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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For The Fiscal Year Ended August 31, 1998
Commission File No. 000-19364
AMERICAN HEALTHCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 62-1117144
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
One Burton Hills Boulevard, Nashville Tennessee 37215
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (615) 665-1122
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.001 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of November 9, 1998, 8,140,507 shares of Common Stock were outstanding. The
aggregate market value of the shares held by non-affiliates of the Registrant
was approximately $72,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held January 15, 1999 are incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
The continuing operations of American Healthcorp, Inc. (the "Company")
primarily consist 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.
This Form 10-K contains forward-looking statements which are based upon
current expectations and involve a number of risks and uncertainties. In order
for the Company to utilize the "safe harbor" provisions of the Private
Litigation Reform Act of 1995, investors are hereby cautioned that these
statements may be affected by the important factors, among others, set forth
below, and consequently, actual operations and results may differ materially
from those expressed in these forward-looking statements. The important factors
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 implement its
backlog of contracted lives within anticipated time frames contemplated by DTCA;
DTCA's ability to attract and/or retain and effectively manage the employees
required to implement the agreements; the impact of existing and any future
litigation or judicial or administrative proceedings; the Company's ability to
acquire or successfully develop capability in chronic disease management other
than diabetes; and DTCA's ability and the ability of its customers and vendors
to prepare their mission-critical information technology resources to handle
Year 2000 processing requirements. The Company undertakes no obligation to
update or revise any such forward-looking statements.
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SOURCES OF REVENUES - DIABETES SERVICES
The following table sets forth the sources of the Company's revenues by
customer type as a percentage of total revenues from continuing operations for
the three years ended August 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
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Year Ended August 31, 1998 1997 1996
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<S> <C> <C> <C>
DTCA Hospital Contracts 60% 91% 95%
DTCA Managed Care Payor Contracts 39 7 2
Other 1 2 3
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100% 100% 100%
==========================================
</TABLE>
The principal sources of revenues for DTCA have been its operating
contracts for hospital-based diabetes treatment centers. These centers are
located in and operated under contracts with general acute care hospitals. The
primary goal of each center is to create a center of excellence for the
treatment of diabetes in the community in which it is located and thereby
increase the hospital's market share of diabetes patients and lower the
hospital's cost of providing services to this population.
DTCA's Diabetes Management System(TM) for hospitals is an integrated
system of care for patients with diabetes that includes: (1) physician case
management strategies whereby program staff works with physicians to identify
objectives for the patient and monitor accomplishment of the objectives during
the patient's stay; (2) clinical interventions for patients with diabetes to
meet physician needs for their patients with diabetes; (3) an information
network service that connects the hospital to DTCA's dedicated nationwide
resources; (4) programs for specific activities related to quality improvement,
cost reduction and market share increases for patients with diabetes; and (5)
programs to monitor the hospital's performance against quality indicators and
processes related to diabetes patients. Also available for hospital customers
are numerous other services such as (1) outpatient diabetes patient education,
teaching and follow-up; (2) programs for diabetes during pregnancy and programs
for insulin pump therapy; and (3) policies and procedures to help ensure formal
recognition of the diabetes program at the hospital by the American Diabetes
Association.
DTCA's hospital-based centers staffing consists of health professionals
who have special expertise and training in diabetes. Depending upon the needs of
the individual client hospital, the professional staff may include a diabetes
clinical nurse specialist, a registered dietitian, an exercise specialist and a
counselor. In addition, DTCA generally provides a program director who is
responsible for on-site program management, community relations and hospital and
physician relations and a program assistant who is responsible for
record-keeping, general administrative functions and providing assistance to the
program director and the professional staff. Generally, all of the program staff
is directed by DTCA. Other personnel (nursing, ancillary and support staff) are
employed and directed by the client hospital.
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The following table sets forth the number and location by state of the
hospitals in which the DTCA's diabetes treatment centers in effect as of August
31, 1998 are located and the aggregate number of licensed beds in these
hospitals:
<TABLE>
<CAPTION>
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Number of Client Hospitals'
State Client Hospitals Licensed Beds (1)
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<S> <C> <C>
Florida 9 2,477
Utah 6 744
Virginia 6 1,265
Georgia 5 1,551
Texas 5 1,916
Missouri 4 931
Tennessee 4 1,928
Alabama 3 845
California 3 890
New Jersey 3 990
North Carolina 3 556
Ohio 3 943
Indiana 2 807
Louisiana 2 283
New York 2 403
Pennsylvania 2 449
South Carolina 2 631
Wisconsin 2 421
Colorado 1 250
Iowa 1 549
Massachusetts 1 344
Nebraska 1 296
Nevada 1 225
Oklahoma 1 445
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TOTAL 72 20,139
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</TABLE>
(1) Numbers based upon the American Hospital Association's 1997/98 Guide to
the Healthcare Field.
While DTCA's revenues historically have been generated primarily by its
operating contracts with hospitals, DTCA has also developed and is continuing to
refine products which are designed to assist managed care payors in reducing the
total costs and improving the quality of care for individuals with diabetes
enrolled in their plans, and believes that a substantial portion of its future
revenue growth will result from healthcare management contracts with managed
care payors. Implementation of DTCA's first management contracts with managed
care payors occurred in fiscal 1996. These diabetes population management
products enable DTCA to manage the total healthcare needs and/or the specific
diabetes care needs of populations of individuals with diabetes. DTCA believes
that its intensive diabetes education,
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patient support and treatment regimens, delivered and/or supervised by a
multi-disciplinary team, will assist in assuring that the most effective care is
delivered at the lowest cost and that ultimately such intensive diabetes
education, support and treatment efforts will reduce or prevent the devastating
and costly complications of diabetes.
Pursuant to DTCA's diabetes population management contracts, DTCA
provides a core group of diabetes clinical and support staff that are
responsible for coordinating and supporting the management of the treatment of
individuals with diabetes in accordance with treatment standards and protocols
that have been developed by DTCA and have been approved by the medical
leadership at each managed care plan. The actual treatment of the individuals is
provided by physicians and hospitals who are part of the payor's network of
providers. Services provided under contracts for DTCA's Diabetes NetCare(TM)
product comprise its most comprehensive product offering and includes DTCA
professional staff on-site at the HMO location to assist in the delivery of this
service. Services provided under DTCA's Diabetes NetLink(TM) product are
provided telephonically and via mail by a team of diabetes treatment and support
staff from a telephone center located in Nashville, Tennessee, and are designed
primarily to improve blood glucose management for diabetes patients and to
monitor and promote compliance with certain standards of care for diabetes
patients and to support the case management activities of the HMO.
Diabetes population management contracts require a sophisticated
management information system to enable DTCA to manage the care of large
diabetes patient populations and to assist in reporting outcomes and costs. The
Company has developed a clinical management system which it believes meets
DTCA's information management needs for its diabetes population management
services and has installed and is utilizing the system for the enrollees of each
of its managed care contract customers.
During fiscal 1997, DTCA's managed care operations reduced the
Company's pretax profitability by approximately $6.1 million. This negative
impact resulted primarily from initial operating losses for the new managed care
payor contracts signed by DTCA at the end of fiscal 1996 and during fiscal 1997
together with the overhead costs related to these contracts and from the costs
associated with marketing efforts to enter into additional disease management
contracts. While DTCA's managed care operations for all of fiscal 1998 reduced
the Company's pretax profitability by approximately $2.0 million, these
operations began contributing to overall DTCA profitability during the fourth
quarter of fiscal 1998. The Company anticipates that its managed care operations
will contribute to DTCA's profitability during fiscal 1999.
As of August 31, 1998, DTCA had contracts with eight managed care
payors to provide diabetes population disease management services to 17 HMO
markets throughout the United States.
DTCA also operates through Arthritis and Osteoporosis Care Center, Inc.
("AOCC"), a wholly-owned subsidiary of the Company, two arthritis and
osteoporosis treatment centers in Nashville, Tennessee and Toledo, Ohio. These
centers are designed as comprehensive treatment centers providing the resources
to meet all of the needs of individuals with arthritis and osteoporosis in one
location. In addition, DTCA also has contracted with five of its diabetes
treatment center hospitals to provide osteoporosis treatment expertise as a
supplement to its diabetes treatment services. Revenues and profits from
osteoporosis services were not material to the Company's operations during
fiscal 1998.
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DTCA'S BUSINESS STRATEGY
DTCA's hospital-based diabetes treatment center business had 57
contracts in effect in 24 states at August 31, 1998. The following table
presents the number of contracts in effect during the past five fiscal years:
<TABLE>
<CAPTION>
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Year Ended August 31, 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Contracts in effect at beginning
of period 58 61 69 69 70
Contracts signed 9 6 5 9 11
Contracts discontinued (10) (9) (13) (9) (12)
--------------------------------------------------
Contracts in effect at end of
period 57 58 61 69 69
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Hospital sites where services
are delivered 72 74 72 74 71
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</TABLE>
The Company's strategy is primarily to develop additional relationships
with managed care payors responsible for the healthcare costs of individuals
with diabetes and to further develop and expand its hospital-based diabetes
treatment center business. In addition, the Company has begun evaluating
opportunities to develop or acquire capabilities in chronic disease management
areas other than diabetes. The Company believes that the healthcare payor market
is recognizing the potential cost savings and improved outcome benefits of
chronic disease management programs, including diabetes population management
services. The Company also believes that its position as the leading provider of
diabetes treatment services to hospitals and physicians, as well as the positive
clinical and financial results it has produced at its initial managed care
contracts, will be an advantage in comparison with potential competitors and
with payors who are considering developing and providing such services
themselves but who have no actual large-scale diabetes population disease
management experience.
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At August 31, 1998, DTCA had contracts with eight payors to provide
diabetes population management services to 17 HMO markets. The number of covered
lives under management pursuant to these contracts for its Diabetes NetCare(TM)
and its Diabetes NetLink(TM) products as of August 31, 1998, 1997 and 1996 is
presented on the following table.
<TABLE>
<CAPTION>
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At August 31, 1998 1997 1996
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Covered lives under management:
<S> <C> <C> <C>
NetCare(TM) contracts 52,390 11,404 100
NetLink(TM) contracts 4,902 -- --
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Total covered lives under management 57,292 11,404 100
==============================================
</TABLE>
In addition, covered lives at August 31, 1998 excludes 2,000
NetCare(TM) contract lives and 33,000 NetLink(TM) contract lives under existing
contracts that are scheduled for implementation subsequent to August 31, 1998.
DTCA'S OPERATIONAL RELATIONSHIP WITH CLIENTS
In DTCA's typical hospital relationship, the Company is retained to be
the service-line manager for the client hospital's diabetes treatment services.
Although DTCA interacts with and provides services to patients located
throughout the entire hospital, a dedicated area or a medical/surgical unit of
the hospital is sometimes reserved for the diabetes treatment center.
In its effort to increase the client hospital's market share of
diabetes patients, DTCA has developed expertise in community relations to make
patients, physicians and payors aware of the services offered by the diabetes
treatment centers. These efforts are designed to increase the visibility of the
client hospital within its community and to attract additional diabetes patients
who otherwise would have utilized other hospitals and providers in the area to
the client hospital and its medical staff.
The hospital provides all equipment and furnishings needed for the
diabetes treatment center and is responsible for routine patient services
including admissions, nursing care, housekeeping, laboratory and other ancillary
services, and billing and collections for all patients. The DTCA staff is
responsible for coordinating and supporting the management of the treatment of
both inpatients and outpatients with diabetes in accordance with the treatment
objectives of the patient's physicians. DTCA provides corporate support to each
client hospital and to the on-site DTCA staff in the areas of community
relations, staff training and education, financial analysis, clinical
programming and management, quality assurance, utilization review and ongoing
program development and refinement.
DTCA typically sends one monthly bill to each client hospital, and is
paid directly by the hospital. Patients receiving services from the diabetes
treatment centers are charged by the hospital for typical hospital services.
Health insurance, including Medicare and Medicaid, cover charges incurred on an
inpatient basis on the same basis as non-diabetes related inpatient episodes.
Many insurance plans, including Medicare, also provide coverage for outpatient
education services for people with diabetes.
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Pursuant to DTCA's diabetes population management contracts, DTCA
provides a core group of diabetes clinical and support staff that are
responsible for coordinating and supporting the management of the treatment of
individuals with diabetes in accordance with treatment standards and protocols
that have been developed by DTCA and have been approved by the medical
leadership at each managed care plan. The actual treatment of the individuals is
provided by physicians and hospitals who are part of the payor's network of
providers. Services provided under contracts for DTCA's Diabetes NetCare(TM)
product comprise its most comprehensive product offering and includes DTCA
professional staff on-site at the HMO location to assist in the delivery of this
service. Services provided under DTCA's Diabetes NetLink(TM) product are
provided telephonically and via mail by a team of diabetes treatment and support
staff from a telephone center located in Nashville, Tennessee, and are designed
primarily to improve blood glucose management for diabetes patients and to
monitor and promote compliance with certain standards of care for diabetes
patients and to support the case management activities of the HMO.
DTCA'S CONTRACTUAL RELATIONSHIP WITH CLIENTS
DTCA has a variety of contractual relationships with its client
hospitals. Fee structures under the hospital contracts consist of either 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 patients and the costs of providing
care to these patients. The form of these contracts includes various structures
ranging from arrangements where all costs of the DTCA program for center
professional personnel, medical director fees and community relations are the
responsibility of DTCA to structures where all DTCA program costs are the
responsibility of the client hospital. The terms of these hospital contracts
generally range from two to five years and are subject to periodic renegotiation
and renewal that may include reduction in fee structures which have a negative
impact on the Company's revenues and profitability.
The Company's managed care contracts for diabetes population management
services that were entered into during fiscal 1996 and fiscal 1997 were "shared
savings" Diabetes NetCare(TM) contracts with initial terms of five years. Health
care cost savings resulting from the Company's programs at these HMO sites were
shared with the HMO according to ratios set forth in the respective contracts.
Under these arrangements, DTCA was at risk for the costs of operating its
program and the HMOs were at risk for 100% of their members' healthcare costs.
Because of expected ramp-up periods to generate cost savings and the normal time
lag associated with claims information necessary to evaluate cost savings,
DTCA's profitability was negatively affected during the first 12 to 18 months of
operation at each site. During fiscal 1998 all new Diabetes NetCare(TM) and
Diabetes NetLink(TM) contracts signed with managed care payors were based on per
member per month payments to DTCA for the HMO's enrollees who have diabetes and
participate in DTCA's programs. In most of these contracts, individuals with
diabetes in these plans are automatically enrolled in DTCA's program but are
permitted to decline to participate. Historically, less than 2% decline to
participate. These contracts were generally for terms of three years with
provisions for subsequent renewal and typically provided that between 15% and
30% of the per member per month fee is at risk subject to DTCA's performance
against clinical and financial cost savings criteria. The structures of the
managed care contracts signed during fiscal 1998 significantly reduced or
eliminated the start-up losses that have been experienced under the managed care
contracts signed during fiscal 1996 and 1997.
In addition, during fiscal 1998 all managed care contracts signed
during fiscal 1996 and 1997 were converted to per member per month structures
similar to those signed in fiscal 1998 or were terminated
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as part of a mutual agreement reached with Coventry Healthcare to discontinue
six Diabetes NetCare(TM) site operations at Principal Healthcare HMOs acquired
by Coventry Healthcare during fiscal 1998. Consequently, as of August 31, 1998,
DTCA does not have any "shared savings" contracts with managed care payors for
its diabetes population management products.
As of the end of fiscal 1998, DTCA had diabetes population management
contracts with Health Options, Inc. (an HMO subsidiary of Blue Cross and Blue
Shield of Florida), an HMO subsidiary of United Healthcare, CIGNA Healthcare,
Highmark, Inc. (Blue Cross and Blue Shield of Western Pennsylvania), Wellpoint
of the Carolinas, John Deere Healthcare and two employee benefit trusts.
The Company anticipates that additional disease management contracts
that the Company may sign with managed care payors may take one of several
forms, including some form of shared savings of overall diabetes enrollee
healthcare costs, per diabetes member per month 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 population management contracts that will be
signed by DTCA will not entail significant initial operating losses.
DTCA currently has seven operating contracts covering services at 13
hospitals that are owned by Columbia/HCA Healthcare Corporation ("Columbia").
The revenues from the Columbia contracts were approximately 11%, 25% and 28% of
the Company's total revenues for fiscal years ended August 31, 1998, 1997 and
1996, respectively. The Company believes that the majority of these seven
contracts with Columbia hospitals will be discontinued over the next two years.
During fiscal 1999, five DTCA contracts with Columbia hospitals will reach the
end of their terms unless renewed.
During year ended August 31, 1998, approximately 32% of the Company's
revenues were derived from DTCA contracts with two managed care payors. One of
these payors was Coventry Healthcare which accounted for 20% of the Company's
revenues for fiscal 1998, 9% ($3.6 million) of which resulted from the
settlement and termination of the managed care agreements with Coventry
Healthcare which provided for diabetes population management services to
approximately 6,000 covered lives.
DTCA'S OPERATING CONTRACT RENEWALS
As a service provider, DTCA's hospital treatment center revenues are
dependent upon the contractual relationships it establishes and maintains with
client hospitals to develop and operate diabetes treatment centers. The terms of
these hospital contracts generally range from two to five years and are subject
to periodic renegotiation and renewal that may include reduction in fee
structures that have a negative impact on the Company's revenues and
profitability. Contracts have been discontinued or not renewed by the Company
and by client hospitals for a number of reasons including financial problems of
the hospital, the consolidation of hospitals in a market, a hospital's need to
reduce the hospital's operating costs including the short-term reduction of
costs associated with elimination of DTCA's program or the contract's
performance.
During fiscal 1998, 14 hospital contracts were renewed. Several of
these renewals included contract rate reductions which DTCA has traditionally
undertaken to maintain favorable long-term contractual relationships. The
Company anticipates that downward pressures on hospital costs will result in a
continuation of contract rate reductions. During fiscal 1999, 21 contracts,
including five contracts with Columbia hospitals, will reach the end of their
terms unless renewed.
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Also during fiscal 1998, ten hospital contracts were discontinued;
three of these discontinued contracts were with hospitals owned by Columbia.
There were no material continuing obligations or costs for the Company
associated with the termination of any client hospital contracts.
Diabetes population management revenues are generated under DTCA's
contracts with managed care payors. These contracts have terms that are
generally three to five years with provisions for renewal. None of these
contracts, other than a contract with Bristol-Myers Squibb Co., have reached the
end of their term and therefore the Company does not have any experience with
the renewals of these contracts. The contract with Bristol-Myers Squibb Co. to
provide diabetes management services for a limited group of their employees was
a pilot project and terminated at the end of its two year term in February 1998.
During fiscal 1998, DTCA renegotiated the payment terms of three of its managed
care contracts to per member per month structures and has terminated six
contracts as part of a mutual agreement with Coventry Healthcare prior to the
expiration of their terms.
DTCA'S PHYSICIAN RELATIONSHIPS
At several of its hospital contracts, DTCA contracts with leading
physicians in that community who specialize in the treatment of diabetes to
serve as medical directors or associate medical directors of the diabetes
hospital-based treatment center. These physicians, who are independent
contractors with DTCA or, in certain circumstances, with the client hospital,
remain in private practice and are responsible for billing and collecting for
their personal professional services. In addition, these physicians receive a
fixed annual stipend under their contracts for providing specific services to
the diabetes treatment center in the areas of medical supervision, liaison with
the hospital's medical staff, quality control and staff and patient education.
These contracts generally have terms of one year with renewal options and
generally cannot be extended beyond the terms of the related hospital contract.
DTCA also targets physicians in the market area of the hospital center
in its awareness efforts. Members of the center staff are assigned to work with
physicians who have diabetes patients in the hospital and to serve as case
manager for those patients, thus helping to assure that the physicians'
treatment objectives are met.
DTCA's managed care operations have no contractual relationships with
physicians for the delivery of patient care services. The Company's diabetes
population management programs serve as a resource to the managed care plan's
network physicians in the delivery of care to enrollees with diabetes. At DTCA's
Diabetes NetCare(TM) locations, DTCA typically contracts at an hourly rate with
one or more physicians in the HMO's local provider network to provide DTCA with
medical supervision in the delivery of its program and also to assist DTCA in
its relationship with other physicians and provider members of the HMO's
provider network.
DTCA'S COMPETITION
The healthcare industry is highly competitive and subject to continual
change in the manner in which services are provided. DTCA's principal
competition for its hospital treatment center business is from hospitals that
have basic programs for treating patients with diabetes. Generally, hospitals
have not committed the time, personnel or financial resources necessary to
establish and maintain comprehensive diabetes treatment services comparable to
the services offered by DTCA's diabetes treatment centers. The Company is also
aware that other companies including major pharmaceutical companies, healthcare
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providers and organizations that provide services to managed care organizations,
which may have greater financial, research, staff, and marketing resources than
the Company, are marketing diabetes disease management services to managed care
payors or have announced an intention to offer such services. While the Company
believes it has significant advantages over its competitors because of the
comprehensive clinical nature of its product offerings, its established
reputation in the provision of diabetes care through its network of hospital
centers and the financial and clinical outcomes from its managed care programs,
there can be no assurance that the Company can compete effectively with these
companies.
DTCA'S GOVERNMENTAL REGULATION
While DTCA itself is not directly subject to many of the governmental
and regulatory requirements affecting healthcare delivery, its client hospitals
must comply with a variety of regulations including the licensing requirements
of federal, state and local health agencies, state mandated rate control
initiatives and the requirements of municipal buildings codes, health codes and
local fire departments. Certain professional healthcare employees of DTCA, such
as nurses, are subject to individual licensing requirements.
DTCA is indirectly affected by changes in the laws governing hospital
reimbursement under governmental programs such as Medicare. There may be
continuing legislative and regulatory initiatives to reduce the funding of the
Medicare and Medicaid programs in an effort to curtail or reduce the overall
federal budget deficit. Recent federal legislation will significantly limit the
rate of increase in Medicare and Medicaid reimbursement rates. These funding
limitations could negatively impact hospital revenues and operations. There can
be no assurance that these changes or future legislative initiatives or
government regulation would not adversely affect DTCA's operations or reduce the
demand for its services.
Various federal and state laws regulate the relationship among
providers of healthcare services, other healthcare businesses and physicians.
The "fraud and abuse" provisions of the Social Security Act provide civil and
criminal penalties and potential exclusion from the Medicare and Medicaid
programs for persons or businesses who offer, pay, solicit or receive
remuneration in order to induce referrals of patients covered by Federal Health
Care Programs (which includes Medicare, Medicaid, Champus and other federally
funded health programs). While the Company believes that its business
arrangements with its client hospitals and medical directors are in compliance
with these statutes, these fraud and abuse provisions are broadly written and
the full extent of their application is not yet known. The Company is therefore
unable to predict the effect, if any, of broad enforcement interpretation of
these fraud and abuse provisions.
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of DTCA under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal government had declined
to take over and pursue a civil "whistle blower" action brought under seal in
June 1994 on behalf of the government by a former employee dismissed by the
Company in February 1994. The Company believes that this lawsuit triggered the
OIG investigation. The civil suit was filed in June 1994 against the Company,
DTCA, and certain named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine whether to take over
the lawsuit. Following its review, the government made the determination not to
take over the litigation, and the complaint was unsealed on February 10, 1995.
Various preliminary motions have been filed regarding jurisdictional and
pleading
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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 is now in
the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
INSURANCE
The Company maintains professional malpractice liability and general
liability insurance for all of its locations and operations. The cost of
liability insurance coverage and the availability of such coverage has varied
widely in recent years. While the Company believes its insurance policies to be
adequate in amount and coverage for its current operations, there can be no
assurance that coverage is sufficient to cover all future claims or will
continue to be available in adequate amounts or at a reasonable cost. The
Company's liability insurance coverage provides for certain deductible levels to
be paid by the Company. Estimated reserves to cover potential payments under
these deductibles have been provided in the Company's financial statements.
EMPLOYEES
As of August 31, 1998, the Company had 400 full-time employees and 127
part-time employees in the following general classifications: 207 nurses; 93
other healthcare professionals, including counselors, dietitians and exercise
therapists; 138 center and managed care site management and administrative
personnel; and 89 operations support and Company management personnel. The
Company's employees are not subject to any collective bargaining agreement.
Management considers the relationship between the Company and its employees to
be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Nashville, Tennessee
and contains approximately 39,000 square feet of office space, which the Company
leases pursuant to an agreement which expires in December 1999. The Company
subleases to AmSurg approximately 15,000 square feet of its corporate
headquarters pursuant to a sublease which also expires December 1999. DTCA also
has eight office space leases associated with its current managed care contract
services including its Diabetes NetLink(TM) call center location for an
aggregate of approximately 38,000 square feet of space for terms of two to five
years. All of the Company's diabetes and arthritis and osteoporosis treatment
centers are located in hospital-based units for which the Company pays no rent.
ITEM 3. LEGAL PROCEEDINGS
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the OIG of the Department of Health and
Human Services in connection with an investigation of DTCA under certain federal
Medicare and Medicaid statutes. On February 10, 1995, the
12
<PAGE> 13
Company learned that the federal government had declined to take over and pursue
a civil "whistle blower" action brought under seal in June 1994 on behalf of the
government by a former employee dismissed by the Company in February 1994. The
Company believes that this lawsuit triggered the OIG investigation. The civil
suit was filed in June 1994 against the Company, DTCA, and certain named and
unnamed medical directors and client hospitals and was kept under seal to permit
the government to determine whether to take over the lawsuit. Following its
review, the government made the determination not to take over the litigation,
and the complaint was unsealed on February 10, 1995. Various preliminary motions
have been filed regarding jurisdictional and pleading matters, resulting in the
filing of a number of amended complaints and the dismissal of the Company as a
defendant. DTCA continues to be a defendant. All of these preliminary motions
have now been resolved and the lawsuit is now in the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE> 14
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding executive
officers of the Company as of August 31, 1998. Executive officers of the Company
serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Employee Age Position
- --------------------------- ----------- ------------------------------------------------
<S> <C> <C>
Thomas G. Cigarran 56 Chairman of the Board and Chief Executive
Officer since 1988, President and Director since
1981. Chairman of the Board of AmSurg since
1992. President and Chief Executive Officer of
AmSurg from 1992 to 1997.
Henry D. Herr 52 Executive Vice President-Finance and
Administration since 1986, Chief Financial
Officer since 1981, Secretary and Director since
1988. Director of AmSurg since 1992. Vice
President and Secretary of AmSurg from 1992 to
1997.
Robert E. Stone 52 Vice President since 1981, Executive Vice
President of DTCA since 1989.
David A. Sidlowe 48 Vice President since 1984, Controller since
1982.
James A. Deal 48 Executive Vice President since 1991, Vice
President from 1982 to 1990, President of DTCA
since 1985. Director of AmSurg since 1992.
Mr. Deal resigned from the Company effective
August 31, 1998.
</TABLE>
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's common stock is traded over the counter on The Nasdaq
Stock Market under the symbol AMHC.
The following table sets forth the high and low sales prices per share
of common stock as reported by Nasdaq for the relevant periods.
<TABLE>
<CAPTION>
Common Stock
Prices
============================
High Low
----------------------------
<S> <C> <C>
Year Ended August 31, 1998
First Quarter $ 14.13 $ 10.63
Second Quarter 8.63 6.25
Third Quarter 11.13 8.13
Fourth Quarter 11.38 8.00
Year Ended August 31, 1997
First Quarter 11.88 8.38
Second Quarter 14.13 9.88
Third Quarter 13.88 10.00
Fourth Quarter 11.75 9.88
</TABLE>
(b) Holders
At November 9, 1998 there were approximately 3,400 holders of the
Company's Common Stock, including 122 stockholders of record.
(c) Dividends
The Company has never declared or paid a cash dividend on its Common
Stock. The Company intends to retain its earnings to finance the growth and
development of its business and does not expect to declare or pay any cash
dividends in the foreseeable future. The declaration of dividends is within the
discretion of the Company's Board of Directors, which will review this dividend
policy from time to time.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
For the Twelve Months Ended and At August 31,
(In thousands except per share data)
<TABLE>
<CAPTION>
===================================================================
1998 1997 1996 1995 1994
===================================================================
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $41,167 $30,537 $31,403 $36,583 $41,144
-------------------------------------------------------------------
Expenses:
Salaries and benefits 26,473 21,437 19,866 18,878 18,699
Other operating expenses 11,084 8,702 7,254 10,865 12,271
Depreciation and amortization 1,308 1,342 1,273 1,339 1,293
Interest 1 6 5 7 6
Spin-off stock option adjustment 5,770 - - - -
-------------------------------------------------------------------
Total expenses $44,636 $31,487 $28,398 $31,089 $32,269
-------------------------------------------------------------------
Income (loss) before income taxes
and discontinued operations (3,469) (950) 3,005 5,494 8,875
Income tax expense (benefit) (1,148) (207) 544 2,252 3,586
-------------------------------------------------------------------
Income (loss) from continuing operations (2,321) (743) 2,461 3,242 5,289
Discontinued operations 57 (940) 799 674 38
-------------------------------------------------------------------
Net income (loss) $(2,264) $(1,683) $ 3,260 $ 3,916 $ 5,327
===================================================================
Basic income (loss) per share:
From continuing operations $ (0.29) $ (0.09) $ 0.31 $ 0.40 $ 0.64
From discontinued operations 0.01 (0.12) 0.10 0.08 0.00
-------------------------------------------------------------------
$ (0.28) $ (0.21) $ 0.41 $ 0.48 $ 0.64
===================================================================
Diluted income (loss) per share:
From continuing operations $ (0.29) $ (0.09) $ 0.30 $ 0.40 $ 0.63
From discontinued operations 0.01 (0.12) 0.10 0.08 0.00
-------------------------------------------------------------------
$ (0.28) $ (0.21) $ 0.40 $ 0.48 $ 0.63
===================================================================
Weighted average common shares and equivalents:
Basic 8,081 8,022 7,980 8,121 8,259
Diluted 8,081 8,022 8,161 8,211 8,461
BALANCE SHEET DATA:
Cash and cash equivalents $13,244 $12,227 $12,562 $11,076 $ 9,909
Working capital 10,859 11,564 13,324 11,089 11,972
Net assets of discontinued operations - 16,407 16,361 14,695 11,475
Total assets 36,857 49,373 48,943 45,873 43,354
Long-term debt and other long-term liabilities 2,446 2,186 2,657 2,156 2,138
Stockholders' equity 26,606 40,441 41,611 38,299 36,460
</TABLE>
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The continuing operations of American Healthcorp, Inc. (the "Company")
primarily consist of Diabetes Treatment Centers of America, Inc. ("DTCA"), a
wholly-owned subsidiary that is a national provider of diabetes patient services
to hospitals and managed care payors designed to enhance the quality and lower
the cost of treatment of individuals with diabetes.
The Company's discontinued operations represent AmSurg Corp.
("AmSurg"), 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 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 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 managed care diabetes population
management services; DTCA's ability to effect estimated cost savings and
clinical outcome improvements under managed care contracts 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 a diabetes population management contract; 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 implement its
backlog of contracted lives within anticipated time frames contemplated by DTCA;
DTCA's ability to attract and/or retain and effectively manage the employees
required to implement its agreements with hospitals and managed care
organizations; the impact of existing and any future litigation or judicial or
administrative proceedings; the Company's ability to acquire or successfully
develop capability in chronic disease management other than diabetes; and DTCA's
ability and the ability of its customers and vendors to prepare their
mission-critical information technology resources to handle Year 2000 processing
requirements. The Company undertakes no obligation to update or revise any such
forward-looking statements.
17
<PAGE> 18
The following table sets forth the sources of the Company's revenues by
customer type as a percentage of total revenues from continuing operations for
the three years ended August 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
===================================================================================
Year Ended August 31, 1998 1997 1996
===================================================================================
<S> <C> <C> <C>
DTCA Hospital Contracts 60% 91% 95%
DTCA Managed Care Payor Contracts 39 7 2
Other 1 2 3
--------------------------------------
100% 100% 100%
======================================
</TABLE>
Principal sources of revenues for DTCA have been its operating
contracts for hospital-based diabetes treatment centers. These centers are
located in and operated under contracts with general acute care hospitals. The
primary goal of each center is to create a center of excellence for the
treatment of diabetes in the community in which it is located and thereby
increase the hospital's market share of diabetes patients and lower the
hospital's cost of providing services to this population.
The following table presents the number of DTCA hospital contracts in
effect and the number of hospital sites where DTCA services were provided under
the terms of these contracts or was in the process of initiating operations as
of the end of fiscal years 1998, 1997 and 1996. The number of hospital contracts
and hospital sites for these periods includes two Arthritis and Osteoporosis
Care Center ("AOCC") contracts with hospitals to provide comprehensive arthritis
and osteoporosis services that are operated by DTCA.
<TABLE>
<CAPTION>
As of August 31,
=================================
1998 1997 1996
=================================
<S> <C> <C> <C>
Hospital contracts 57 58 61
Hospital sites where services are provided 72 74 72
</TABLE>
18
<PAGE> 19
The components of changes to the total number of DTCA hospital contracts and
hospital sites under these contracts for fiscal years 1998, 1997 and 1996 are
presented below.
<TABLE>
<CAPTION>
Year ended August 31,
========================================================================================
1998 1997 1996
========================================================================================
Hospital Hospital Hospital
Contracts Sites Contracts Sites Contracts Sites
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total contracts/sites at
beginning of period 58 74 61 72 69 74
New contracts/sites
signed 9 12 6 11 6 11
Contracts/sites
discontinued (10) (14) (9) (9) (13) (13)
Conversion of stand
alone contract to
multiple site contract -- -- -- -- (1) --
----------------------------------------------------------------------------------------
Total contracts/sites at
end of period 57 72 58 74 61 72
========================================================================================
</TABLE>
During fiscal 1998 and 1997, 14 and 20 contracts, respectively, were
renewed for DTCA hospital-based diabetes treatment centers. During fiscal 1999,
there will be 21 hospital contracts which will reach the end of their terms
unless renewed. The Company periodically renegotiates existing DTCA hospital
contracts and, in that connection, has historically agreed to reduce its fee
structure in certain of these contracts in order to maintain favorable long-term
client relationships with these hospitals. The Company anticipates that it will
continue to make such fee reductions or center contract restructurings which
will have a negative impact on the Company's revenues and profitability.
During fiscal 1998, ten DTCA hospital contracts were discontinued and
during fiscal 1997 nine DTCA hospital contracts were discontinued. During fiscal
1998 and 1997, three DTCA contracts and eight DTCA contracts, respectively, that
were discontinued were with hospitals owned by Columbia/HCA Healthcare
Corporation ("Columbia"). While DTCA did renew one contract in fiscal 1998 and
three contracts in fiscal 1997 with Columbia hospitals, it believes that the
majority of its seven contracts with Columbia, as of August 31, 1998, will be
discontinued over the next two years. During fiscal 1999, five DTCA contracts
with Columbia hospitals will reach the end of their terms unless renewed.
While DTCA's revenues historically have been generated primarily by its
operating contracts with hospitals, DTCA has also developed and is continuing to
refine products which are designed to assist managed care payors in reducing the
total costs and improving the quality of care for individuals with diabetes
enrolled in their plans, and believes that a substantial portion of its future
revenue growth will result from healthcare management contracts with managed
care payors. Implementation of DTCA's first management contracts with managed
care payors occurred in fiscal 1996. These diabetes population management
products enable DTCA to manage the total healthcare needs and/or the specific
diabetes care
19
<PAGE> 20
needs of populations of individuals with diabetes. DTCA believes that its
intensive diabetes education, patient support and treatment regimens, delivered
and/or supervised by a multi-disciplinary team, will assist in assuring that the
most effective care is delivered at the lowest cost and that ultimately such
intensive diabetes education, support and treatment efforts will reduce or
prevent the devastating and costly complications of diabetes.
Pursuant to DTCA's diabetes population management contracts, DTCA
provides a core group of diabetes clinical and support staff that are
responsible for coordinating and supporting the management of the treatment of
individuals with diabetes in accordance with treatment standards and protocols
that have been developed by DTCA and have been approved by the medical
leadership at each managed care plan. The actual treatment of the individuals is
provided by physicians and hospitals who are part of the payor's network of
providers. Services provided under contracts for DTCA's Diabetes NetCare(TM)
product comprise its most comprehensive product offering and includes DTCA
professional staff on-site at the HMO location to assist in the delivery of this
service. Services provided under DTCA's Diabetes NetLink(TM) product are
provided telephonically and via mail by a team of diabetes treatment and support
staff from a telephone center located in Nashville, Tennessee, and are designed
primarily to improve blood glucose management for diabetes patients and to
monitor and promote compliance with certain standards of care for diabetes
patients and to support the case management activities of the HMO.
Diabetes population management contracts require a sophisticated
management information system to enable DTCA to manage the care of large
diabetes patient populations and to assist in reporting outcomes and costs. The
Company has developed a clinical management system which it believes meets
DTCA's information management needs for its diabetes population management
services and has installed and is utilizing the system for the enrollees of each
of its managed care contract customers.
As of August 31, 1998, DTCA had contracts with eight managed care
payors to provide diabetes population disease management services to 17 HMO
markets. The number of covered lives under management pursuant to these
contracts for its Diabetes NetCare(TM) and its Diabetes NetLink(TM) products as
of August 31, 1998, 1997 and 1996 is presented on the following table.
<TABLE>
<CAPTION>
========================================================================================
At August 31, 1998 1997 1996
========================================================================================
<S> <C> <C> <C>
Covered lives under management:
NetCare(TM) contracts 52,390 11,404 100
NetLink(TM) contracts 4,902 -- --
------------------------------------------
Total covered lives under management 57,292 11,404 100
==========================================
</TABLE>
In addition, covered lives at August 31, 1998 excludes 2,000
NetCare(TM) contract lives and 33,000 NetLink(TM) contract lives under existing
contracts that are scheduled for implementation subsequent to August 31, 1998.
During fiscal 1997, DTCA's managed care operations reduced the
Company's pretax profitability by approximately $6.1 million. This negative
impact resulted primarily from initial operating losses for the new managed care
payor contracts signed by DTCA at the end of fiscal 1996 and during fiscal 1997
together with the overhead costs related to these contracts and from the costs
associated with marketing
20
<PAGE> 21
efforts to enter into additional disease management contracts. While DTCA's
managed care operations for all of fiscal 1998 reduced the Company's pretax
profitability by approximately $2.0 million, this operation began contributing
to overall DTCA profitability during the fourth quarter of fiscal 1998. The
Company anticipates that its managed care operations will contribute to DTCA's
profitability during fiscal 1999.
The Company's initial managed care contracts for diabetes population
management services that were entered into during fiscal 1996 and fiscal 1997
were "shared savings" Diabetes NetCare(TM) contracts with initial terms of five
years. Health care cost savings resulting from the Company's programs at these
HMO sites were shared with the HMO according to ratios set forth in the
respective contracts. Under these arrangements, DTCA was at risk for the costs
of operating its program and the HMOs were at risk for 100% of their members'
healthcare costs. Because of expected ramp-up periods to generate cost savings
and the time lag in calculating cost savings, DTCA's profitability was
negatively affected during the first 12 to 18 months of operation at each site.
During fiscal 1998 all new Diabetes NetCare(TM) and Diabetes NetLink(TM)
contracts signed with managed care payors were based on per member per month
payments to DTCA for the HMO's enrollees who have diabetes and participate in
DTCA's programs. In most of these contracts, individuals with diabetes in these
plans are automatically enrolled in DTCA's program but are permitted to decline
to participate. These contracts were generally for terms of three years with
provisions for subsequent renewal and typically provided that between 15% and
30% of the per member per month fee is at risk subject to DTCA's performance
against clinical and financial cost savings criteria. The structures of the
managed care contracts signed during fiscal 1998 significantly reduced or
eliminated the start-up losses that have been experienced under the managed care
contracts signed during fiscal 1996 and 1997.
In addition, during fiscal 1998 all managed care contracts signed
during fiscal 1996 and 1997 were converted to per member per month structures
similar to those signed in fiscal 1998 or were terminated as part of a mutual
agreement reached with Coventry Healthcare to discontinue six Diabetes
NetCare(TM) site operations at Principal Healthcare HMOs acquired by Coventry
Healthcare during fiscal 1998. Consequently, as of August 31, 1998, DTCA does
not have any "shared savings" contracts with managed care payors for its
diabetes population management products.
As a result of the mutual agreement to terminate the Coventry
Healthcare contracts in July 1998, the Company recorded additional revenue of
approximately $3.6 million associated with this settlement and also recorded
additional costs of $1.8 million associated with the termination of services at
these locations. The resulting pretax profit of approximately $1.8 million from
this settlement was recognized during the Company's fourth fiscal quarter of
1998.
The Company's growth strategy is primarily to develop additional
relationships with managed care payors responsible for the healthcare costs of
individuals with diabetes and to further develop and expand its hospital-based
diabetes treatment center business. In addition, the Company has begun
evaluating opportunities to develop or acquire capabilities in chronic disease
management areas other than diabetes. The Company believes that the healthcare
payor market is recognizing the potential cost-savings and improved outcome
benefits of chronic disease management programs, including diabetes population
management services. The Company also believes that its position as the leading
provider of diabetes treatment services to hospitals and physicians, as well as
the positive clinical and financial results it has produced at its initial
managed care contracts, will be an advantage in comparison with other potential
competitors and with payors who are considering developing and providing such
services themselves but who have no actual large-scale diabetes population
disease management experience.
21
<PAGE> 22
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of DTCA under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal government had declined
to take over and pursue a civil "whistle blower" action brought under seal in
June 1994 on behalf of the government by a former employee dismissed by the
Company in February 1994. The Company believes that this lawsuit triggered the
OIG investigation. The civil suit was filed in June 1994 against the Company,
DTCA, and certain named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine whether to take over
the lawsuit. Following its review, the government made the determination not to
take over the litigation, and the complaint was unsealed on February 10, 1995.
Various preliminary motions have been filed regarding jurisdictional and
pleading matters, resulting in the filing of a number of amended complaints and
the dismissal of the Company as a defendant. DTCA continues to be a defendant.
All of these preliminary motions have now been resolved and the lawsuit is now
in the discovery stage.
The Company has cooperated fully with the OIG in its investigation, and
believes that its operations have been conducted in full compliance with
applicable statutory requirements. Although there can be no assurance that the
existence of, or the results of, the investigation would not have a material
adverse effect on the Company, the Company believes that the resolution of
issues, if any, which may be raised by the government and the resolution of the
civil litigation would not have a material adverse effect on the Company's
financial position or results of operations except to the extent that the
Company incurs material legal expenses associated with its defense of this
matter and the civil suit.
YEAR 2000 COMPLIANCE PLAN
Historically, many computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
program failing to properly recognize a year that begins with "20" instead of
"19." Potential system failures or miscalculations are generally referred to as
Year 2000 issues. While the Company's business does not involve the sale of
computer services or medical equipment that might be affected by Year 2000
compliance, the Company does make extensive use of information technologies to
support its operations.
In particular, the Company's managed care operations are structured
around its electronic medical record capability and various data interchange
capabilities with its managed care customers. The underlying electronic medical
record system upon which the Company's propriety standards of care are built is
licensed from an outside software company.
The Company has initiated an extensive effort to address Year 2000
compliance and has engaged a major national healthcare consulting company to
assist in the development and implementation of this plan. This Year 2000
Project addresses software applications, information technology hardware, other
infrastructure and customer and other third party relationships and data
exchanges. The structured approach of this Project includes (1) compiling an
inventory of affected technology, systems and processes; (2) assessing Year 2000
compliance for critical components of the Company's operations and selection of
appropriate remediation efforts where required; (3) remediating, converting or
replacing each critical non-compliant component; (4) testing each critical
component for compliance; and (5) implementing remediated and tested components.
Because the Company is highly dependent, particularly in its managed care
22
<PAGE> 23
operations, on the ability of its customers to provide DTCA with enrollment,
claims and other data which is utilized by the Company to provide services under
its contracted service agreements, the Year 2000 Project also includes
activities related to coordinating and, in some cases, testing compliance of key
data exchange systems with the Company's customers.
As of November 20, 1998, the Company has completed the inventory phase
of its Year 2000 Project. In addition, the Company has identified the electronic
medical record utilized in its managed care operations as its primary
mission-critical component and has recently initiated a planned upgrade of this
software capability to a version of the base electronic medical record that the
third party provider of this platform represents as Year 2000 compliant. This
conversion will position the Company to realize significant operating
enhancements for the system in addition to Year 2000 compliance.
Pursuant to its Year 2000 Project plan, the Company expects to have
addressed all of its mission-critical systems and processes for Year 2000
compliance by August 31, 1999. Some non-critical systems may not be addressed
until after that date or until after January 2000; however, the Company believes
that the potential failure of some or all of these non-critical systems does not
pose a material threat to its operations. The Company believes that it will
incur up to $500,000 in operating expenditures, which represents approximately
15% to 20% of the Company's information technology operating budget for the
fiscal year ending August 31, 1999, to support the Year 2000 Project through
completion. This estimate is based on presently available information and will
be updated as the Company continues its assessment and proceeds with
implementation of the Year 2000 Project. Most of these expenditures will be made
during the year ended August 31, 1999 and there were no material expenditures
related specifically to Year 2000 issues incurred during the year ended August
31, 1998. In addition, the Company expects that there may be limited amounts of
equipment and infrastructure capital expenditures that will be accelerated
because of Year 2000 compliance issues. However, because the majority of its
information technology and infrastructure capital expenditures for its managed
care operations have been made within the last two years and primarily have
included equipment which the Company believes will prove to be Year 2000
compliant, the Company currently anticipates that accelerated capital
expenditures because of Year 2000 issues will be less than $500,000.
The Company also anticipates that a primary focus of its managed care
information technology system development resources throughout fiscal 1999 will
be directed toward Year 2000 compliance efforts. The Company also believes that
it has the resources and capabilities to support current customer information
technology needs and also believes that its ability to add new managed care
business and hospital center business will not be negatively impacted by its
Year 2000 efforts.
While the Company believes that it has the resources and the
capabilities to adequately address Year 2000 compliance, if the Company's unique
proprietary medical record application cannot be made Year 2000 compliant, or if
the data exchanges between the Company and its managed care customers cannot be
made Year 2000 compliant because of failure of the Company's or a customer's
system or a supplier's system on which the Company relies, there can be no
assurances that these failures would not have a material adverse effect on the
business operations or financial performance of the Company. The Company has not
yet established a contingency plan to address any such failures but intends to
formulate plans to address unavoided or unavoidable risks and expects to have
the contingency plans formulated by August 1999.
23
<PAGE> 24
RESULTS OF OPERATIONS
The continuing operations of the Company represents the results of
operations of DTCA and the corporate costs of American Healthcorp,Inc. Included
in the results from discontinued operations are charges to AmSurg for general
management, administrative and accounting services provided by the Company.
Charges to AmSurg for such services approximated the Company's cost.
FISCAL 1998 COMPARED TO FISCAL 1997
The increase in revenues for 1998 from 1997 resulted from improved
performance under DTCA's shared savings managed care contracts for diabetes
population management services, an increase in the average number of lives
enrolled in DTCA's diabetes population management contracts to 24,700 for fiscal
1998 from 8,500 for fiscal 1997 as well as from $3.6 million of revenue in
fiscal 1998 resulting from the settlement with Coventry Healthcare terminating
diabetes population management contracts at six HMO sites covering approximately
6,000 enrolled lives effective July 31, 1998. These increases in managed care
payor contract revenues were offset partially by decreased revenues from
hospital treatment center contracts resulting from a 6% decrease in same
contract revenues for contracts in operation as of September 1, 1996 and from a
decrease in the average number of hospital contracts in operation between the
periods from 60 contracts during 1997 to 55 contracts during 1998. The reduction
in same contract revenues resulted from hospital contract rate renegotiations
and restructurings, which are expected to continue in 1999. The Company
anticipates that continued new hospital contract signings and reduced hospital
contract terminations will increase the average number of contracts in operation
during 1999 compared with 1998. The Company also anticipates that DTCA revenues
for 1999 will increase over 1998 revenues primarily as a result of additional
lives enrolled under its existing diabetes population management contracts with
managed care payors as well as from additional lives from new managed care payor
contracts anticipated to be signed during 1999.
The increase in salaries and benefits for 1998 over 1997 resulted
primarily from higher staffing levels associated with increases in the number of
lives enrolled in DTCA's managed care payor contracts, from increased employee
incentive compensation awards associated with improved operating performance
during 1998 and from severance and other employee related costs of approximately
$936,000 associated with the termination of the Coventry Healthcare managed care
payor contracts. Salaries and benefits as a percentage of revenues decreased to
64% for 1998 from 70% for 1997 primarily as a result of improved revenue
performance at its managed care contract operations and as a result of the
settlement associated with the Coventry Healthcare contract terminations. The
Company anticipates salaries and benefits expense to increase during fiscal 1999
compared with fiscal 1998 primarily as a result of increased staff required for
expected increases in the number of lives enrolled under DTCA's managed care
contracts.
The increase in other operating expenses for 1998 over 1997 resulted
primarily from higher costs associated with increases in the average number of
lives enrolled in DTCA's managed care payor contracts and from other operating
expenses of approximately $880,000 associated with the termination of the
Coventry Healthcare managed care payor contracts. Other operating expenses as a
percentage of revenues decreased to 27% for 1998 from 29% for 1997 primarily as
a result of improved revenue performance at DTCA's managed care payor contracts.
The Company anticipates other operating expenses will increase during 1999
compared with fiscal 1998 primarily as a result of increased costs associated
with anticipated increases in the number of lives enrolled under DTCA's managed
care payor contracts as well as from increased expenses associated with planned
improvements in the Company's information technology capabilities including the
costs associated with its Year 2000 compliance efforts.
24
<PAGE> 25
The decrease in depreciation and amortization expense for 1998 from
1997 resulted from decreased amortization expense associated with its hospital
treatment center operations as a result of expensing contract start-up costs as
incurred during 1998 in comparison to amortizing these costs over periods of one
to three years during prior years. This decrease was offset somewhat by the
increased depreciation expense associated with furniture, equipment and
computer-related capital expenditures associated with its diabetes population
management operations for managed care payors. The Company anticipates
depreciation and amortization expense to increase during 1999 compared with
fiscal 1998 primarily as a result of increased information technology and other
capital expenditures associated with expected increases in the number of covered
lives enrolled under DTCA's managed care payor contracts as well as from
improvement in the Company's information technology capabilities.
As a result of the Company's distribution of its AmSurg common stock
and pursuant to the terms of the Company's stock option plans, the number of
shares issuable pursuant to the Company's outstanding stock options and the
exercise price per share were adjusted to maintain the value of the options
subsequent to the Distribution at the pre-Distribution level. This adjustment
had the effect of reducing the average exercise price of outstanding options to
$3.27 per share from $8.62 per share and resulted in an additional 254,000
shares being subject to options. Additionally, all outstanding options became
fully vested. 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.
25
<PAGE> 26
The impact of this adjustment on the Company's financial statements is
summarized below:
<TABLE>
<CAPTION>
Net Income
Increase
(Decrease)
===========
<S> <C>
Compensation expense $(5,770,000)
Estimated deferred income tax benefit 2,190,000
-----------
Net decrease in net income $(3,580,000)
===========
Stockholders'
Equity
Increase
(Decrease)
===========
Increase in paid-in capital $ 5,770,000
Net decrease in net income (3,580,000)
-----------
Net increase in stockholders' equity $ 2,190,000
===========
</TABLE>
The Company's income tax benefit increased to $1.1 million for 1998
compared to $207,000 for 1997 primarily as a result of the income tax benefit
generated in 1998 from the non-recurring stock option expense adjustment
associated with the AmSurg Distribution offset partially by improved operating
performance in the Company's operating results before consideration of this
stock option expense adjustment. The differences between the statutory federal
income tax rate of 34% and the Company's effective tax benefit rates during both
1998 and 1997 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.
The results of operations from discontinued operations for 1998 and for
1997 include the Company's share of AmSurg's net income or loss based on the
Company's percentage ownership of AmSurg as well as the Company's expenses
associated with the Distribution which totaled $345,000 during 1998 and $615,000
during 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
The DTCA revenues decrease for 1997 from 1996 resulted primarily from
the impact of DTCA hospital contract rate renegotiations and restructurings and
hospital contract terminations, offset somewhat by revenues from new DTCA
hospital contracts and by revenues generated during 1997 under the managed care
payor contracts for diabetes population management services. Hospital contract
rate renegotiations and restructurings were the primary reasons for a 3%
decrease in same contract revenues for contracts in operation as of September 1,
1995.
26
<PAGE> 27
The increase in overall DTCA salaries and benefits for 1997 over 1996
resulted primarily from higher staffing costs associated with DTCA's managed
care contracts for diabetes population management services and from normal
salary and benefit increases. Salaries and benefits as a percentage of revenues
for 1997 were 70% as compared with 63% for 1996. This increase resulted
primarily from the impact of additional salary costs associated with the
Company's managed care contract operations which produced limited revenues
during 1997.
The increase in DTCA's other operating expenses for 1997 over 1996
resulted primarily from increased costs associated with the implementation of
managed care contracts for diabetes population management services causing other
operating expenses as a percentage of revenues for 1997 to increase to 28%
compared with 23% for 1996.
The increase in DTCA's depreciation and amortization expense for 1997
from 1996 resulted from additional amortization expense associated with the
costs of hospital contract development at contracts recently placed in operation
plus the depreciation expense associated with furniture, equipment and
computer-related capital expenditures at the managed care payor sites partially
offset by reduced amortization at DTCA hospital contracts where the costs of
contract development have been fully amortized.
The decrease in income tax expense (resulting in an income tax benefit
for 1997 compared with income tax expense for 1996) for 1997 from 1996 resulted
from a non-recurring favorable $760,000 adjustment to income tax expense in 1996
from the favorable resolution of prior year income tax issues with the IRS as
well as from decreased operating results for 1997. The differences between the
federal statutory income tax rate of 34% and the Company's effective income tax
rates during the periods are due primarily to the favorable nonrecurring
adjustment in 1996, the impact of state income taxes and the amortization of
certain excess costs over net assets of purchased companies which are not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities from continuing operations for fiscal 1998
generated $4.8 million in cash flow which included a cash flow benefit of
approximately $3.3 million associated with the termination of the Coventry
Healthcare contracts. Investing activities during this period used $3.5 million
which consisted of $3.0 million used for the acquisition of property and
equipment purchases for DTCA primarily associated with its expanding managed
care payor operations, and $496,411 in AmSurg Distribution costs paid during the
year. Financing activities associated with continuing operations for fiscal 1998
used $337,390 in cash flow which included $686,007 used to repurchase the
Company's stock offset partially by $398,917 in proceeds from the exercise of
options to purchase the Company's common stock.
The Company believes that cash flow from DTCA operating activities and
the Company's available cash balances of $13.2 million at August 31, 1998 will
continue to enable the Company to fund DTCA's current working capital needs,
including the working capital and capital expenditures associated with its
managed care payor operations, the payment of the remaining costs associated
with the termination of the Coventry Healthcare contracts, and the costs
associated with the Company's Year 2000 compliance efforts. In addition, the
Company may also utilize its cash resources to fund repurchases of the Company's
common stock; as of August 31, 1998 the Company had repurchased 78,820 shares of
stock pursuant to an authorization to purchase up to 400,000 shares as approved
by the Company's Board of Directors in January 1998.
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31,
=================================
1998 1997
=================================
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1b) $13,243,571 $12,226,821
Accounts receivable, net 3,623,461 3,469,839
Other current assets (Note 1c) 798,714 1,307,075
Deferred tax assets (Notes 1g and 3) 998,000 1,306,000
---------------------------------
Total current assets 18,663,746 18,309,735
---------------------------------
Net assets of discontinued operations (Note 2) -- 16,407,271
---------------------------------
Property and equipment (Note 1d):
Leasehold improvements 191,950 77,434
Equipment 5,828,698 3,581,093
---------------------------------
6,020,648 3,658,527
Less accumulated depreciation (2,336,242) (1,851,087)
---------------------------------
Net property and equipment 3,684,406 1,807,440
---------------------------------
Long-term deferred tax assets (Notes 1g and 3) 2,753,000 691,000
---------------------------------
Other assets, net (Note 1e) 290,513 309,998
---------------------------------
Excess of cost over net assets of purchased
companies, net (Note 1f) 11,465,139 11,847,358
---------------------------------
$36,856,804 $49,372,802
=================================
</TABLE>
See accompanying notes to the consolidated financial statements.
28
<PAGE> 29
AMERICAN HEALTHCORP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
August 31,
=================================
1998 1997
=================================
<S> <C> <C>
Current liabilities:
Accounts payable $ 1,015,918 $ 785,674
Accrued salaries and benefits 2,985,589 1,457,139
Accrued liabilities 2,163,963 1,240,660
Unearned contract fees (Note 1h) -- 2,251,176
Income taxes payable (Notes 1g and 3) 1,054,407 885,950
Current portion of other long-term liabilities (Note 4) 584,805 125,000
---------------------------------
Total current liabilities 7,804,682 6,745,599
---------------------------------
Other long-term liabilities (Note 4) 2,446,089 2,186,481
---------------------------------
Commitments and contingencies (Notes 5 and 9)
Stockholders' equity (Notes 6 and 7)
Preferred stock
$.001 par value, 5,000,000 shares authorized,
none outstanding -- --
Common stock
$.001 par value, 15,000,000 shares authorized,
8,125,507 and 8,051,559 shares outstanding 8,125 8,052
Additional paid-in capital 23,719,833 18,142,278
Retained earnings 2,878,075 22,290,392
---------------------------------
Total stockholders' equity 26,606,033 40,440,722
---------------------------------
$36,856,804 $49,372,802
=================================
</TABLE>
See accompanying notes to the consolidated financial statements.
29
<PAGE> 30
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended August 31,
========================================================
1998 1997 1996
========================================================
<S> <C> <C> <C>
Revenues (Note 1h) $ 41,167,436 $ 30,536,776 $31,403,644
--------------------------------------------------------
Expenses:
Salaries and benefits 26,472,583 21,437,253 19,866,459
Other operating expenses 11,084,345 8,701,748 7,254,703
Depreciation and amortization (Note 1) 1,308,320 1,341,825 1,272,756
Interest 1,308 5,512 5,248
Spin-off stock option adjustment (Note 7) 5,770,000 -- --
--------------------------------------------------------
Total expenses 44,636,556 31,486,338 28,399,166
--------------------------------------------------------
Income (loss) before income taxes and
discontinued operations (3,469,120) (949,562) 3,004,478
Income tax expense (benefit) (Notes 1g and 3) (1,148,000) (207,000) 544,000
--------------------------------------------------------
Income (loss) from continuing operations (2,321,120) (742,562) 2,460,478
Income (loss) from discontinued operations, net of
income taxes (Note 2) 56,483 (940,471) 799,143
--------------------------------------------------------
Net income (loss) $ (2,264,637) $ (1,683,033) $ 3,259,621
========================================================
Basic income (loss) per share (Note 1i):
From continuing operations $ (0.29) $ (0.09) $ 0.31
From discontinued operations 0.01 (0.12) 0.10
--------------------------------------------------------
$ (0.28) $ (0.21) $ 0.41
========================================================
Fully diluted income (loss) per share (Note 1i):
From continuing operations $ (0.29) $ (0.09) $ 0.30
From discontinued operations 0.01 (0.12) 0.10
--------------------------------------------------------
$ (0.28) $ (0.21) $ 0.40
========================================================
Weighted average common shares and equivalents
(Note 1i)
Basic 8,080,942 8,022,257 7,979,853
Fully diluted 8,080,942 8,022,257 8,160,764
</TABLE>
See accompanying notes to the consolidated financial statements.
30
<PAGE> 31
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-in Retained
Stock Stock Capital Earnings Total
========================================================================================
<S> <C> <C> <C> <C> <C>
Balance, August 31, 1995 $ -- $ 7,979 $ 17,577,713 $ 20,713,804 $ 38,299,496
Exercise of stock options (Note 7) -- 22 179,453 -- 179,475
Stock repurchase (Note 6) -- (15) (127,488) -- (127,503)
Net income -- -- -- 3,259,621 3,259,621
----------------------------------------------------------------------------------------
Balance, August 31, 1996 -- 7,986 17,629,678 23,973,425 41,611,089
Exercise of stock options (Note 7) -- 66 512,600 -- 512,666
Net loss -- -- -- (1,683,033) (1,683,033)
----------------------------------------------------------------------------------------
Balance, August 31, 1997 -- 8,052 18,142,278 22,290,392 40,440,722
Exercise of stock options (Note 7) -- 152 493,483 -- 493,635
Stock repurchase (Note 6) -- (79) (685,928) -- (686,007)
Spin-off stock option
adjustment (Note 7) -- -- 5,770,000 -- 5,770,000
Distribution of AmSurg
stock (Note 2) -- -- -- (17,147,680) (17,147,680)
Net loss -- -- -- (2,264,637) (2,264,637)
----------------------------------------------------------------------------------------
Balance, August 31, 1998 $ -- $ 8,125 $ 23,719,833 $ 2,878,075 $ 26,606,033
========================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
31
<PAGE> 32
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended August 31,
==================================================
1998 1997 1996
==================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,264,637) $ (1,683,033) $ 3,259,621
Income (loss) from discontinued operations (Note 2) 56,483 (940,471) 799,143
--------------------------------------------------
Net income (loss) from continuing operations (2,321,120) (742,562) 2,460,478
Income tax expense (benefit) (Notes 1g and 3) (1,148,000) (207,000) 544,000
--------------------------------------------------
Income (loss) before income taxes (3,469,120) (949,562) 3,004,478
Noncash expenses, revenues, losses and gains
included in income:
Depreciation and amortization (Note 1) 1,308,320 1,341,825 1,272,756
Spin-off stock option adjustment (Note 7) 5,770,000 -- --
Decrease in working capital items 785,557 1,877,076 187,498
Other noncash transactions 1,249,788 150,982 (96,713)
--------------------------------------------------
5,644,545 2,420,321 4,368,019
Income taxes (net paid) (507,549) 3,673 (1,419,382)
Additions to other long-term liabilities -- -- 583,333
Increase in other assets (165,234) (188,101) (201,003)
Payments on other long-term liabilities (Note 4) (129,487) (715,139) (394,610)
--------------------------------------------------
Net cash flows provided by operating activities 4,842,275 1,520,754 2,936,357
--------------------------------------------------
Cash flows from investing activities:
Investment in discontinued operations
including spin-off costs (Note 2) (496,411) (976,103) (831,949)
Acquisition of property and equipment (2,991,724) (1,304,235) (651,676)
--------------------------------------------------
Net cash flows used in investing activities (3,488,135) (2,280,338) (1,483,625)
--------------------------------------------------
Cash flows from financing activities:
Stock repurchase (Note 6) (686,007) -- (127,503)
Exercise of stock options (Note 7) 348,617 424,702 160,429
--------------------------------------------------
Net cash flows provided by (used in) financing activities (337,390) 424,702 32,926
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,016,750 (334,882) 1,485,658
Cash and cash equivalents, beginning of period 12,226,821 12,561,703 11,076,045
--------------------------------------------------
Cash and cash equivalents, end of period $ 13,243,571 $ 12,226,821 $ 12,561,703
==================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
32
<PAGE> 33
AMERICAN HEALTHCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended August 31,
==================================================
1998 1997 1996
==================================================
<S> <C> <C> <C>
Decrease (increase) in other working capital items excluding income taxes:
Accounts receivable, net $ (153,622) $ 51,540 $ 80,979
Other current assets 508,358 172,860 118,243
Accounts payable 230,244 52,956 (33,190)
Accrued expenses 2,451,753 (234,789) (395,201)
Unearned contract fees (2,251,176) 1,834,509 416,667
--------------------------------------------------
$ 785,557 $ 1,877,076 $ 187,498
==================================================
SUPPLEMENTAL NOTES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
1. Other noncash transactions consist of the following:
Deferred compensation agreements $ 848,900 $ 397,956 $ 551,775
Write-off of assets for terminated contracts 401,250 -- --
Unearned contract fees -- (125,000) (458,333)
Liability insurance reserves -- 8,800 (50,000)
Miscellaneous other (362) (130,774) (140,155)
--------------------------------------------------
$ 1,249,788 $ 150,982 $ (96,713)
==================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The continuing operations of American Healthcorp, Inc. (the "Company")
consist primarily of Diabetes Treatment Centers of America, Inc. ("DTCA"), a
wholly-owned subsidiary that is a national provider of diabetes patient services
to hospitals and managed care payors. The Company's discontinued operations
represent AmSurg Corp. ("AmSurg"), 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. (See Note 2.)
a. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned or majority-owned. AmSurg is reflected as a discontinued operation.
All material intercompany profits, transactions and balances have been
eliminated.
b. Cash and Cash Equivalents - Cash and cash equivalents are comprised
principally of tax-exempt debt instruments, repurchase agreements, commercial
paper and other short-term investments with maturities of less than three months
and accrued interest thereon.
c. Other Current Assets - Other current assets at August 31, 1998 and 1997
are comprised of prepaid expenses, inventories and other receivables.
d. Property and Equipment - Property and equipment costs include
expenditures which increase value or extend useful lives. Depreciation is
recognized under the straight line method over useful lives ranging principally
from 5 to 7 years for leasehold improvements, 3 to 5 years for computer software
and hardware and 5 to 10 years for furniture and other office equipment.
e. Other Assets - Other assets principally include costs incurred in
obtaining DTCA hospital contracts which are being amortized over the lives of
the related contracts (generally 2 to 5 years). Total accumulated amortization
of other assets at August 31, 1998 and 1997 was $483,476 and $654,145,
respectively.
f. Excess of Cost Over Net Assets of Purchased Companies - The excess
costs at August 31, 1998 and 1997 arose from a management buy-out of the Company
in August 1988. This excess cost is being amortized over 40 years and has no
income tax basis. Accumulated amortization at August 31, 1998 and 1997 was
$3,822,192 and $3,439,973, respectively. The Company assesses the impairment of
the value of excess of cost over net assets of purchased companies and other
long-lived assets in accordance with criteria consistent with the provisions of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", primarily using
estimated cash flows projected over the useful life of the related assets.
g. Income Taxes - The Company files a consolidated federal income tax
return which includes all of its wholly-owned subsidiaries and computes its
income tax provision under Financial Accounting Standard No. 109, "Accounting
for Income Taxes".
34
<PAGE> 35
h. Revenue Recognition - Revenues under the Company's contracts are
calculated based on various performance-based and fixed-fee methodologies and
are recognized when the related service has been provided. Performance-based
revenues include estimates which are subject to adjustment in subsequent
periods. Unearned contract fees reported as a current liability as of August 31,
1997 constituted contractual payments received from managed care payor
organizations in excess of performance-based revenues earned.
During the years ended August 31, 1998, 1997 and 1996, approximately 11%,
25% and 28%, respectively, of the Company's revenues were derived from DTCA
contracts with hospitals which had a common parent company. During the year
ended August 31, 1998, approximately 32% of the Company's revenues were derived
from DTCA contracts with two managed care payors.
i. Net Income (Loss) Per Share - Net income (loss) per share is reported
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. The calculation of diluted earnings per share for the years
ended August 31, 1998 and 1997 does not include 583,573 and 199,723,
respectively, in common stock equivalents relative to outstanding stock options
as their effect would be antidilutive.
j. Fair Value of Financial Instruments - Financial Accounting Standard No.
107, "Disclosures About Fair Value of Financial Instruments", requires
disclosure of the fair value of certain financial instruments. Cash and cash
equivalents, receivables and payables are reflected in the financial statements
at cost which approximates fair value.
k. Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
l. Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Standards Board issued Financial Accounting Standard No. 130 ("FAS
130") "Reporting Comprehensive Income" and Financial Accounting Standard No. 131
("FAS 131") "Disclosures about Segments of an Enterprise and Related
Information." Both FAS 130 and FAS 131 become effective for fiscal years
beginning after December 15, 1997 and early application is permitted. The
Company does not believe that the adoption of FAS 130 and FAS 131 will have any
material effect on its financial statements.
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
effect of the Distribution was a reduction in retained earnings of $17,147,680
which represented the Company's net investment in AmSurg.
35
<PAGE> 36
The results of operations from discontinued operations for 1998 and for
1997 include the Company's share of AmSurg's net income or loss based on the
Company's percentage ownership of AmSurg as well as the Company's expenses
associated with the Distribution which totaled $345,000 during 1998 and $615,000
during 1997.
Summary operating results of AmSurg are as follows:
<TABLE>
<CAPTION>
======================================================================================================================
Year Ended August 31, 1998 1997 1996
======================================================================================================================
<S> <C> <C> <C>
Revenues $15,916,989 $50,319,564 $29,205,697
Net income (loss) $ 768,439 $ (366,088) $ 1,285,255
</TABLE>
A reconciliation of AmSurg net income (loss) to the Company's income
(loss) from discontinued operations is as follows:
<TABLE>
<CAPTION>
======================================================================================================================
Year Ended August 31, 1998 1997 1996
======================================================================================================================
<S> <C> <C> <C>
Net income (loss) $ 768,439 $(366,088) $ 1,285,255
AmSurg minority stockholders' interest (367,456) 40,617 (486,112)
Distribution costs incurred by American Healthcorp (344,500) (615,000) --
-----------------------------------------------------------
Net income (loss) from discontinued operations $ 56,483 $(940,471) $ 799,143
===========================================================
</TABLE>
3. INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
======================================================================================================================
Year Ended August 31, 1998 1997 1996
======================================================================================================================
<S> <C> <C> <C>
Current taxes
Federal $ 549,000 $ 492,000 $ 491,000
State 57,000 122,000 66,000
Deferred taxes (1,754,000) (821,000) (13,000)
-----------------------------------------------------------
Total $(1,148,000) $(207,000) $ 544,000
===========================================================
</TABLE>
36
<PAGE> 37
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred asset for the fiscal years ended August 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
==================================
1998 1997
==================================
<S> <C> <C>
Deferred tax assets:
Financial accruals without economic performance $ 655,000 $1,346,000
Spin-off stock option adjustment 2,190,000 --
Deferred compensation 1,132,000 842,000
----------------------------------
3,977,000 2,188,000
----------------------------------
Deferred tax liability:
Tax over book depreciation 119,000 76,000
Tax over book amortization 107,000 115,000
----------------------------------
226,000 191,000
----------------------------------
Net deferred tax assets $3,751,000 $1,997,000
==================================
Net current deferred tax assets $ 998,000 $1,306,000
Net long-term deferred tax assets 2,753,000 691,000
----------------------------------
$3,751,000 $1,997,000
==================================
</TABLE>
The Company has not provided a valuation allowance on its deferred tax
assets because it believes its realization is more likely than not.
The difference between income tax expense (benefit) computed using the
effective tax rate and the statutory federal income tax rate follows:
<TABLE>
<CAPTION>
======================================================================================================================
Year Ended August 31, 1998 1997 1996
======================================================================================================================
<S> <C> <C> <C>
Statutory federal income tax from continuing
operations $(1,180,000) $(323,000) $ 1,022,000
State income taxes, less Federal income tax benefit (129,000) 7,000 152,000
Amortization of excess of cost over net assets of
purchased companies 130,000 130,000 130,000
Internal Revenue Service settlement -- -- (760,000)
Other 31,000 (21,000) --
-----------------------------------------------------------
Income tax expense (benefit) $(1,148,000) $(207,000) $ 544,000
===========================================================
</TABLE>
37
<PAGE> 38
The Company recognized a $760,000 reduction in its income tax expense in
its fiscal year ended August 31, 1996 resulting from the resolution of all
issues between the Company and the Internal Revenue Service relating principally
to the deductibility of costs associated with the leveraged buyout of the
Company in 1988 and the sale of the Company's alcohol and drug treatment
business in 1989. In fiscal 1994, the Company had filed a petition with the
United States Tax Court to contest the proposed disallowance by the IRS of
deductions associated with these issues. In September 1996 a settlement was
reached with the IRS which substantially confirmed the Company's position on
these issues and, accordingly, the Company reversed $760,000 of income tax
liabilities it had previously provided for these matters.
4. OTHER LONG-TERM LIABILITIES
The Company has a non-qualified deferred compensation plan under which
officers of the Company and certain subsidiaries may defer a portion of their
salaries and receive a Company matching contribution plus a contribution based
on the performance of the Company. Prior to September 1, 1990, other key
managers of the Company were also eligible to participate in a similar plan.
Company contributions vest at 25% per year. The plan is unfunded and remains an
unsecured obligation of the Company. Participants in these plans elect payout
dates for their account balances which can be no earlier than four years from
the period of the deferral. Included in other long-term liabilities are vested
amounts under these plans of $2,090,682 and $1,822,012 as of August 31, 1998 and
1997, respectively, net of the current portion of $584,805 and $125,000,
respectively. Plan payments required in the five years subsequent to August 31,
1998 for the Company are $584,805, $163,195, $390,721, $82,872 and $217,809.
Other long-term liabilities at August 31, 1998 and 1997 also include
$355,407 and $364,469, respectively, of reserves related to self-insured
deductibles under the Company's liability insurance program. The Company's
professional and general liability risks above certain levels of per claim and
annual aggregate deductibles are insured with major insurance carriers. The
Company's policies provide coverage on a claims-made basis. The Company accrues
the estimated liability for the retained deductibles on claims and incurred but
not reported claims under these policies based on historical loss patterns and
management projections.
5. LEASES
The Company has operating lease agreements principally for its corporate
office space and for certain DTCA managed care payor contract site offices. The
corporate office lease extends through 1999 with an option to renew for an
additional five year period. The Company subleases to AmSurg approximately
15,000 square feet of its corporate office headquarters pursuant to a sublease
which also expires December 1999. The payor office rentals are approximately
2,000 to 14,000 square feet each and have terms of two to five years. Rent
expense under lease agreements for the years ended August 31, 1998, 1997 and
1996 was approximately $951,000, $591,000 and $367,000, respectively.
38
<PAGE> 39
The future minimum lease commitments, net of sublease income, for each of
the next five years following August 31, 1998 for the Company for all
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
=================================================
Year Ended August 31,
=================================================
<S> <C>
1999.................................. $1,030,498
2000.................................. 723,178
2001.................................. 445,459
2002.................................. 363,286
2003.................................. 248,911
-------------------------------------------------
Total $2,811,332
=================================================
</TABLE>
6. STOCKHOLDERS' EQUITY
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 August 31, 1998, the Company has repurchased 78,820
shares at a cost of $686,007.
In December 1994, the Company's Board of Directors authorized the
repurchase and cancellation of up to 400,000 shares of the Company's common
stock. The authorization enabled the Company to make the repurchases from time
to time in the open market prior to December 26, 1996. The Company had
repurchased 351,900 shares at a cost of $2,342,051 pursuant to this
authorization.
7. STOCK OPTIONS
The Company has several stock option plans under which non-qualified
options to purchase the Company's common stock have been granted. Options under
these plans are normally granted at market value at the time of the grant and
normally vest over four years at the rate of 25% per year. Options have a term
of 10 years from the date of grant. At August 31, 1998, 345,216 shares were
reserved for future option grants.
As a result of the Company's distribution of its AmSurg common stock (see
Note 2) and pursuant to the terms of the Company's stock option plans, the
number of shares issuable pursuant to the Company's outstanding stock options
and the exercise price per share were adjusted to maintain the value of the
options subsequent to the Distribution at the pre-Distribution level. This
adjustment had the effect of reducing the average exercise price of outstanding
options to $3.27 per share from $8.62 per share and resulted in an additional
254,000 shares being subject to options. Additionally, all outstanding options
as of the date of the Distribution became fully vested. As a result of this
adjustment of the stock options, the Company recorded 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
39
<PAGE> 40
Distribution. Although this adjustment resulted in no change in the aggregate
value of the options, the compensation expense and associated increase in
additional paid-in capital were recognized because the adjustment resulted 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.
The impact of this adjustment on the Company's financial statements is
summarized below:
<TABLE>
<CAPTION>
Net Income
Increase
(Decrease)
===========
<S> <C>
Compensation expense $(5,770,000)
Estimated deferred income tax benefit 2,190,000
-----------
Net decrease in net income $(3,580,000)
===========
Stockholders'
Equity
Increase
(Decrease)
===========
Increase in paid-in capital $ 5,770,000
Net decrease in net income (3,580,000)
-----------
Net increase in stockholders' equity $ 2,190,000
===========
</TABLE>
40
<PAGE> 41
Stock option activity for the three years ended August 31, 1998 is
summarized below:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
========== ==============
<S> <C> <C>
Outstanding at August 31, 1995 927,276 $.001 - $21.43
Options granted 319,325 $6.44 - $12.60
Options exercised (17,555) $2.78 - $11.42
Options terminated (55,743) $5.93 - $11.42
----------
Outstanding at August 31, 1996 1,173,303 $.001 - $21.43
Options granted 123,275 $9.38 - $12.83
Options exercised (62,075) $.001 - $11.39
Options terminated (63,652) $5.10 - $12.69
----------
Outstanding at August 31, 1997 1,170,851 $.001 - $21.43
Options granted 233,800 $6.84 - $11.31
Options cancelled at spin-off (1,344,055) $.001 - $21.43
Replacement options issued at spin-off 1,598,264 $1.71 - $15.41
Options exercised (146,732) $1.71 - $ 7.56
Options terminated (15,931) $4.37 - $10.75
----------
Outstanding at August 31, 1998 1,496,197 $1.71 - $15.41
==========
</TABLE>
41
<PAGE> 42
The following table summarizes information concerning outstanding and
exercisable options at August 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
=============================================== ===============================
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price
--------------- ----------- ----------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Less than $2.00 804,516 4.6 $ 1.73 804,516 $ 1.73
$2.01 - $5 00 377,081 8.4 $ 4.65 377,081 $ 4.65
$5.01 - $8 00 272,125 5.0 $ 6.27 268,750 $ 6.27
More than $8.01 42,475 9.0 $ 9.04 6,000 $ 15.41
--------- ----------
1,496,197 5.8 $ 3.39 1,456,347 $ 3.35
========= =========
</TABLE>
The Company has also reserved 50,000 shares of common stock to be granted
as restricted stock as part of the Company's Board of Directors compensation
program of which 13,960 shares have been granted.
The Company accounts for its stock options issued to employees and outside
directors pursuant to Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation expense has been
recognized in connection with the issuance of stock options. The estimated
weighted average fair values of the options at the date of grant using the
Black-Scholes option pricing model as promulgated by Financial Accounting
Standard No. 123, "Accounting for Stock Based Compensation" in the years ended
August 31, 1998, 1997 and 1996 are $4.41, $6.19 and $4.72 per share,
respectively. In applying the Black-Scholes model, the Company assumed no
dividends, an expected life for the options of six and one-half years, a
forfeiture rate of 3% for the year ended August 31, 1998 and 4.5% for the years
ended August 31, 1997 and 1996, respectively, and an average risk free interest
rate of 5.5%, 6.4% and 6.2% for the years ended August 31, 1998, 1997 and 1996,
respectively. The Company also utilized a volatility rate of 53% in both years
ended August 31, 1998 and 1997, and 55% for the year ended August 31, 1996. Had
the Company used the Black-Scholes estimates to determine compensation expense
for options granted during the years ended August 31, 1998, 1997 and 1996, net
income (loss) and net income (loss) per share would have been reduced to the
following pro forma amounts.
42
<PAGE> 43
<TABLE>
<CAPTION>
Year Ended August 31,
===========================================================
1998 1997 1996
===========================================================
<S> <C> <C> <C>
Net income (loss)
As reported $(2,264,367) $(1,683,033) $ 3,259,621
Pro forma $(3,105,392) $(2,148,000) $ 2,807,000
Net income (loss) per share
As reported $ (.28) $ (.21) $ .40
Pro forma $ (.38) $ (.27) $ .34
</TABLE>
8. EMPLOYEE BENEFITS
The Company has a Section 401(k) Retirement Savings Plan ("Plan")
available to substantially all employees of the Company and its wholly owned
subsidiaries. Employee contributions are limited to a percentage of their basic
compensation as defined in the Plan and are supplemented by Company
contributions which are subject to vesting requirements. Company contributions
under the Plan totaled $340,301, $318,382 and $265,528 for the years ended
August 31, 1998, 1997 and 1996, respectively.
9. CONTINGENCIES
In November 1994, the Company received an administrative subpoena for
documents from a regional office of the Office of the Inspector General ("OIG")
of the Department of Health and Human Services in connection with an
investigation of DTCA under certain federal Medicare and Medicaid statutes. On
February 10, 1995, the Company learned that the federal government had declined
to take over and pursue a civil "whistle blower" action brought under seal in
June 1994 on behalf of the government by a former employee dismissed by the
Company in February 1994. The Company believes that this lawsuit triggered the
OIG investigation. The civil suit was filed in June 1994 against the Company,
DTCA, and certain named and unnamed medical directors and client hospitals and
was kept under seal to permit the government to determine whether to take over
the lawsuit. Following its review, 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 is now
in 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
43
<PAGE> 44
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.
44
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
American Healthcorp, Inc.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of American
Healthcorp, Inc. and subsidiaries as of August 31, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended August 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Healthcorp, Inc. and
subsidiaries as of August 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
October 9, 1998
45
<PAGE> 46
QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands except per share data)
<TABLE>
<CAPTION>
=============================================================================================================================
FISCAL 1998 First Second Third Fourth
=============================================================================================================================
<S> <C> <C> <C> <C>
Revenues $ 7,746 $8,454 $ 9,470 $15,497
Income (loss) before income taxes and discontinued operations $(6,071) $ (128) $ 51 $ 2,679
Net income (loss) $(3,748) $ (116) $ 3 $ 1,597
Diluted income (loss) per share
from continuing operations * $ (0.47) $(0.01) $ 0.00 $ 0.18
Diluted income (loss) per share * $( 0.46) $(0.01) $ 0.00 $ 0.18
</TABLE>
<TABLE>
<CAPTION>
=============================================================================================================================
FISCAL 1997 First Second Third Fourth
=============================================================================================================================
<S> <C> <C> <C> <C>
Revenues $ 7,979 $7,353 $ 7,246 $ 7,959
Income (loss) before income taxes and discontinued operations $ 378 $ (601) $ (614) $ (113)
Net income (loss) $ 463 $ (194) $(1,435) $ (517)
Diluted income (loss) per share
from continuing operations * $ 0.03 $(0.05) $ (0.05) $ (0.01)
Diluted income (loss) per share * $ 0.06 $(0.02) $ (0.18) $ (0.06)
</TABLE>
* Income (loss) per share calculations for each of the quarters were based on
the weighted average number of shares and dilutive options outstanding for
each period. Accordingly, the sum of the quarters may not necessarily be
equal to the full year income (loss) per share.
46
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company is included in
pages 4-6 under the caption "Election of Directors" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 15, 1999 and
is incorporated herein by reference.
Pursuant to General Instruction G(3), information concerning executive
officers of the Company is included in Part I, under the caption "Executive
Officers of the Registrant" of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 15, 1999, to
be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c)
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 15, 1999, to
be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c)
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held January 15, 1999, to
be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(c)
and is incorporated herein by reference.
47
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
3. EXHIBITS
3.1 Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-1
(Registration No. 33-41119))
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-1 (Registration No.
33-41119))
4.1 Article IV of the Company's Restated Certificate of
Incorporation (included in Exhibit 3.1)
10.1 Second Amended and Restated Loan Agreement dated as of April
15, 1997 among AmSurg, SunTrust Bank, Nashville, N.A., and
NationsBank of Tennessee, N.A., as amended on May 6, 1997 and
on September 2, 1997 (incorporated by reference to Exhibit
10.4 to Form 10/A-3 of AmSurg Corp. filed November 3, 1997)
10.2 Amended and Restated Distribution Agreement dated November 3,
1997 between American Healthcorp, Inc. and AmSurg Corp.
(incorporated by reference to Exhibit 2.1 to Form 10/A-3 of
AmSurg Corp. filed November 3, 1997)
10.3 Management and Accounting Services Agreement dated December
31, 1996 between American Healthcorp, Inc. and AmSurg Corp.
(incorporated by reference to Exhibit 10.6 to Form 10/A-3 of
AmSurg Corp. filed November 3, 1997)
Management Contracts and Compensatory Plans
10.4 Employment Agreement as Amended and Restated dated August 31,
1992 between the Company and Thomas G. Cigarran (incorporated
by reference to Exhibit 10.3 to Form 10-K of the Company for
its fiscal year ended August 31, 1992)
10.5 Employment Agreement as Amended and Restated dated August 31,
1992 between the Company and Henry D. Herr (incorporated by
reference to Exhibit 10.4 to Form 10-K of the Company for its
fiscal year ended August 31, 1992)
10.6 Employment Agreement as Amended and Restated dated August 31,
1992 between the Company and James A. Deal (incorporated by
reference to Exhibit 10.5 to Form 10-K of the Company for its
fiscal year ended August 31, 1992)
48
<PAGE> 49
10.7 Employment Agreement as Amended and Restated dated August 31,
1992 between the Company and Robert E. Stone (incorporated by
reference to Exhibit 10.6 to Form 10-K of the Company for its
fiscal year ended August 31, 1992)
10.8 Employment Agreement dated May 15, 1983 between the Company
and David A. Sidlowe (incorporated by reference to Exhibit
10.10 to Registration Statement on Form S-1 (Registration No.
33-41119))
10.9 Capital Accumulation Plan, as amended (incorporated by
reference to Exhibit 10.11 to Registration Statement on Form
S-1 (Registration No. 33-41119) and Exhibit 10.8 to Form 10-K
of the Company for its fiscal year ended August 31, 1995)
10.10 Non-Statutory Stock Option Plan of 1988 (incorporated by
reference to Exhibit 10.12 to Registration Statement on Form
S-1 (Registration No. 33-41119))
10.11 1991 Employee Stock Incentive Plan, as amended (incorporated
by reference to Exhibit 10.10 to Form 10-K of the Company for
its fiscal year ended August 31, 1992)
10.12 1991 Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 10.14 to Registration Statement on Form
S-1 (Registration No. 33-41119))
10.13 1991 Outside Directors Discretionary Stock Option Plan
(incorporated by reference to Exhibit 4(c) to Registration
Statement on Form S-8 (Registration No. 33-42909))
10.14 Form of Indemnification Agreement by and among the Company and
the Company's directors (incorporated by reference to Exhibit
10.15 to Registration Statement on Form S-1 (Registration No.
33-41119))
10.15 1996 Stock Incentive Plan (incorporated by reference to the
Company's proxy statement for the annual meeting of
stockholders held January 23, 1996)
21 Subsidiaries of the registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
There have been no reports on Form 8-K during the quarter for which
this report is filed.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN HEALTHCORP, INC.
November 25, 1998 By: /s/ Thomas G. Cigarran
---------------------------------
Thomas G. Cigarran
Chairman of the Board,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------- ---------------------------------- -----------------
<S> <C> <C>
/s/ Thomas G. Cigarran Chairman of the Board, November 25, 1998
- ------------------------------- President and Chief Executive
Thomas G. Cigarran Officer, Director (Principal
Executive Officer)
/s/ Henry D. Herr Executive Vice President November 25, 1998
- ------------------------------- Finance and Administration, Chief
Henry D. Herr Financial Officer, Secretary,
Director (Principal Financial
Officer)
/s/ David A. Sidlowe Vice President and Controller November 25, 1998
- ------------------------------- (Principal Accounting Officer)
David A. Sidlowe
/s/ Frank A. Ehmann Director November 25, 1998
- -------------------------------
Frank A. Ehmann
/s/ Martin J. Koldyke Director November 25, 1998
- -------------------------------
Martin J. Koldyke
/s/ C. Warren Neel Director November 25, 1998
- -------------------------------
C. Warren Neel
/s/ William C. O'Neil, Jr. Director November 25, 1998
- -------------------------------
William C. O'Neil, Jr.
</TABLE>
50
<PAGE> 1
EXHIBIT 21
SUBSIDIARY LIST
AS OF NOVEMBER 23, 1998
(PAGE 1 OF 1)
<TABLE>
<CAPTION>
STATE OF OWNERSHIP
NAME OF SUBSIDIARY ORGANIZATION OWNED BY PERCENTAGE
- --------------------------------------------- ---------------- -------------------------- -------------
<S> <C> <C> <C>
Diabetes Treatment Centers of America, Inc. DE American Healthcorp, Inc. 100%
Arthritis and Osteoporosis Care Center, Inc. DE American Healthcorp, Inc. 100%
American Healthcorp of Texas, Inc. DE American Healthcorp, Inc. 100%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 13,243,571
<SECURITIES> 0
<RECEIVABLES> 3,623,461
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,663,746
<PP&E> 6,020,648
<DEPRECIATION> 2,336,242
<TOTAL-ASSETS> 36,856,804
<CURRENT-LIABILITIES> 7,804,682
<BONDS> 0
0
0
<COMMON> 8,125
<OTHER-SE> 26,597,908
<TOTAL-LIABILITY-AND-EQUITY> 36,856,804
<SALES> 0
<TOTAL-REVENUES> 41,167,436
<CGS> 0
<TOTAL-COSTS> 37,556,928
<OTHER-EXPENSES> 7,078,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,308
<INCOME-PRETAX> (3,469,120)
<INCOME-TAX> (1,148,000)
<INCOME-CONTINUING> (2,321,120)
<DISCONTINUED> 56,483
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,264,637)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
