reduced same hospital contract revenues. Increases in managed care payor
revenues from the comparable periods resulted primarily from new managed care
payor contracts with fees based principally on per member per month payment
structures. Revenues for future periods for the managed care contracts will be
dependent primarily upon DTCA's ability to generate health care cost savings
under its shared cost savings contracts, DTCA's ability to enroll additional
lives under its existing per member per month contracts and DTCA's ability to
sign and implement additional managed care contracts. Same hospital contract
revenues for the quarter and nine months ended May 31, 1998 were 10% less than
both the 1997 periods. These same hospital revenue decreases were principally a
result of contract rate renegotiations and restructurings. The Company believes
that the impact of hospital contract restructurings will negatively impact same
hospital revenue comparisons during the remainder of fiscal 1998.
Salaries and benefits for the quarter and nine months ended May 31,
1998 increased 16% and 11%, respectively, as a result of increased staffing
levels associated primarily with managed care payor operations and normal salary
increases partially offset by reduced salaries and benefits associated with
fewer hospital contracts in operation. Salaries and benefits as a percentage of
revenues for the quarter and nine months ended May 31, 1998 were 66% and 70%,
respectively, compared with 75% and 72% for the
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<PAGE> 14
quarter and nine months ended May 31, 1997, respectively. Salaries and benefits
as a percentage of revenues for the periods ended May 31, 1998 decreased
compared to the same periods in 1997 principally because of increased revenues
related to managed care payor operations.
Other operating expenses for the quarter and nine months ended May 31,
1998 increased 35% and 16%, respectively, principally as a result of additional
managed care payor contracts in operation. Other operating expenses as a
percentage of revenue increased to 30% for the quarter ended May 31, 1998 from
29% for the same quarter in 1997, and remained at 28% for the nine months ended
May 31, 1998 and 1997. Operating expenses as a percentage of revenues increased
during the quarter ended May 31, 1998 primarily as a result of additional
expenses from new managed care payor contracts.
The income tax expense for the quarter ended May 31, 1998 was $48,000
compared to a benefit of $203,000 for the same quarter in 1997. This change
resulted from improved operating results. The income tax benefit for the nine
months ended May 31, 1998 of $2,230,000 was principally the result of recording
the tax benefit associated with compensation expense related to the adjustment
of stock options in the quarter ended November 30, 1997, as discussed in the
following paragraph. The differences between the statutory federal income tax
rate of 34% and the Company's effective tax income rates during the periods are
due primarily to the impact of state income taxes and the amortization of excess
costs over net assets of purchased companies which are not deductible for income
tax purposes.
As a result of the Distribution and pursuant to the terms of the
Company's stock option plans, the exercise price per share of outstanding
options to purchase shares of the Company's common stock was reduced and the
number of shares underlying such options was, 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 were not entitled to receive shares of AmSurg common stock with
respect to such options. The amount by which the options were adjusted resulted
from a comparison of the market price per share of American Healthcorp common
stock before and after the Distribution. In addition, the vesting of options was
accelerated for options that have not yet vested. This adjustment had the effect
of reducing the average exercise price of outstanding options to $3.27 per share
from $8.62 per share. As a result of this adjustment of the stock options,
generally accepted accounting principles required that the Company record
non-cash compensation expense and an equal increase in stockholders' equity
(additional paid-in capital) in an amount equal to the difference between the
aggregate exercise price of outstanding options to purchase shares of the
Company's common stock having an exercise price below the market price of the
Company's common stock and the aggregate market price for such shares
immediately prior to the Distribution. The compensation expense and associated
increase in additional paid-in capital were recognized because generally
accepted accounting principles require such recognition when an adjustment
results in a change in the ratio of the exercise price to the market price per
share even though no change in the aggregate value of the options has taken
place. Although it would have been possible to adjust the options without
changing this ratio, it could only have been accomplished by issuing a large
number of new options which would have resulted in substantial dilution to the
Company's stockholders. While the adjustment did result in an additional 254,000
shares being subject to options, the number of additional shares being subject
to options is significantly less than the number which would have been required
to avoid recognition of compensation expense. The option adjustment, on a
one-time basis, resulted in the recognition of compensation expense of $5.8
million and also resulted in an income tax benefit associated with the
compensation expense of $2.2 million during the quarter ended November 30, 1997.
14
<PAGE> 15
In addition, the option adjustment described above will also have the
effect, during periods when the Company is reporting net income, of decreasing
future earnings per share primarily because of the impact of the additional
number of shares being subject to options that were issued as part of this
adjustment on the calculation of common stock equivalents used in the
calculation of earnings per share.
The Distribution also resulted in certain nonrecurring expenses being
recognized by the Company as part of its discontinued operations. For the
Company, the non-recurring expenses of the Distribution were approximately
$960,000 of which $615,000 was incurred and expensed during the year ended
August 31, 1997 and $345,000 was incurred and expensed during the three month
period ended November 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities from continuing operations for the nine months
ended May 31, 1998 utilized $198,836 in cash flow. Investing activities during
the nine months ended May 31, 1998 used $1.9 million in cash flow which
consisted primarily of property and equipment purchases for DTCA of $1.4 million
associated principally with DTCA's new managed care contracts and payment of
costs associated with the spinoff of AmSurg of $496,411. Financing activities
associated with continuing operations for the nine months ended May 31, 1998
provided $12,274 in cash flow in proceeds from the exercise of options to
purchase the Company's common stock of $168,781 offset by the Company's
repurchase of its stock of $156,507.
The Company believes that cash flow from DTCA operating activities and
the Company's available cash balances of $10.2 million at May 31, 1998 will
continue to enable the Company to fund DTCA's current working capital needs and
capital expenditure needs, including its diabetes disease management efforts.
The Company has evaluated its computer software and databases to ensure
that any modifications required to be year 2000 compliant are made in a timely
manner. Management does not expect the financial impact of such modifications to
be material to the Company's financial position or results of operations in any
given year.
PART II
ITEM 1. Legal Proceedings.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of DTCA under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal government had declined
to take over and pursue a civil "whistle blower" action brought under seal in
June 1994 on behalf of the government by a former employee dismissed by the
Company in February 1994. The Company believes that this lawsuit triggered the
OIG investigation. The civil suit was filed in June 1994 against the Company,
DTCA, and certain named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine whether to take over
the lawsuit. Following its review, the government made the determination not to
take over the litigation, and the complaint was unsealed on February 10, 1995.
Various preliminary motions have been filed regarding jurisdictional and
pleading
15
<PAGE> 16
matters, resulting in the filing of a number of amended complaints and the
dismissal of the Company as a defendant. DTCA continues to be a defendant. All
of these preliminary motions have now been resolved and the lawsuit has entered
the discovery stage.
The Company 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 will 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 will 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.
The Company must be notified of any proposal intended to be
presented for action at the 1999 Annual Meeting of
Stockholders by any stockholder of the Company not later that
October 18, 1998. The Company may exercise discretionary
voting authority with respect to any such proposal if it does
not have notice of such matter by that date.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
There have been no reports on Form 8-K filed during the
quarter for which this report is filed.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN HEALTHCORP, INC.
(Registrant)
Date July 14, 1998 By /s/ Henry D. Herr
--------------------------- ---------------------------------
HENRY D. HERR
Executive Vice President
Finance and Administration,
(Principal Financial Officer)
Date July 14, 1998 By /s/ David A. Sidlowe
---------------------------- ---------------------------------
DAVID A. SIDLOWE
Vice President and Controller
(Principal Accounting Officer)
17
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